The Development of the Chilean Bond Market Introduction

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paper of this research project, we showed that the Chilean bond market is not ... (sector, size, leverage), what type of bond they issued (maturity,indexation and ...

The Development of the Chilean Bond Market Matías Braun

Universidad Adolfo Ibáñez and UCLA Anderson School of Management

Ignacio Briones

Universidad Adolfo Ibáñez

(Draft version 1.3, July 2006)

Introduction During the last two decades, Chile’s outstanding record of economic growth was accompanied by a significant development of its financial market. Scholars interested in the link between financial and economic development have surveyed this experience. However, most part of the research on the Chilean financial market has been focused either on the banking sector (Budnevich 1997, Larraín 1995; Ramírez and Rosende 1992) or on macroeconomic linkages of this process (Hernández and Parro 2004; Corbo and SchmidtHebbel 2003; Valdés and Soto 1997, De Gregorio, Edwards and Valdés 1999). Although recent contributions have explored some of the microeconomic and institutional aspects lying behind this process (Gallego and Loayza 2004; Cifuentes, Desormeaux and Gonzalez 2003; Medina and Valdés 1998), many market aspects remain unexplored. This is the case of the fixed income securities market we analyze in this paper. A first relevant question is to know whether the Chilean fixed income securities market appears to be underdeveloped or not. Based on a cross country analysis, reviewed in a first paper of this research project, we showed that the Chilean bond market is not underdeveloped. This is true either at the aggregate level or in relation to the corporate bond market. Despite this first important general finding, a good understanding of the Chilean case requires a deeper sector analysis. In this paper we describe the main characteristics of the bond market over the last 15 years in terms of its regulation, and the supply and demand actors involved. Special 1

emphasis is given to the corporate bond market, which we survey in detail. We base the analysis on quarterly balance sheet data for all listed companies including those that have or have not issued bonds since 1990. We try to determine which ones have issued bonds (sector, size, leverage), what type of bond they issued (maturity,indexation and risk rating), which was the purpose of the issuance (use of funds), where and when were they issued (locally or abroad). This information is complemented with a survey applied to more than 40 companies and a nearly equal number of institutional investors. All in all, the analysis allows us to propose several preliminary hypotheses about the main determinants of the development of the Chilean corporate bond market. The remaining of the paper is organized as follows. Section 1, briefly surveys the evolution of the regulatory framework towards the financial market. Section 2 presents the main stylized facts of the evolution of the Chilean financial market over the last 15 years. In the third section, we analyze in detail the corporate bond market and propose some explanations for the development path achieved during these last years. Section four concludes and rise up some questions for further research.

I- The historical evolution of the Chilean capital market

1- The regulatory framework As can be seen from Figure 1 the development of the Chilean financial market is a relatively recent phenomenon. After a former expanding phase ending during the 1920s, the Chilean capital market experienced a period of repression lasting for half a century. As a result the stock of financial liabilities felt from almost 60% of GDP to near 10%. It is only since the 1980s that the financial market began to reverse this tendency, showing an impressive expansion with financial liabilities representing nowadays near two times the country’s GDP.

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The recent aforementioned change is closely linked with the marked oriented reforms implemented in Chile since the mid 1970s. More specifically, the main regulatory phases affecting Chile’s financial market can be briefly described as follows.

[Insert Figure 1]

A) Financial repression (before the 1970s) Since the 1930s, the financial market was characterized by a progressive change of orientation concerning its regulation. That tendency was in line with the inward-looking development model to which Chile began to adhere and in which the State exerted a strong interventionist economic policy. A cumulus of restrictive regulation was progressively set, including controlled interest rates, quantitative restrictions on credit and explicit interventionism in its allowance to priority sectors. The result was a rapid decline of the financial market. Moreover, during the “Popular Unity” government (Allende during 19711973) the banking industry was almost completely nationalized, with the State controlling nearly 90% of the domestic bank credit.1 Overall, the State controlled directly and indirectly nearly 93% of all financial assets of the economy.2 Besides these measures related to banking control, the government also imposed limits on company financing. B) Financial liberalization (1973-2005) After the political crisis and the military coup of 1973, Chile moved faster towards market oriented policies. At the financial market level, the reforms can be divided in several successive steps that we now turn to briefly describe.

