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The Latam Pink Tide: takeaway from a field trip

https://bondvigilantes.com/wp-content/uploads/2022/10/1-the-latam-pink-tide-takeaway-from-a-field-trip-1024×576.pngThe political landscape in Latin America…

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The political landscape in Latin America over the past 18 months – from Boric in Chile to Petro in Colombia more recently – has changed to varying degrees but only in one direction: to the left. Some have coined the change the pink tide, others the pink wave. I like the image of a pink tide, slower but mightier than a wave. This pink tide may expand in a couple of weeks if Brazil’s presidential election sees Lula winning, in what is expected to be a tight second round against incumbent Bolsonaro. I am just back from a two-week research trip in Latam (Mexico, Chile, Peru and Colombia) where I met with several corporate bond issuers and local investors and I came back with a mixed view. On the one hand, policy risk has materially increased and the business environment has changed in some countries. On the other hand, I find value in Latam corporate bonds in US dollar relative to other regions of emerging market debt.


Source: M&G, Wikipedia Oct 2022, countries with members of Sao Paulo Forum ruling parties (Pink) and  non-Sao Paulo Forum ruling parties (blue)

From a fundamental standpoint, businesses in the region are in decent shape even though policy risk has already impacted some of them. Utilities have seen credit metrics deteriorating recently, but the starting point is strong in terms of balance sheets. The oil and gas industry benefits from high oil prices but is vulnerable to tax and environmental regulation, notably in Colombia. The demand outlook and market imbalance for key metal-based commodities should provide support for miners in general but Chinese GDP – as a key demand driver – remains a question mark. In the retail space, profits have been impacted by margin erosion due to input cost inflation but top-line numbers continue to stay strong, sustained by consumption. Refinancing risk is moderate and Latam HY default rates are expected to be low-2% in 2022, and moderately higher next year. In terms of valuation, Latin American corporate bonds in US dollar offer a spread of 480bps over US Treasuries – a wide level not seen in 6 years (excluding the pandemic). In 2016, default risk was much higher after the region got caught in a wide-spread corruption scandal originating in Brazil and credit metrics were weaker too. Political risk has increased in many countries in the region but one may argue that the increases in geopolitical risk elsewhere – e.g. Eastern Europe, US-China – are more lasting and worrying changes for asset prices in the medium to long term.

Here is my takeaway on the four countries I visited, how the business environment has changed (or not) with the pink tide, and the implications for bond investors.

Mexico

  • Probably where the macro outlook is the most stable. Leftist president Lopez Obrador (“AMLO”) is very popular in the country – notably thanks to its elderly population’s pensions and the perceived fight against corruption – whilst not so popular with the business community. Strong consumption is driving the economy and most companies I met have strong top-line growth. However, higher input cost has had an impact on businesses that are unable to pass through the entire cost inflation to end clients (margin erosion) or those which are prevented do so by regulation in the energy sector (working capital needs are elevated on lagged payments of subsidies). The Russia/Ukraine conflict in Europe and the US-China geopolitical tensions are all seen to benefit Mexico in the way of US nearshoring.
  • Inflation, like elsewhere, is a question mark. The government expects 3.2% next year but this is well below economist forecasts of mid-4. Banxico continues to keep a high premium over US rates and the Mexican Peso has been stable and outperforming many other peer currencies this year. The current administration, despite its left-leaning rhetoric, is actually praised by investors for its fiscal sustainability. Both deficits and debt levels are low, and the government’s 2023 budget proposal is unlikely to put fiscal stability at risk.
  • State-owned Pemex continues to be the “elephant in the room” with tight liquidity and an insolvent balance sheet that requires a constant lifeline from the government, despite this year’s elevated oil prices. Local investors think the AMLO administration will provide support at any cost. Going into the next presidential election in 2024, there is a wide expectation that the left (Morena party) will stay in power and back Pemex whatever it takes.

