Developments in Colombia’s capital markets in recent years reflect those in the wider economy. The well-established sovereign fixed-income market has seen increased issuance as the government seeks to finance its widening budget deficit while rolling over its existing stock of debt. Albeit much smaller in scale, corporate debt issuance also picked up in 2016, amid an inflationary and monetary-tightening environment that has slowed bank lending to firms, but it remains some way off its 2010 peak. After a sharp sell-off of the Colombian peso in 2014 and 2015, as global oil prices weakened, the exchange rate bore the brunt of this external economic shock and 2016 was a year of relative stability. Foreign exchange traded volumes continued to pick up, but again remain below their 2010 peak (see analysis).
State Of The Market
The economic slowdown, coupled with increased uncertainty, has seen few firms come to market with secondary equity offerings in recent years, and there have not been any initial public offerings (IPOs) since 2012. Market capitalisation as a share of GDP approximately halved between 2012 and 2016, with steep declines in the valuation of previously dominant energy firms accounting for much of the drop, and market cap now lies below that of regional peers, also as a share of GDP. The most notable transaction of 2016 saw local power generator Isagén go private as the government sold its majority stake (57.6%) to Canada’s Brookfield Asset Management for around $2bn. At the same time liquidity on the equity market halved in dollar terms over the period from 2012 to 2016.
After particularly strong growth in 2014 and 2015, private equity has become an increasingly important fixture in the local capital markets scene, particularly for infrastructure financing. However, the pace of fund creation slowed somewhat in 2016 in the face of the challenging macroeconomic environment. While Colombia remains dependent on commodities for the bulk of its exports, they are traded on foreign exchanges rather than domestically. Increased economic uncertainty and market volatility, particularly in the foreign exchange market, have spurred demand for sophisticated derivative products so that investors and firms can better hedge their risk exposure (see analysis). As the country’s current account has widened in recent years, the need for external financing has become more acute. Inflows of portfolio financing show foreign investors play a more important role across all asset classes. Nonetheless, the shortage of equity and corporate debt offerings, combined with the drying up of liquidity in secondary markets across most asset classes, will be a concern for domestic and international investors alike going forward.
Sovereign Debt
By far the deepest and most-developed capital market in Colombia is that of government-issued debt, with medium and long-term tenors known locally as TES bonds. With $77bn outstanding and an average monthly traded volume of $33bn in 2016, it is one of the largest such markets in Latin America. Nonetheless, traded volumes, particularly when measured in dollars, trended downwards in 2015-16, with monthly volumes having regularly reached several multiples of these levels during the 2010-14 period (see analysis).
Investor appetite for these assets has been stimulated in recent years by a combination of internal and external factors. Daniel Velandia Ocampo, director of research and chief economist at Credicorp Capital, told OBG that a key factor was the reduction from 33% to 14% of the tax rate charged to foreign owners of TES bonds in 2012, as well as the 2014 re-weighting by JPM organ of one of its widely watched emerging market bond indices, giving greater weight to TES bonds. Javier Gómez Restrepo, head of research at the Colombia Stock Exchange (Bolsa de Valores de Colombia, BVC), told OBG, “Foreign investors have also been encouraged by the relatively attractive rates on offer in Colombia. Overall, increased foreign participation is good for the country, but it does mean increased vulnerability to external shocks.”
Another important factor has been Colombia’s ability to maintain its investment grade rating (see Economy chapter) even in the face of a marked economic slowdown and widening twin fiscal and current account deficits during 2014/15. There has been a marked change in the composition in the exchange transactions of the TES bond market, with banks and financial conglomerates accounting for 25% of trades in 2011 and 40% by 2016. At the same time, brokers have seen their share fall from 35% to 23% over the same period, while foreigners, whose shares were negligible in 2012, accounted for 4% of all TES bond trading in 2016. Foreigners were the single biggest acquirer of TES bonds in that year, with their net position increasing by COP13.6bn ($4.1bn) so that they held 26% of all outstanding TES bonds by year-end 2016. In terms of their relative performance, TES bonds returned 17% between the start of 2016 and 2017, compared to 39% for comparable Brazilian bonds, whereas Mexican bonds actually declined by 2% over the same period.
