Argentina, finally in the investors’ loop?
June 2018 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2018 Issue
After a decade of isolation and increasing economic regulation, presidential elections at the end of 2015 led to a significant change in Argentina’s business environment.
The success of the coalition ‘Cambiemos’ in the 2017 mid-term elections was a key indicator that the pro-business climate in Argentina will be long lasting.
Although investors had begun to show an increasing interest in Argentina for some time, after the presidential elections, M&A operators expect a boost to the government’s pro-business agenda, with new legal reforms to help investors and companies.
Concrete measures and changes to the legal framework
Upon taking office, the new government launched an ambitious programme to strengthen the economy, improve the investment climate, regain access to international markets and reintegrate Argentina’s economy with the rest of the financial world.
One of the first measures was reaching an agreement with the bondholders who did not accept the exchange offers made in the 2005 and 2010 debt restructurings (holdouts). This marked the end of a conflict that lasted more than a decade and was affecting Argentina’s access to foreign credit and, during the last few months, its ability to make payments on the restructured bonds.
Other measures to encourage investment and foreign trade included the amendment to the foreign exchange control regulations imposed by the former government, the lifting of restrictions to capital inflow and outflow (including de facto restrictions on repatriation of investments through dividends or otherwise), the elimination of export duties for certain goods of the Mercosur Common Nomenclature, which favoured the mining industry, and the loosening of import restrictions, reduction of import duties and the updating of regulations related to imported goods and granting promotional benefits for new projects.
In addition to its undeniable benefits from a social inclusion perspective, the government believes that investing in infrastructure will be key if Argentina wants to achieve sustainable growth. With more infrastructure Argentina will become more competitive, they say, which will, in turn, lead to more investment.
In this vein, in November 2016, a new legal instrument was created to encourage private investment in collaboration with the public sector: the public-private partnership (PPP). The PPP regime allows private investors to undertake projects with government entities with a greater degree of flexibility by limiting certain government prerogatives, allowing contracting parties to offer a wider range of guarantee methods and project structuring through SPVs, financial trusts or other schemes, providing step-in rights for financiers, and a right to the maintenance of the contractor’s financial-economic balance. The PPP legal framework includes certain tax benefits. Payment instruments issued by a PPP trust are regarded as publicly-traded notes and therefore non-residents are exempt from income tax on the income and gains derived from them.
In the same context, as from 2016, the government launched several auctions to award long-term power purchase agreements (PPAs) sourced from renewable energies. So far, 147 PPAs have been awarded that amount to approximately 4.4 GWs. More auctions are expected for the near future as the government is trying to foster this industry and at the same time meet a mandatory renewable portfolio standard, according to which, by 2025, 20 percent of consumed power has to be sourced from renewable energies. The regulations include a promotional programme for the use of renewable energy, which provides certain tax benefits.
Also aiming at furthering investment, in 2017, the Entrepreneurship Law was enacted to sponsor start-up businesses. This law created a 30-year government-sponsored fund to lend, grant or invest capital in start-ups, which favours the supply of capital to incubators and accelerators. It also created crowdfunding systems and a seed fund, which aims to educate and finance entrepreneurs. Another outcome was the creation of a new investment vehicle, the simplified corporation, which can be set up by digital means and, due to its more flexible rules and lower costs for its administration, may be very attractive for new investors in general. The Entrepreneurship Law also includes support for an entrepreneurial activity programme which provides tax benefits.
Moreover, several regulations were passed to simplify existing regulations and excessive bureaucracy that are also expected to favour transparency and reduce investment costs.
After the mid-term elections, the government promoted certain integral reforms, including an integral tax reform that contains certain attractive features for investors, such as: (i) reduction of the corporate income tax rate for undistributed income, from 35 percent to 30 percent through the fiscal year 2019 and to 25 percent starting in 2020 (although this is coupled with a tax on dividends, the lower rate for undistributed income works as an incentive for start-ups and re-investment); (ii) an exemption for non-residents from income tax on the income and capital gains derived from public bonds and the sale of publicly-traded shares; (iii) the inclusion of a mechanism to reduce the negative tax effect of inflation; and (iv) a refund of value-added tax paid in the purchase and construction of capital assets. In this context, Argentine provinces have agreed to reduce state gross turnover tax rates as well.
