Latin America 2011

July / August 2011 • IBERIAN LAWYER • www.iberianlawyer.com

IBERIAN LAWYER

SPECIAL FOCUS: LATIN AMERICA 2011Driving a new economic and law firm dynamic

An abstract from Iberian LawyerJuly / August 2011

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Special FocuS: latin americaSpecial FocuS: latin america

Driving a new economic and law firm dynamicInternational investor interest is on the increase across Latin America but it is Brazil that remains the major focus, creating a new law firm dynamic in the region

Latin America continues to present mixed opportunities for international investors. Argentina continues to show slow growth while investor interest in Peru has dipped

ahead of impending elections. Markets such as Chile, Colombia and Mexico may be seeing a rise in activity but to call Brazil the region’s “sleeping giant” is now beyond cliché. It is

here that the vast majority of foreign investment is now focused and which is drawing in new legal players, while

re-enforcing the lead of the domestic and best-established foreign law firms, say

many.Brazil’s statistics are impressive – the

eighth-largest economy in the world; a population of over 200m; and stable political and judicial systems – but behind the numbers it has often failed to deliver on its potential.

It may have the fastest-growing economy in Latin America but its businesses have however been among the slowest of the BRIC (Brazil, Russia, India and China) nations to expand onto the international stage. But despite some concerns over inflation, there is confidence that Brazil may finally be the “next big thing”. Such is its economic strength that some lawyers see a growing disconnect between the country and its nearest neighbours.

Joan Roca Sagarra, Managing Partner of one of Spain’s largest firms Roca Junyent, highlights the recurring attraction of the region to Iberian businesses. “Latin America is a big market but it seems to be becoming a case of ‘Brazil and the others’. It seems to be getting the bulk of regional investment from all over the world.”

Long-gone however are the days when Iberian and US companies, almost alone, targeted Brazil for its natural resources.

“Our focus is on advising investors from any part of the world and we now see companies from all continents looking for opportunities in Brazil,” explains Rafael Dutra, a Partner with Dias Carneiro Advogados, the referral firm of Uría Menéndez. Dias Carneiro recently worked on China’s Chongqing Polycomp International’s purchase of fibreglass company Capivari Fibras de Vidro and State Grid’s $1.8bn purchase of seven Brazilian power transmission companies from Isolux, Elecnor, ACS Cobra and Abengoa.

Seven of Brazil’s ten biggest deals in 2010 involved foreign investors, among them

Telefónica (Spain); Sinopec (China); Norsk Hydro (Norway); LAN Airlines (Chile); Qatar Holding; and Portugal Telecom. This year has seen French supermarket Carrefour’s $3.4bn offer for a stake in Cia Brasileira de Distribuicao; Japan-based Investor Group’s $1.9bn deal with CBMM; and Swiss giant Zurich’s $1.6bn bid for Banco Santander’s Latin American insurance business.

“Foreign investment is coming from a variety of sources, including China, South Korea, India, and the US and Europe,” agree Jose Luis Freire, Managing Partner of national firm TozziniFreire Advogados in São Paulo, which works closely with Lisbon’s PLMJ. “Of course, Iberian companies have been very quiet in their domestic market so are now looking for more opportunities in Latin America.”

For some observers however, Brazilian outward investment has to date been too limited to the Americas. State-owned oil and gas company Petrobras, for instance, has built up assets in Argentina, Bolivia, Peru and Paraguay with deals such as the purchase of Perez Companc Energía in 2005 and Esso’s distribution company in Chile in 2009. Last year saw mining giant Vale purchase Canadian mining group Inco for $18bn.

Freire believes however that the market is changing and Brazilian investors are looking elsewhere. “We see mining, energy and financial companies looking all over the world. Our local currency is strong so international assets are relatively cheap,” he says.

Portugal has been a point of interest, with Petrobras, Oderbrecht and companies like Companhia Siderúgica Nacional, Votorantim and Camargo Corrêa all active. Embraer has a subsidiary in Portugal (OGMA) as well as a joint venture in China. In June, the Bank of Brazil and Angola’s BIC bank were linked to the sale of nationalised bank Banco Português de Negócios.