Corporate Debt
The market for corporate debt is far smaller, with a total of $16bn outstanding at end-2016. It is also far less liquid, with average monthly traded volume coming in at $5.4bn in 2016. With only COP5.9trn($1.8bn) of corporate debt issued in 2015, this was the lowest since 2008. There was a strong recovery in 2016, however, with the issuance of COP9.7trn ($2.9bn). While this was 10.2% higher than the 10-year average, it was still way below the peak of COP13.8trn ($4.1bn) in 2010. Corporate debt issuance is consistently dominated by banks and financial conglomerates, which accounted for two-thirds of corporate bonds issued and half of all outstanding corporate debt in 2016.
Public Equity
By comparison, with its fixed-income markets, Colombia’s publicly listed equity market is relatively narrow, while liquidity, IPOs and secondary offerings have all dried up in recent years. From its 2012 peak of COP3.9trn ($1.2bn), average monthly trade volume has trended downwards, reaching only COP2.9trn ($870m) in 2016. Of the 70 shares listed on the BVC, only 25-30 are actively traded. The most widely watched index is Colcap currently made up of 24 ordinary and preference shares from 20 issuers, and reconstituted annually on the basis of traded volumes, percentage free float and daily trading. Within Colcap, shares are weighted on the basis of an adjusted market cap, with these weightings adjusted every 90 days.
BVC’s Restrepo pointed to a series of six programmes introduced since 2014 to boost the liquidity of specific stocks that had not been widely traded previously. These initiatives, whereby the BVC acts as market maker, have had a degree of success, driving down bid/offer spreads, dramatically in some cases, and even at a time when liquidity in the market as a whole has been in decline. Restrepo underlined that the focus of the BVC in the short-to-medium term is to boost liquidity among existing issuers, rather than trying to bring new IPOs to market in what is a challenging economic environment.
Changing Composition
Recent years have seen dramatic changes in the trading of locally listed stocks. Reflecting the negative impact of falling oil prices on the share prices of firms in the sector, oil and gas companies have declined from a high of 36.9% share of the market as recently as 2011 to only 13% of the market by end-2016. Consequently, the relative importance of all other sectors has increased over the same period. The financial sector saw its market share composition increase from 18% to 49.6% at the end of 2016, while holding companies increased from 8% to 18%, and exchange-traded funds (ETFs) increased from 1% to 6% over the same period. Demand for ETFs was particularly intense in 2016, with their share of the market tripling from 2% in that year alone.
There has also been a dramatic increase in foreign participation in the local equity market, from a low of 4% in 2009 to peak at 33% in 2015, before declining to 25% in 2016 as local institutional investors were again big net buyers. Over the same period, brokers’ share also increased significantly, from a low of 8% in 2009 to 25% by 2016.
These trends are mirrored by the large decline in the participation of retail investors, which accounted for half the market in 2008, but only 16% in 2016. Another notable trend, consistent with domestic retail investors shying away from the market, is towards larger transaction sizes. Between 2012 and 2016 the share of traded volume accounted for by transactions greater than COP1bn ($300,000) in size increased from 14% to 33%, while the share accounted for by transactions between COP100m ($30,000) and COP500m ($150,000) declined from 42% to 27%. Other transaction sizes were relatively stable over the period. In another encouraging development, despite liquidity continuing to decline in 2016, the bid/offer spread actually narrowed from an average of 1.2% to 0.8%, likely also reflecting the tendency towards larger transaction sizes.
Performance
In terms of comparative performance, Colombia’s stock market gained 17% over the course of 2016, enough to place it in the middle of the pack of its peers. While lagging the performance of Peru (58%) and Brazil (38%), Colombia outpaced the US (13%) and Mexico (10%).
The top five performing Colombian equities in 2016 were: Avianca Holdings, with preferential shares (112.4%); Canacol Energy Company in the oil and gas segment (66.3%); energy company Celsia (43.8%); Davivienda, with preferential shares in banking (37.6%); and energy firm Isa (35.2%). The bottom five performers for 2016 were: mixed holding company Corficolombiana (-3.6%), the only one that was in negative territory; Banco de Bogotá (1.2%); Conconcreto in the construction segment (2.8%); energy company Empresa de Energía de Bogotá (5.2%); and local energy giant Isagén (5.6%).
