Arranging almost $3 billion in financing for two different deals in emerging markets, simultaneously, would never be a cakewalk. But during the fourth-quarter of 1998, the financial markets were unusually tremulous. The state of affairs, in fact, was described by thenTreasury Secretary Robert Rubin as “the most serious international financial disruption of the last 50 years.”
Nonetheless, Andrew S. Fastow, CFO of $31.3 billion Houston-based Enron Corp., the world’s largest private developer of energy-related infrastructure, was able to close on $3 billion in borrowings between July 1998 and May 1999–$1.8 billion to build the second phase of a power plant in India and $1.3 billion for an acquisition in Brazil. And key to his success, he says, were Enron’s “profitable and mutually beneficial relationships with the 29 international banks that make up our Tier 1 and Tier 2 group”–the large lenders that have repeatedly participated in Enron’s efforts.
That, however, is not the full story. Enron’s ability to put together these two lending syndicates during tumultuous times illustrates several “musts” for corporate borrowers in emerging markets. For one thing, says Fastow, you must distinguish between countries in which it makes sense to invest capital and those in which you do business. In the latter category, for example, is Russia. “There’s lots of business to do, but it’s hard to invest there,” he explains. Beyond that, he says, you must protect yourself against worst- case scenarios. In Enron’s case, that means “building all underlying businesses to be dollar-denominated. Sometimes, we are actually paid in dollars; at other times, our contracts adjust and settle on a monthly basis, indexed to the dollar.”
Such tactics reflect lessons learned by U.S.- based corporate borrowers during two years of convulsions in the emerging-market countries. Those convulsions were precipitated by the Thai central bank’s decision in July 1997 to float the baht, which rapidly led to currency devaluations in Indonesia and Korea. Asia’s pneumonia quickly became Latin America’s influenza in January 1999, with the devaluation of the Brazilian currency (the real). And sandwiched between those events was the Russian default on its sovereign debt in August 1998. Complicating matters was that “no one foresaw the sudden massive erosion of loan values once market sentiment changed and exchange rates collapsed,” says a late September report by the International Monetary Fund (IMF).
And while positive macroeconomic growth has returned to Asia and Latin America, the hangover from 1998 reinforces the need to assess what worked and what did not for multinational borrowers during the crisis. In such unstable environments, says David Schoenberger, CFO of Compania Anonima Nacional Telefonos de Venezuela (better known by its acronym, CANTV), “You have to be in tune with the markets,” he says, “and keep a finger on their pulse.” If not, “companies can find themselves in a position in which it is either impossible or extremely costly to raise needed funds.”
It’s little wonder that many borrowers were not prepared for the currency crises. Until 1997, the allure of the emerging markets had been overwhelming. From 1965 through 1995, in fact, the economies of Japan, Hong Kong, Republic of Korea, Singapore, Taiwan, Indonesia, Malaysia, and Thailand together logged an average annual growth in gross domestic product (GDP) per capita of close to 6 percent. Add China to this crew–the behemoth economy of 1.3 billion people–and you get the dazzle of enormous potential with the underpinnings of a sturdy work ethic, burgeoning middle classes, and the possibility of compressing several stages of industrial development.