The privatisation programme now being implemented by the Portuguese Government under the terms of its €78bn bailout is therefore raising particular interest among Brazilian businesses, agrees Alexander Bertoldi, Managing Partner of Brazil’s largest firm, Pinheiro Neto, which works alongside Vieira de Almeida.

“Portugal may be a relatively small market but it offers direct access to the EU,

Latinoamérica sigue ofreciendo oportunidades heterogéneas para los inversores internacionales. Argentina continúa mostrando un crecimiento lento, mientras que el interés de los inversores en el Perú ha caído en vista de los recientes resultados electorales. Otros mercados como Chile, Colombia y México han visto crecer la actividad, pero el líder de la región es sin duda Brasil. Es allí donde se concentra la mayor parte de la inversión extranjera y donde están surgiendo nuevos actores en el mercado legal, a la vez que se reafirman en su liderazgo los mejores despachos nacionales y extranjeros.

Dewey & LeBoeuf, Shearman & Sterling, Milbank Tweed Hadley & McCloy and Skadden are increasingly active. DLA Piper has also opened through a local association.

In addition to M&A, capital markets work is central to this push. The main domestic stock exchange is São Paulo’s BM&F BOVESPA, but most public companies have secondary listings on the New York Stock Exchange or under a Rule 144A offering. The US is a key destination for notes offerings too. Examples include Davis Polk acting for Gafisa on the SEC-registered offering of 85.1 million shares, and Cleary Gottlieb advising Petrobras on its $70bn share offering to fund exploration; the world’s largest-ever offering.

Finance is another factor, say lawyers. Financing for major transactions and projects tends to be governed by US (or sometimes UK) law. This puts US banks – and law firms – in a strong position, not least with the Brazilian Government looking to invest $350bn in transport and energy infrastructure over the next decade.

Local restrictions The Anglo-Saxon push should, however, have little impact on the Iberian law firms’ standing as transactions have a clear divide in terms of the legal systems used, note some. Private and company law is largely influenced by Portugal and Spain’s civil code while public law takes its lead from the US.

This gives the two sets of law firms distinct markets. The Anglo-Saxons focus on M&A, capital markets and finance but most crucially do not practise Spanish or Portuguese law. The Spanish firms in turn can leverage off the heavy investments of their domestic clients.

“International activity often comes via subsidiaries located on the Iberian Peninsula and, besides the fact that Iberian companies still make considerable investments in Brazil, I do not believe that these links will become less important,” says Dutra at Dias Carneiro Advogados.

Such a perception is evidenced through the deal statistics. There were 14 major M&A deals in 2010 for Spanish firms and at the half-way point of 2011, already 13 completed deals.

“Since the end of the 1990s, Spanish, or rather Iberian companies have been among the main players in M&A transactions in Brazil,” explains Andoni Hernández, Managing Partner of Cuatrecasas’ São Paolo office. “Our own decade-long presence has enabled us to participate in regional transactions on behalf of investors from other European countries and now investment centres like China and the Middle East.”

to businesses with a tradition of international growth and cross-border management expertise – which is still lacking among many Brazilian businesses,” he says.

Law firm influxWith their historic ties, Portuguese and Spanish firms should be well positioned to capitalise on the investment flows both in and out of Latin America, believe many.

Alongside Brazil, where Uría Menéndez has its own offices in São Paulo, the firm operates a “best friends” network across the region. Garrigues is likewise prominent through its Affinitas network. The firm is applying to operate in São Paulo and has a formal association with Rio de Janeiro-based Schmidt Valois Miranda Ferreira & Agel.

Gómez-Acebo & Pombo and Cuatrecasas Gonçalves Pereira also have deep regional ties, albeit in Brazil both have looked to broaden their referral options. Gómez-Acebo & Pombo continues however to work with Pinheiro Neto, while Cuatrecasas opened in São Paulo last year after the dissolution of its formal ties to national firm Machado Meyer Sendacz e Opice.

Among Spain’s leading firms, Roca Junyent therefore stands out, having to date preferred to maintain wider relations, including through the Terralex Network, although it does have strong ties to Argentina’s Estudio O’Farrell. Like a growing number of Iberian firms it is though focusing more effort on facilitating Middle East and Asia investment into Latin America – it has a base in China as do Garrigues, Cuatrecasas and Uría Menéndez, while Lisbon’s PLMJ and Morais Leitão Galvão Teles Soares da Silva (MLGTS) have established China ties for the same reason.