b.1- First generation of market reforms: Deregulation (1973-1981) Between 1973 and 1974, the government aimed at "normalizing" the financial activities. It eliminated the tax on interest rate and decreed a progressive liberalization of the interest rate structure. Starting in 1975, an important component of the policies implemented was 1 Former Finance Minister Voskovic asserted, "The State controls now 16 banks who supply 90 % of all the

credit". Quoted in Meller, (1996) 2 See Braun and Briones (1997)

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the privatisation of State owned banks by allowing the private sector to acquire the banks assets using high leverage financing schemes3. The privatisation process was accompanied by the relaxation of several entry restrictions into the banking industry. The former deregulation efforts also focused in introducing more flexibility regarding the remaining financial intermediation markets such as bond, insurance and stock markets. The Government dictated a new law concerning the Superintendence of Banks (1975) and mutual funds (1976), and a law that authorized the operations of "brokerage" for banks and financial institutions others than traditional brokers. In 1976 a stock register was created and the public disclosure of information became mandatory. At the same time the government proceeded to an extension of the criteria of inflation-indexation to all financial instruments larger than 90 days term. The beginning of the 1980s was associated to a consolidation of the existing institutions within the financial market and to a standardization of their general regulation. The Government authorized banks to offer indexed savings accounts (1979) and dictated a new organic law for the state-owned bank (“Banco del Estado”). A new Superintendency of Securities a Insurance (SVS) with the objective of regulating the stock market was established in 1980 and a new Company Law was introduced in 1981. Besides, a private system of pensions (AFP) based in individual capitalization accounts was created in 1980 (but was set up in 1982). As described later, soon the AFP became the larger institutional investor within the domestic financial market. In contrast with the aforementioned regulatory framework, the banking industry lacked of prudential regulation. Lending to related enterprises within economic conglomerates owning banks was not precluded. Moreover, moral hazard problems resulting from a combination of implicit state guarantees on deposits and highly leverage banks due to the privatisation process, deteriorated the asset portfolios of banks. The latter, in combination with a real external shock that significantly dropped Chile’s terms of trade, resulted in a severe banking and economic crisis starting in 1982. Between 1982 and 1983, GDP felt by

3 Potential private buyers were allowed to borrow from the Government (CORFO) up to 90% of the sale price

giving the privatized assets as collateral. (see, Meller 1996, Barandarián and Hernández 1999 or Hachette 2000 for more details) 4

15%, with unemployment reaching nearly 30%. The Central Bank reserves diminished by half while banking losses represented three times their paid in capital. As a consequence of this drawback, a new phase of regulation and supervision emerged, especially on the banking sector.

b.2- The banking crisis and the second generation of reforms during the 1980s As a consequence, the banking system was intervened. Between 1982 and 1985, the State intervened 21 financial institutions. The State provided liquidity to banks which, in turn, assumed a subordinated debt in favour of the Central Bank that had to be paid in a maximum of 50 years. After the intervention, banks were re-privatised following a modality called "popular capitalism" (that is, the sale of banking shares was opened to everybody and particularly to the employees). The post crisis period came along with a second wave of regulation of the financial market and an increase in the powers of the Superintendency of Banks and Financial Institutions (SBIF). The new regulatory framework gave priority to prudential aspects, especially at the banking system level where a new banking law was dictated in 1986. The new banking law included a) the establishment of reserve requirements as well as limits on the banks leverage ratio; b) the setting of incentives for private monitoring through mandatory disclosure requirements and partial State guarantees on deposits; c) the separation of the banking business form the one of subsidiaries related to a common economic conglomerate. The regulatory reforms were also deepened in the remaining areas of financial market during the mid 1980s. A new bankruptcy law clarifying owner responsibilities in cases of failure was set. At the same time, the State disengaged from most of its public utility companies (communication, energy) and an ambitious plan of privatisation was put in place. In 1984 a tax reform eliminated the privileged treatment of firms debt over their equity and in 1985 the restrictions of pension founds to acquire company shares were partially removed. The combination of all these factors is related to the huge development that the stock market experienced later. In 1987 the Insurance Law and the Securities Market Law were amended to require all instruments eligible for investment by the private 5

pension funds4 to have a risk rated by private risk agencies and by the official entity, the Risk Rating Commission (CCR). Finally, in 1989 the Central Bank of Chile became independent. The latter will have consequences in the external deregulation of the capital market that arose during the 1990s.