Chile

  • For decades, everyone forgot that Chile was located in South America. The business district of Santiago does look modern, but other areas of the city nonetheless still have visible signs of the 2019 unrest in which over a million people protested against social inequality. The election of a young (now 36 year-old) left-wing President in 2021, Gabriel Boric, paved the way for a referendum to change the 40-year-old Chilean Constitution. Too controversial, the new Constitution was rejected in September 2022 by over 60% of voters. Since then, the leftist government has lost a lot of political capital and locals expect another – more sensible – Constitution should be presented within 24 months.
  • Chile’s economy relies much on the mining industry and most of the key players I met reiterated the importance of China for copper (50% of global demand). Marginal copper demand should also come from India and Asia ex-China in the future, driven by electric vehicles and renewables. The outlook is even brighter for lithium (the country has the world’s largest reserves) which displays an impressive demand outlook (2021 was +50% yoy; YTD 2022 +40% yoy; min 25% per year until 2025) on the back of electric vehicle sales in China and Europe. Both copper and lithium miners are facing risk of increased royalties with the proposed tax reform.
  • The non-mining sectors have experienced various trends. In retail, margins have been under pressure due to input cost inflation, but businesses are generally solid with strong balance sheets, and they benefited from both higher spending from early pension withdrawals and a strong rebound in consumption after Covid. The telecom sector is unique in Latam in the sense that it is the most disrupted in the region – too many players and an inability to increase prices have resulted in weaker credit profiles over time (e.g. VTR). Utilities are impacted by the fact that Chile is a net oil and gas importer and most companies have shown working capital pressure with impacts on credit metrics.

Peru

  • Lima is not Santiago. Roads are noisier, streets are busier, and Lima felt overall livelier (day and night). Politics too. As of late August, in average a new minister has been named every six days since ex-teacher and unionist Pedro Castillo became president in July 2021. Castillo’s reputation varies from “poor” to “bad” in the business community. More surprising though, it seems that the population blames the president for high inflation. Although higher prices impact most countries around the world, food is a very large item in the inflation basket in Peru and the weak Peruvian sol is only amplifying the effect.
  • The mining sector (10% of GDP and 60% of exports) is carefully monitoring upcoming policy impacts. For instance, the government is trying to force miners to put on payroll most of their contractors (a measure that happened in Mexico last year and had a small impact) and royalties will go up in copper mining. Similarly to Chile, miners have seen cost inflation across the board in Q2: explosives, transportation, steel. However, unlike Chile, electricity prices are competitive because Peru produces (and exports) gas. In the third quarter, inflation has seen a slowdown.
  • I also had the opportunity to meet with local Peruvian pension funds. The mood was rather bleak. Partly because pension withdrawals over the past couple of years (as a source of income for households during the pandemic) halved pension funds’ asset under management. But also because there was a general sense of resignation about Peru’s political outlook. Castillo has faced two impeachment proceedings since he took office – both failed, but corruption allegations continue, and political stability is never granted.

Colombia

  • The most recent addition on the Latam pink map (before Lula in Brazil?), former guerrilla fighter Gustavo Petro became Colombia’s new president in June 2022. Petro is a more seasoned politician than Castillo in Peru and more experienced than Boric in Chile. He appointed in August a market-friendly Finance Minister (José Antonio Ocampo) and quickly introduced an ambitious (and ever-changing) tax reform proposal with a new oil and gas export tax (allegedly abandoned), the non-deductibility of royalties, a corporate income tax surcharge of 10% (increased from the 5% proposed at the time of my trip) for oil and gas and financial institutions, as well as higher income tax on wages of more than 10 times the minimum wage, amongst other measures.
  • The oil and gas sector is at the centre stage of Petro’s proposal for a couple of reasons. First, Colombia is a net oil exporter and majority state-owned company Ecopetrol accounts for 12% of the country’s revenue. Increasing taxes on the sector in the current oil price environment is an effective way to raise budget revenues. Second, there is also an ideological argument. Petro campaigned for a sustainable transition of the Metals and Mining and Oil and Gas industries. For that purpose, he made a very controversial appointment with Irene Vélez as Minister of Mining and Energy: a philosopher and doctor in political geography, she has close to no experience in mining and energy. Following the announcement by the government of restriction on fracking and limitations on new concessions or permits for oil explorations, credit spreads of oil and gas issuers (including Ecopetrol) widened significantly.
  • I also met a large utility firm in Bogota, and they were not spared either by policy change. The government recently changed tariffs to Consumer Price Index (CPI) from Producer Price Index (PPI) and the previous government had already prevented the Foreign Exchange market pass through for transmission assets, which is a problem for utilities that had funded their assets with long-term USD bonds on the assumption that their revenues were USD-linked.

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.

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Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 

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This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

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With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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