Among the Portuguese firms the traditional focus has inevitably been towards Brazil but the leading firms also all operate regional referral networks. PLMJ has maintained its joint venture with TozziniFreire since 2004, MLGTS’ relationship with Mattos Filho Veiga Filho Marrey Jr. e Quiroga Advogados goes back to

2006, while Vieira de Almeida has long-standing ties to Pinheiro Neto, and SRS Advogados is associated with national firm Veirano Advogados.

Brazil’s rising economic fortunes have also prompted renewed interest from US and UK-based firms. A decade ago the number of prominent Anglo-Saxon firms could be counted on one hand, today they are flooding into the market.

Most recently, UK insurance specialist Kennedys, for instance, has formed an alliance with Torres Marcellino & Associados, while offshore firm Harneys, French giant Fidal, Germany’s Heuking Kühn Lüer Wojtek and UK-based DAC, have also all linked up in Brazil.

Alongside the likes of established players such as Clifford Chance, Linklaters and Allen & Overy, it is however the top New York practices that are now expected to make the most impact. Davis Polk & Wardwell and Cleary Gottlieb Steen & Hamilton have both announced Brazilian launches, echoing the arrival in 2009 of Simpson Thacher & Bartlett. Jones Day has also opened, under the lead of former Madrid Managing Partner Luis Riesgo, while

We now see companies from all continents looking for opportunities in Brazil.Rafael Dutra, Partner, Dias Carneiro Advogados

“ ”


It is worth noting however that local practice restrictions do apply to foreign law firms, with the Brazilian Bars effectively banning them from practising local law. This has given the domestic firms a lead on local (and regional) deals with a Brazil component and reinforced their market positions; giving them also a dominant position in the Latin American transactional market. According to Thomson Reuters, four of the top six M&A advisers in the first half of 2011 were Brazilian: Pinheiro Neto Advogados (first); Souza Cescon (third), Barbosa Mussnich & Aragão (fourth) and Machado Meyer Sendacz & Opice (sixth). No other Latin American firms feature.

“Foreign firms are only permitted to practise international law so new entrants are mainly competing with each other for cross-border matters,” says Freire at TozziniFreire. “Lots of the big M&A deals involve

companies with shares listed abroad, and this is where most of the work is for the non-local firms.”

So while cross-border work is on the up, the restrictions on legal practice mean that capitalising on Brazil’s domestic potential remains out of reach for many law firms. For Roca, such a situation means that while São Paulo may be emerging as a regional finance centre it has some way to go before it emerges as Latin America’s legal capital. “It would be great if

Brazil can show it really is global but there has always been a question mark over it.”

Even so, the major Madrid and Lisbon firms need worry less whether Brazil does or does not emerge on the global stage – with Iberia’s own economic troubles many clients see the region as strategically important and inbound work continues. They also do not need to worry about US competition either, as many continue to operate “fly in, fly out” operations, and apart from notable exceptions like Jones Day, Baker & McKenzie or DLA Piper, most have no intention of practising Spanish let alone Portuguese law.

The competition for Iberian firms – whether in São Paulo or across Latin America – therefore remains largely among themselves.

Managing deal expectations in Mexico

As well as having an increasingly sophisticated domestic economy, levels of corporate activity in Mexico act as a barometer of the wider region’s economic health, says Daniel Del Río, a corporate Partner with leading national firm Basham Ringe y Correa.

“The Mexican economy is heavily dependent on foreign investment and consumer demand in the US and in both respects we see signs of increasing activity. There is rising interest across the telecoms, energy and inevitably manufacturing sectors and much of this is being driven by investors, and demand, derived from outside the country.”

Such a scenario is in contrast to the situation only two years ago when falling US demand and fears over the extent of the country’s swine flu outbreak weighed heavily on the economy, he says.

“Concerns remain over the degree of comfort many investors have for Mexico and we are obviously still a long way from the boom years, but we do see companies assessing new opportunities. They want to

capitalise on the growing domestic demand and the cost savings presented by local manufacturers and outsourcing businesses.”