Earnings
Having closed at 17.2 at the end of 2015, the price-earnings (P/E) ratio on Colcap averaged 22 throughout 2016, before closing the year at 18.3. This dynamic has been largely price driven, as earnings have remained much more stable than share prices, particularly in the financial and other non-oil sectors. Andrés Duarte Pérez, director of equity research at financial firm Corficolombiana, told OBG, “At these levels, there still appears to be value in the market compared to other leading indices like the FTSE 100 and S&P 500. With earnings in the oil sector expected to be strong, and earnings in financials remaining solid, we could see the P/E ratio fall further in the months ahead.”
P/E ratios vary significantly across sectors. Financial holding and financial sector firms have relatively low ratios on average of 7.4 and 12.9, respectively, while energy and public services firms average 30.6 and industrial holding companies 41.9.
Capitalisation
At 29.4% of GDP in 2015, Colombia’s stock market capitalisation was below the 42.8% average of its regional peers and less than half the level seen in 2012 before the economy was hit by collapsing oil prices (see analysis). With economic growth expected to pick up in the coming years, however, market analysts are reasonably confident about the medium-term prospects. “Over the next three to five years, barring unforeseen global events, capitalisation should steadily increase from its 2015 low. The agriculture and industry sectors have not traditionally been featured heavily in the index, and could be big growth areas if a competitive foreign exchange rate can be maintained. Over the longer term, one of the dividends from the peace agreement could be increased geographic and sectoral representation on the stock market,” Duarte told OBG. “The banking sector may also need to raise more equity in the coming years to sustain growth while transitioning to the more stringent capital requirements of the Basel III regime.”
Listings & De-Listings
There have been no IPOs since Cemex Latam Holdings came to market in 2012. In 2014 a number of listed firms merged to form gasoline retail and service stations company Terpel, a newly listed stock, although this did not bring any new firms to market and in fact served to reduce the number of issuers.
Secondary offerings have fared a little better, with three banks – Grupo Aval, Bancolombia and Banco de Bogotá – raising capital in 2014. Reflecting the challenging economic situation, there were no secondary offerings in 2015, while there was a solitary offering by Grupo Argos, a cement company in 2016. As well as the challenging economy, Jaime Humberto López Mesa, president of the Colombian Association of Exchange Commission Agents, told OBG that cultural factors also play a part in the reluctance of Colombian firms seeking a public listing. He said, “Family businesses still predominate and there is a strong preference in many quarters to avoid the transparency and governance requirements that necessarily come with a public listing.”
In fact, recent years have seen a number of large issuers exit the market. At the end of 2016 there were 70 listed firms, this number having declined steadily since 2008. The biggest transaction of 2016 saw the government sell its majority stake in power generator Isagén. Meanwhile, Pacific Exploration and Production Corporation, a big player in the oil sector previously known as Pacific Rubiales, had its shares suspended on the BVC in April 2016, pending their permanent delisting.
Private Equity
In 2015 Colombia became the third most important private equity market in Latin America on the back of a total investment of $415m for the year. Since the country’s first two private equity funds were launched in 2005, there has been a proliferation of new funds, with 28 appearing during the 2014/15 period alone. By 2016 there were 87 funds in operation run by 55 different fund managers, according to the Colombian Association of Private Equity Funds (Asociación Colombiano de Fondos de Capital Privado, ColCapital). Between 2005 and May 2016, total capital commitments of private equity funds operating in Colombia reached more than $21.9bn, of which some $11.7bn was allocated for investment in Colombia alone.
Capital commitments to Colombia had increased by 59% from their 2014 level, largely on the back of private equity and debt funds established to finance infrastructure assets, such as the purchase of Isagén, as well as a major road-building programme projects (see Economy chapter). Over the period between 2005 and 2016, 72.4% of capital commitments were accounted for by local investors, with the remaining 27.6% coming from foreign investors. Pension funds are the single biggest type of investor, contributing 39.8%, followed by other financial institutions with a further 16.5%. Accounting for $5.2bn invested through 11 funds, infrastructure is by far the most important category, followed by growth funds, accounting for $3.3bn, real estate ($2bn) and buyout funds ($1bn). By comparison, natural resources, venture capital and impact funds account for relatively small shares of capital commitments.
