Financial advisors, bankers, securitisation experts and strategic consultants, First Corporate Finance is riding the wave of Argentina’s newly found openness to international investors. Miguel Arrigoni, its Chairman and CEO, has a long standing experience in the financial sector and is now ready to launch the very first investment bank in Argentina.
Just over twelve months ago, Arrigoni flew to Boston to meet with investors who asked him about the tower industry in Argentina, about which there was then very little to say. After a year of in-depth analysis and studies, he spoke to TowerXchange about trading conditions in the country, its readiness to open doors to international investors and the prospects for international investment in Argentinian towers.
TowerXchange: Miguel, please introduce yourself and your professional background.
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
I started working in finance forty years ago, when I was just seventeen. I worked within BDO, one of the largest audit firms in the world and then created Arrigoni y Asociados whose team became part of Ernst & Young in 1997 and subsequently Deloitte & Touche. I ran the corporate finance division for Latin America for EY and then Deloitte until 2013, when we decided to separate our entity and create First Corporate Finance.
The core team of First has been together for over twenty-five years and to date we number ninety experts, making up the largest corporate finance office in Argentina.
Back in 2013, we decided to create our separate firm because we were expecting certain economic and political changes to happen and wanted to be able to serve the market independently. To date, these changes are indeed happening under the Macri presidency and we are able to serve our clients in a variety of financial fields.
First Corporate Finance is specialised in investments, M&A, raising debt through the capital markets – in securitisation we own 80% market share in Argentina. In fact, we’ve performed around 1,400 transactions without one single default which is quite impressive by Argentinian standards!
Recently, we’ve created First Capital Markets, which is specialised in brokerage and trading, putting us on the way to become one of the first local investment banks in Argentina.
Our goal is to serve local and foreign investors. You see, back in the nineties, the international financial community was very involved in Argentina whereas now 80% of all financial activities are performed at a local level. We all know the history of Argentina and its closed economy but right now, things are changing and the market is definitely opening up to foreign companies.
TowerXchange: When did you first start looking at towercos and their business model?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
We are very active in the infrastructure sector as a whole. Argentina is an underdeveloped country with plenty to do in all fields including energy, mining, highways et cetera. And this definitely includes telecoms and telecoms infrastructure.
To date, there are about 1.5 mobile phones per person in the country. We are talking about 144% SIM penetration rate and 62.7mn connections for about 43.6mn inhabitants.
Last year, we visited some investors in Boston and were asked questions about the passive infrastructure business. At the time, we really had no idea that the lack of investment in the telecom sector was so deep.
Our studies show that to reach decent quality of service (QoS) in Argentina, we’d need about 30-40,000 towers and to date, we can count on approximately 15,000 sites. We are talking about 20,000 new towers and an investment in the short term of US$2bn, if not US$3bn.
With 4,000 subscribers per site, we are miles away from the U.S. standards and although we know that many countries in the region have similar averages, I don’t think the QoS is as bad as in Argentina. Especially if we consider that certain areas aren’t underserved but literally disconnected, such as many villages in Patagonia with 1-2,000 inhabitants.
TowerXchange: How do you foresee the Argentinian tower market shaping up? And when?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
I think the biggest change that needs to happen is in the way operators do business. So far, we’ve been used to the traditional model of each operator owning their towers but the sharing concept does need to be adopted not only to improve efficiency but also to, hopefully, respond to new regulatory requirements.
In fact, the government is definitely pushing for a new telecom regulation to come into play and we hope this will mandate infrastructure sharing. Argentina has a long way to go to become competitive - I foresee at least ten years from now - and only a strong push from the government can speed things up.
From its side, the government is now assessing ways to use state-owned real estate for telecoms. In fact, finding locations for telecom sites has historically been a problem for the telecom industry and the government is now experimenting alternative ways to find suitable spots, also by utilising public land.
TowerXchange: Do you think that Argentinian carriers are inclined to sell their towers?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
Maybe they aren’t inclined yet but it’s the logical move they should aim for. The level of investment by operators has been quite low over the past few years, with the exception of perhaps Claro.
When the new telecom regulation will come into force, it will push for network enhancement, improved QoS and cell site densification so carriers will have to invest. Selling towers is a logical solution to finance network rollout.
The QoS in Argentina is so poor that if you travel from downtown to any centric neighbourhood in Buenos Aires - I am talking about a five mile ride - your call will drop at least four times. Even in Buenos Aires, call drop rates are very high. Black holes in the city are everywhere!