b.3- Third phase: External Financial deregulation during the 1990s During the 1990s many of the reforms started in the mid 1980s were strengthened. Moreover, several constraints affecting the capital account of the balance of payments were removed. For instance, firms with outstanding risk ratings were allowed either to raise capital abroad (typically trough the ADR´s mechanism) and to issue foreign bonds. The external constraints preventing institutional investors such as the Pension Funds and the insurance companies to hold international assets were removed up to a certain amount of their assets portfolios. International capital controls setting minimum permanence requirements for direct investment were progressively relaxed. Regarding portfolio investment, the capital controls intended to lower the volatility of international short term flows, were de facto removed in 1998. In 1997, a Law regulating the participation of retail banks in other non-traditional banking industries such as investment banking, insurance or factoring was approved by the Congress.

b.4- Fourth phase: the MKI and MKII reforms In 2001 the Chilean Government was engaged in a new capital reform, known as the “MKI” (Capital Market I) reform. The new proposed framework turned around three main pillars: taxation, institutional reforms and pension funds. These reforms were intended to increase the level of domestic savings, improving the liquidity and depth of the financial market, raising competition between banks, insurance companies and pension funds. Taxation reforms included the elimination of capital gain taxes (15%) on the sale of high volume traded stocks and securities, the sale of stocks for three years after an IPO, and the short selling of stocks and bonds. The institutional reforms included the deregulation of the insurance industry by relaxing the limits on their investment portfolios, allowing the inclusion of new financial instruments and the introduction of new disclosure and solvency

4 See the Appendix for the detailed evolution on investment restrictions for the Pension Funds.

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requirements. Besides, the mutual funds were benefited by modifications that simplified the trading of stocks, allowed the funds to develop complementary activities and standardized the funds capital requirements. Finally, the MKI authorized the creation of new entities called “general fund administrators” which could manage simultaneously multiple funds such as mutual funds, investment funds and mortgage portfolios. As regards to pension funds reforms, the MKI allowed the AFP’s to manage five different risk profile funds (instead of the two existing ones). These funds, ranging from A to E, were eligible directly by the affiliates to the pension funds. The reform also raised the limits on individual voluntarily contribution to pension funds, contributions which, in turn, have tax benefits. In 2003, the Government presented a project containing a second step of reforms, the “MKII” project. The project intends to strength the reforms implemented in the previous phase and allows the development of new areas within the local financial market. The major areas included in the MKII intend to: a) stimulate venture capital industry by means of proposing temporary tax exemption on capital gains, b) facilitate the creation of limited liability corporations (that appear to be more flexible for venture projects), and c) set-up a national register of assets that can is expected to increase the access to credit by means of using assets as collateral. A second line of reforms is related to corporate governance standards improvement in areas such as disclosure requirements, minority shareholders protection, transactions between related parties, supervision and insider trading. In third place, the MKII is also intended to improve the supervision and enforcement faculties of local regulatory institutions (SVS and SBIF), trough raising the levels of transparency in the securities market, encouraging the electronic issue and trading, setting new minimal capital requirements for financial intermediaries and promoting the self-regulation of stock exchanges. In that line, the MKII also proposes to broaden the criteria to obtain a licence to operate banks, life insurance companies and pension funds. Finally, the MKII seeks to extend the incentives to voluntary savings by opening collective plans in which the employer contribution to the employee fund can be considered as an expense for taxation purposes.