On the other hand, a new antitrust law is under consideration in the Argentine Congress, which entails a remodelling of Argentine antitrust enforcement by addressing several long-time issues which have either been ignored or not sufficiently covered by previous administrations. Regarding merger controls, the amendments include: (i) an increase of the merger control thresholds and amounts for exemptions (which were at very low levels); (ii) a suspensory system; and (iii) a fast track mechanism, which altogether reduces the number of transactions subject to antitrust clearance.
Also, a labour reform bill has been submitted for the approval of the Argentine Congress. The labour reform includes a moratorium plan and certain benefits for the regularisation of non-registered employment, both of which would benefit companies attempting to regularise their status.
Moreover, a bill has been submitted for the approval of the Argentine Congress to reform the current Capital Markets Law and other financial regulations, seeking to modernise the entire regulatory framework applicable to Argentine capital markets by incorporating current international practices.
On the international stage, Argentina has also taken a more active role, for example by hosting and leading the World Trade Organisation’s 11th Ministerial Conference in December 2017 and holding the presidency of the G20 in 2018.
M&A activity is mostly driven by macroeconomic conditions. In this sense, the ongoing political and regulatory changes described above seem to be opening the M&A floodgates and improving investors’ perceptions regarding doing business in Argentina.
Sophisticated M&A operators and use of international tools
Argentine M&A operators are not unfamiliar with international practices and standards. In fact, when structuring a deal, Argentina has adopted most of the deal-building tools generally used in the international M&A market.
Although the documents may vary on a case-by-case basis, depending on the specifics of each particular transaction, Argentine operators are used to working with confidentiality agreements, memorandums of understanding or letters of intent, stock purchase agreements, asset purchase agreements, loans and varied types of guarantee/collateral agreements, among others, which follow internationally-utilised structures (including representations and warranties, affirmative and restrictive covenants, indemnification provisions and escrow arrangements, among others).
As a general rule, under Argentine law, fixing a foreign law and dispute resolution mechanism are permitted, provided certain conditions are met, which is particularly attractive for certain investors seeking legal and judicial certainty.
Hottest areas for investment
In the last few years, the hottest areas for investment in Argentina have been the communication, technology, renewable energy, medical services, pharmaceutical and real estate sectors.
In addition, other sectors, such as infrastructure, are booming, especially with the implementation of the PPP regime. This regime will be initially tested with the construction of road corridors through a national and international bidding process.
The bidding contemplates an investment of $12.5bn during the first four years and $4.17bn during the following 11 years. There will be 7277km of national routes, with the construction of 1610km of highways, 3310km of safe routes, 324km of special works and 26km of variants, in total 5270km. In this first of three phases, there will be 810km of highways, 1494km of safe routes, 252km of special routes and 17km of variants.
Other sectors considered to have great potential in the upcoming years are agribusiness, financial services and mining.
As explained, one of the major failures of the Argentine economy has been its capital market. However, since the change of government, several companies have launched IPOs, including Loma Negra Compania Industrial Argentina, which raised nearly $1bn, with a primary listing in New York and another on Argentina’s BYMA exchange. Travel website Despegar.com raised $332m in September and bank Grupo Supervielle raised $322m in May 2016. It is expected that these will encourage other companies to follow.
There are high expectations for Argentina’s economy to recover. Hopefully the latest incentives, coupled with some good decisions from the government regarding Argentina’s macroeconomic situation, will turn companies’ and investors’ attention to Argentina in the near future.
Pablo Garcia Morillo is a partner and María Laura Bolatti Cristofaro is a senior associate at Marval O’Farrell & Mairal. Mr Morillo can be contacted on +54 (11) 4310 0100 ext. 2204 or by email: firstname.lastname@example.org. Ms Cristofaro can be contacted on +54 (11) 4310 0100 ext. 2106
© Financier Worldwide
Pablo Garcia Morillo and María Laura Bolatti Cristofaro
Marval O’Farrell & Mairal