But indicative of this upturn in activity is the return also of greater regulatory scrutiny of commercial agreements and transactions, specifically M&A deals, by both the sector-specific and national authorities, says Del Rio. “The regulatory regimes in areas such as finance, telecoms and energy are well established and the Competition Authority too has proved to be very effective in chasing down what they regard as infringements.”

As Mexico begins therefore to reappear on investors’ radars, agreements have however to be entered into with the assumption that they will attract regulatory attention, says Del Rio. “As with any major market it is necessary to ensure that all the necessary precautions and protections are in place. There are no cost or business benefits in cutting corners.”

Además de contar con una economía interna cada vez más sofisticada, los niveles de actividad corporativa en México son también un barómetro de la salud económica del resto de la región latinoamericana, comenta Daniel Del Río, socio de Basham Ringe y Correa.

Daniel Del Río


Venezuela’s China connectionCountries across Latin America are competing to attract foreign investors with Venezuela standing out, among many, as a major recipient of Chinese investmentThe last decade has seen Latin America the subject of intense investment interest, particularly from China, which over the past year has been the number three investor in terms of the value and number of M&A transactions across the region, says Fernando Peláez-Pier, Managing Partner of Caracas-based Hoet Pelaez Castillo & Duque.

“The rapid development of the region, with high growth rates and the continuing expansion of infrastructure projects as well as a wealth of natural resources and raw materials has attracted investment from public and private Chinese companies, the volume of which is now exceeded only by investment by Mexico and Brazil and is well ahead of that by the US and Spain.”

According to information obtained from the Chinese Ministry of Commerce, Chinese international investment in 2010 totalled US$67.8 trillion. Latin America ranked second in terms of investment destinations representing over 13 percent of the total amount, with the main recipients being Brazil, Venezuela and Colombia.

“In my opinion the levels of China’s investment in the region will only increase to make it the number one investor across Latin America. The only potential reason for this not to happen would be if China were to suffer a domestic economic crisis, which is of course not beyond possibility.”

China’s investment in the region is driven by several factors, says Peláez-Pier. At the forefront has clearly been a desire to secure supplies of natural resources and raw materials, oil minerals and food products. More recently however the interest has developed towards control of the companies producing these products either wholly or by majority.

Venezuela has been a long time recipient of Chinese investment especially in the energy sector, he notes. As a result of the implementation of international co-operation treaties through the China Development Bank, around $48bn has been invested in the country in energy, mining, telecommunications, housing and infrastructure projects as well as in manufacturing.

“As with any foreign investment

many of these have been through joint ventures with the Venezuelan Government which will invariably hold a majority stake, such as those through the state-owned oil company Petróleos de Venezuela. In the infrastructure sector, it is more usual for the contracts to be executed by a Chinese company via a local Venezuelan branch.”

Such structures are often in contrast to Chinese investments made elsewhere across Latin America, which are usually made in the form of direct investments undertaken through public or private companies, says Peláez-Pier. “In Venezuela, investment projects are nowadays primarily facilitated through bilateral treaties and with the funding derived predominantly from the China Development Bank.”

In order to attract international investment, countries across the region are however looking to expand bilateral treaties to protect foreign investors and avoid double taxation, he says. But inevitably also important is economic and political stability to ensure continuity in economic and fiscal programmes, as well as regulatory, tax and labour laws, regardless of the incumbent Government.

“As has been demonstrated by the clear economic success of Chile in recent decades, economic and legislative stability are essential to attract high levels of foreign investment, and these are increasingly the factors that determine the validity of opportunities available in different countries.”

The strategic decisions of companies looking to differing opportunities in Latin America are inevitably driven by such criteria, with countries such as Brazil, Colombia, Peru, Mexico and Panama also standing out as beneficiaries. Peru and Panama particularly have seen rising levels of investment over the past years, says Peláez-Pier, although elections across the region have had a varying impact on confidence.

“Venezuela may be seeing strong demand in the energy and petrochemicals sectors, and which continue to account for a significant volume of Chinese investment, but so far everything points to Brazil and Colombia as those countries most consistently fostering the comfort levels required of international investors as a whole.”