Fundraising
Speaking to OBG, María Isabella Muñoz Méndez, executive director of ColCapital, recognised the progress being made in Colombia in terms of private equity, but highlighted a number of challenges. “Fundraising is always a challenge, so we try to diversify the investor base, by encouraging family offices, for example. Pinning down historical financial performance is also difficult, since the first funds, set up between 2005 and 2010, are only now exiting their investments. Finally, the regulatory burden is particularly heavy for seed and venture capital funds, so it may be wise for the government to look at whether they need a dedicated regulatory regime or different incentives,” she told OBG.
In addition to the recent surge in funds and capital commitments in the infrastructure segment, Muñoz Méndez added, “Energy, and particularly renewable energy, is likely to be big in the future. We could also see private equity interest generated in the rural and tourism sectors as a result of the peace agreement, while services are also likely to become an increasingly important segment.”
Infrastructure Financing
One of the most important growth divers in 2017 and beyond is expected to be investment in infrastructure (see Economy chapter). To date, local banks have been the most important players (see Banking chapter), while private equity and debt funds have been playing a growing role in recent years. In 2016 important global players arrived on the scene with the financial close of infrastructure funds by Ashmore-CAF, and with BlackRock also signalling its intention to launch a fund. Sura Asset Management and Credicorp also closed a COP1.3trn ($390m) private infrastructure investment vehicle in early 2016.
Two important 4G road projects secured financial close in 2016. Pacifico 3, a 146-km highway connecting the regions of Antioquia, Caldas and Risaralda, and Concesión Costera, for the 159-km Cartagena-Barranquilla Highway. The $648m Pacifico 3 deal, structured by Goldman Sachs, was awarded a prize in September 2016 by Latin Finance in the category of Best Infrastructure Financing: Andes. This ground-breaking deal represented the first such investment by international capital markets in Colombian infrastructure. It involved a $260m, US dollar-denominated, fixed-rate bond due in 2035, as well as a COP397bn ($119.1m), inflation-linked bond, also due in 2035. Both bonds are listed in Luxembourg and structured under New York City laws. Bancolombia and Corpbanca also provided some $180m in long-term debt financing to the project.
By way of credit enhancement, to ensure the senior bonds achieved a “BBB-” international investment grade rating, Financiera de Desarrollo Nacional (FDN) provided a subordinated, multipurpose credit line for the deal. Essentially, this provides investors with financial comfort in the event of traffic shortfall or cost overruns. Part of the FDN’s financing was derived from the sale of Isagén, as the government allocated funds for the purpose. While the authorities have signalled an interest in developing a domestic market in infrastructure bonds, achieving this aspiration appears to be some way off.
Outlook
The 2012 collapse and liquidation of InterBolsa, the country’s former dominant brokerage firm, after a scandal involving its excessive engagement in risky transactions, has cast a long shadow on the regulation of capital markets in Colombia. At the time, the authorities stepped in decisively to effectively shut down the company. In the interim, the Superintendencia Financiera, the regulatory body overseeing Colombia’s capital markets, introduced a series of reforms to tighten up regulation. In the near term regulators are working to strengthen the regulatory framework protecting retail investors, who have become reluctant to invest directly in the markets since the InterBolsa scandal. In 2015 regulations were changed to permit the short-selling of equities, which led to a surge in such transactions during 2016. Regulators also engage closely with counterparts in Chile, Peru and Mexico to oversee the Latin American Integrated Market (Mercado Integrado Latinoamericano, MILA), which will integrate regional capital markets. López Mesa told OBG, “Regional integration of capital markets through MILA and the Pacific Alliance will be a game-changer, but overcoming regulatory barriers are the biggest challenge at the moment. Market players are eagerly anticipating the creation of a regional funds passport, which would allow a fund to operate across all of the participating markets.”
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