With regards to towers, the recent spin-offs of Telefónica and Claro might not call for pure sale and leaseback operations but my point is that one way or the other, operators have to improve their service and invest in the country. The tower business is clearly not the core activity of operators but they do have options. They can sell, spin off or start sharing… Whatever works!
TowerXchange: And how many towers are we talking about? Who owns what in Argentina?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
Operators say that there are as many as 15,000 towers in Argentina but we’ve analysed the status of the market and believe that there are no more than 12,000 active sites in the country. I am referring to sites that actually work!
Interestingly enough, the top three operators have very similar market shares (around 30-33%) and each of them owns one third of all existing towers. And in spite of its really bad service, charges have been quite high from all three operators.
TowerXchange: How investible is the Argentinian telecom industry? What are its threats?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
The legacy from the past governments isn’t all negative. In fact, Argentina enjoys very low level of debts. Specifically, we are talking about less than 15% foreign debt compared to the national GDP.
On the downside, this has corresponded to very little or zero investment but right now, we have the ability to easily increase the level of debt. The question is how do we use that money. If used wisely and spent on infrastructure projects, Argentina has all the potential to become a leading force in the CALA and global economic landscape.
As we all know, the past government restrained the freedom to move capital out of the country and this has contributed to the country’s crisis. In fact, we’ve lost two third of capital resources as a result of this imposition.
Now we just need to become “normal”. Technically speaking, investors are already free to take their money out of the country but obviously the market is cautious. The image of Argentina has been poisoned by nationalisations that took place between 2008 and 2013 but many facts were misinterpreted.
In fact, the Argentinian government did pay Repsol US$5bn to compensate for the expropriation and, talking about our national airline, Aerolineas was a disaster under the management of Grupo Marsans, with as many as 80% of flights being cancelled on a daily basis. So the government takeover wasn’t a negative move, if you ask me.
Don’t get me wrong; Argentina has a negative track record in many areas but also a very bad brand whose image is possibly worse than reality. Its reputation needs to be restored to boost the confidence of investors and the international community as a whole.
I think it will take the whole year for international companies to reassess the status of things here in Argentina, before making any more investments. Investments are more likely in 2017. But with regards to towercos, it could be that some players - also in light of the entrance of Innovattel - look at the industry and decide to go for some smaller investments. This could also be pushed by a very good local offer in terms of labour and suppliers.
TowerXchange: From a legal standpoint, many fear it might be difficult to enforce contracts. What’s your take?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
The securitisation law was created back in 1996 (Trust Law N. 24,441) and is quite sophisticated. In fact, it’s an exact replica of the U.S. securitisation law. It’s a strong weapon that has been used a lot in the country; specifically, 90% of the financing we do is developed using it.
I believe towers can fall under the REIT (Real Estate Investment Trust) model and the securitisation legislation does help to guarantee those investments. Additionally, foreign entities investing in a trust such as a REIT aren’t taxable according to local law, which helps considering our levels of taxation can be quite high.
I believe towers can fall under the REIT (Real Estate Investment Trust) model and the securitisation legislation does help to guarantee those investments. Additionally, foreign entities investing in a trust such as a REIT aren’t taxable according to local law, which helps considering our levels of taxation can be quite high
TowerXchange: And with regards to currency, how would you advise international companies looking at investing in the country?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
There are several financial tools that protect investors from inflation and currency fluctuation. There are some new rules that allow indexing and inflation adjustments for example. And if you bring US$ into the country, you could purchase a swap insurance here in Argentina to protect your investment.
Additionally, contracts now can be stipulated in US$ but I’d also like to remind international investors that local banks hold very high level of liquidity to leverage investments made in Argentinian pesos. There is quite a lot of local capital that is just waiting to be invested in the country!
TowerXchange: Do you have any advice for towercos now assessing a move into Argentina?
Miguel Arrigoni, Chairman and CEO, First Corporate Finance:
I think Argentina represents a wonderful opportunity for towercos and I believe it all depends on timing. My advice would be to start studying the market sooner rather than later, especially since I believe 2017 will be a great year for various local industries, including telecommunications.
I’d also like to remind foreign investors that Argentina has a long history of highly productive and successful overseas businesses. The many national crises did erase much of its memory but now Argentinians are ready to embrace progress and this is an unmistakable signal for the telecom industry to start investing to boost its presence and level of service in the country.