Venezuela sigue enfrentándose al reto

de atraer inversión extranjera, sin embargo

con la creciente inversión China el país ha sido capaz de desarrollar

modelos interesantes de financiación, fácilmente

extrapolables al resto de países en Latinoamérica, afirma Fernando Peláez-

Pier, socio de Hoet Peláez Castillo & Duque

en Caracas.

Fernando Peláez-Pier

Foreign firms are only permitted to practise international law so new entrants are mainly competing with each other for cross-border matters.Jose Luis Freire, Managing Partner,

TozziniFreire Advogados

“”



Costa Rica: gateway to the AmericasCentral America is a region booming with opportunities across the services, infrastructure and energy sectors, despite the global economic downturn

Doing business across Central and Latin America always presents challenges but also a learning journey with Costa Rica at the forefront of the region’s economic evolution, asserts Pedro Oller, Senior Partner of Oller Abogados. Nonetheless to avoid pitfalls clients need to rely on advisers with the right experience, relationships and market knowledge.

“The current financial situation is one that has burdened everyone. We are under a global economic crisis that does not place any region in an obviously better position, yet opportunities to grow here do remain.”

His own firm is celebrating its tenth anniversary, yet stands out among other firms in the region in that it has preferred to maintain an independent “best friends” approach to facilitating the increasingly important regional connections.

The United States-Dominican Republic-Central America Free Trade Agreement (CAFTA) came into being in 2009 and eliminates barriers to trade and investment among the seven signatory countries: Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States.

“CAFTA presents major opportunities for all but Europe is a market of choice for Costa Rica and Central America as a whole. Exports have proven that as a fact and now the rising levels of investment from Europe confirm it.”

Last May, CAFTA also signed a reciprocal agreement with the European Union (EU) to expand trade between the two regions. “The association with the EU represents a huge opportunity, but Costa Rica has already singled itself out. We have seven free trade agreements from Chile to Canada. Pending is the Costa Rica-China FTA, as well as the ongoing negotiations with Singapore and Colombia,” says Oller.

In 2010, EU-Costa Rican trade was valued at US$1.6bn and once the EU agreement is fully ratified, Costa Rican exports alone will save $240m in import taxes, he says. “We wish to be aligned with the EU. We aim to be in-sync with the EU. And we strive to be in position with the EU.”

CAFTA is an opportunity in itself but it is not the end but a means to let Central America, and especially Costa

Rica, become a beacon of prospect in a troubled global environment, he says.

Among the recently announced regional deals is a £300m investment by IBM that is anticipated to generate 1,000 new jobs by 2014.

In the first quarter of 2011, foreign direct investment reached $468m in Costa Rica alone, 16 percent up on the same period last year – an example is Bridgestone’s recent confirmation of the country as a regional financial centre, with a $70m investment.

His own firm is seeing particular interest also in the energy sector, he says, and is now advising China National Petroleum Corporation in an agreement with domestic fuel supplier Recope. “Such accords translate to other sectors where we are also collaborating with a number of environmentally conscious investments from Canada and the US and with partners in the EU.”

Costa Rica offers both domestic and regional opportunities, says Oller. “It is well known that we have a strategic location, an excellent business climate, quality infrastructure and proven track record with successful and visionary companies – over 200 have already chosen Costa Rica as their preferred regional location.”

Looking forward, he sees growing opportunities in the domestic tourism sector – with revenues up two percent to around $670m on last year – but also in services: software, entertainment and media, engineering and design, call centres and back office functions. The healthcare and medical devices sectors are also seeing growing investment, while as a result of CAFTA membership, Costa Rica is now liberalising the state’s monopoly in the insurance and telecom markets.

Significant also has been the enactment this year of the UNCITRAL protocol for international arbitration which opens the door to even more commercial and legal activity, believes Oller.

“Despite its relatively small size, Costa Rica is ‘punching above its weight’. It continues to be a beacon of international law and investment, its culture, legal system and economic success are helping to point out a new regional economic direction.”

Las actuales oportunidades de inversión que se presentan en Costa Rica reflejan la creciente atracción de la región latinoamericana a nivel internacional, dice Pedro Oller, socio director de Oller Abogados. El país se presenta como un punto estratégico importante para coordinar inversiones en América Central.

Pedro Oller

Investing in Brazilian infrastructure Brazil is likely to be a permanent fixture in the headlines over the coming years as it prepares to host the World’s two biggest sporting events – the 2014 FIFA World Cup and the 2016 Olympics.

Antonio Corrêa Meyer, Founding Partner of leading local firm Machado Meyer Sendacz & Opice Advogados, however, is quick to warn that the country must make major investments in its infrastructure if it is to fulfil its ambitions.

“The government seriously needs to update the country’s infrastructure, and not just those related to the World Cup and Olympics,” he says. “We need to improve airports, roads, ports and energy projects otherwise Brazil will never be genuinely able to expand.”

The Government has nonetheless made ambitious soundings, particularly with the announcement last year of plans to invest $350bn into the country’s infrastructure. This programme includes major projects such as the proposed $19bn high speed rail link between Rio de

Janeiro and Sao Paulo. Meyer says that the authorities are

looking closely at the best way to finance such schemes but, inevitably, they will require a large amount of private finance. With the Brazilian Real being so strong and Brazilian banks offering high interest rates, the hope is that more international sponsors and financiers will get involved and drive the market forwards.

“BNDES, the state-owned bank, has so far played an important role financing infrastructure developments but the Government is now looking at new instruments, such as PPPs and better tax regimes, to help international companies get more involved in projects.”

With concern mounting that infrastructure for both the World Cup and the Olympics may yet hit delays, ensuring the right developers and financing mechanisms are in place is crucial, Meyer concludes. “Brazil needs to invest in its infrastructure if it is to invest in its future.”

En vista de la preocupación por los posibles retrasos

en la construcción de infraestructuras para la Copa del Mundo y los Juegos Olímpicos, es

imprescindible contar con inversores y mecanismos

de financiación adecuados, afirma Antonio Corrêa

Meyer, Socio Fundador de Machado Meyer Sendacz &

Opice Advogados.

Antonio Corrêa Meyer

The balance ensuring Brazil’s growth remains sustainableBrazil’s rising internal demand should make up for falling demand for international resources and shakes in the capital marketsAs Europe and the US threaten double-dip recessions and questions rise concerning over-heating in Asia, the Brazilian dance can still continue, says Todd Crider, Partner with Simpson Thacher & Bartlett in São Paulo

“The Brazilian economy is a twin-engine jet propelled by the commodities boom and by the rapidly expanding consumer base. While a global contraction might hurt commodities, the consumer engine will likely limit Brazil’s vulnerability to a downturn and keep the economy in flight.”

The two largest offerings in the world over the past two years have been for Brazilian companies (Petrobras for US$70 bn and Santander Brasil for US$7.5 bn). Since 2004 a rush of companies has accessed the international capital markets from Brasil attracting banks and law firms from around the world and propelling the BM&F-BOVESPA (Bolsa de Valores, Mercadorias & Futuros de São Paulo) to one of the largest market capitalisations among global exchanges.

“Indeed, there is a recent mini-surge

in new listings, including to the US, from jurisdictions lacking liquidity or where potential local instability benefits from the enhanced disclosure and accountability standards provided by SEC registration.”

The underperformance of the Brazilian capital markets (both in terms of new offerings and stock prices) this year is a disappointment to many but it nonetheless presents an opportunity to international private equity firms, who must otherwise compete with the liquidity premium afforded by potential IPOs, says Crider.

“Major funds are deploying teams in the region, often for the first time. Their arrival means bigger game will be targeted: transactions sizes will, in many cases, add a zero and opportunities will exist for control of newly public companies on the BM&F-BOVESPA.”

Brazil is enjoying a historical moment in which opportunity finally matches its aspirations, but as global demand falls, Brazil must work harder to remain the “Girl from Ipanema” for the global market.

Todd CriderLa atracción de invertir en Brasil para las empresas

internacionales va más allá del aprovechamiento de los recursos naturales

o el acceso a un mercado de consumidores en

rápido ascenso, São Paulo emerge actualmente como

la capital financiera de la región, afirma Todd Crider,

socio de Simpson Thacher & Bartlett.

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IBERIAN LAWYER

An abstract from Iberian LawyerJuly / August 2011

For further information please [email protected]

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Latin America 2011