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II- The Chilean fixed income securities market

Supply side Figure 2 presents the evolution of the ratio between stock value and GDP of the main financial liabilities of the Chilean economy during the last 25 years. From this figure, two initial general comments are in order. First, despite the amount of total financial liabilities outstanding has increased significantly during the last two decades, most part of this development happened between the mid 1980’s and the mid 1990’s when total financial liabilities doubled from 100 to 200% of GDP. This level remained relatively stable afterwards. Second, equity is by far the largest financial liability of the economy, representing nearly 50% of it or 113% of GDP in 2004. Bank deposits account for roughly 20% of the total stock of financial liabilities while the fixed income securities market we describe below explains the remaining 30%. In 2004, the amount outstanding of fixed income securities represented nearly 54% of Chiles’s GDP. Interestingly, this ratio has remained relatively stable since the mid 1980’s but its public/private composition has changed in favour of private bonds. Between the mid 1980’s and 2004, private bonds have increased their share to GDP from 8 to 22% while the share of public securities has declined from 50% of GDP to 32% during the same period.

[Insert Figure 2]

Public Bonds Up to 2004, the amount outstanding of fixed income securities issued by the public sector was 33 billion dollars. These bonds can be classified into two general categories depending on the issuer: the Central Bank of Chile and the central government.

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Central bank bonds These bonds are used by the monetary authority as a mechanism to regulate the monetary base through open market operations and to determine the benchmark yield curve of the economy. The Central Bank is the largest individual bond issuer in Chile. In 2004 its total amount of bonds outstanding was equivalent to 21% of GDP, divided into 2,9% of GDP for short term bonds and 18,3% of GDP for long term bonds (see Figure 3). Among short term bonds we identify the so called PDBC and PRBC5. PDBC are issued in nominal local currency and have maturities ranging from 30 to 360 days, while PRBC are CPI indexed and have a maturity of 360 days. These bonds are not considered as part of the fixed securities market but as part of the financial intermediation market. Long term bonds have maturities up to twenty years and are either CPI indexed or dollar indexed. While during the 1990’s long term Central Bank bonds were almost exclusively CPI indexed, since 2000 nearly one third of their amount outstanding were foreign currency indexed bonds. Table 1 summarizes the characteristics of the main Central Bank bonds.

[Insert Table 1] [Insert Figure 3]

Central bank bonds are by far the most traded fixed income securities. From 1990 to 1995, they represented nearly 80% of total transactions in fixed income securities at Santiago Stock exchange. This share declined afterwards but remained beyond 50%. They are the most liquid fixed income securities as well. Between 1990 and 2004, we estimate their turnover ratio in the three existing stock exchanges at 438%. This is nearly two times the ratio for corporate and mortgage securities (see Table 4 and Table 5). 6

5

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“Pagarés Descontables del Banco Central” and “Pagarés Reajustables del Banco Central”, respectively.

Although in 2004, the Santiago Stock Exchange accounted for near 99% of total transactions in the fixed securities market, before 1995 it had a market share of only 55%. The two remaining stock exchanges, the Electronic Stock Exchange and the Valparaiso Stock exchange accounted for nearly 40% and 5%, respectively, of total transactions in fixed income securities. This issue was taken into account when computing our turnover ratios. 9

Central Government bonds Central government bonds can be classified into two categories: domestic bonds and sovereign bonds. Among the former, the largest component is associated with what has been called bonos de reconocimiento (recognition bonds). These bonds originated from the transition from the pay-as-you-go pension system to the private pension funds scheme implemented during the 1980’s. Workers who chose to join the new system were granted with a bono de reconocimiento to account for the contribution they made into the old system. Their amount outstanding has increased from US$ 8 billion during the mid 1980’s to US$ 12 billion in 2004. While declining, these bonds still represent a significant fraction of GDP (15%, see Appendix). These bonds are basically held by the private pension funds and insurance companies until maturity, determining a low liquidity in the secondary market. Although they represented nearly 25% of the total amount of bonds outstanding in 2004, they just accounted for 4% of total transactions in fixed income securities. Besides, their turnover ratio (34%) was more that ten times lower than the one of Central Bank bonds (Table 4 and Table 5). The second main type of central government bonds issued domestically are the Treasury bonds. However, while their amount outstanding was relatively high during the 1980’s (6,5% of the GDP), nowadays their importance has became marginal. Lacking a sovereign benchmark to facilitate private bond placement in international markets, in 1999 the Government decided to place a sovereign bond of US$ 500 millions in the US market. Since then, five additional government placements occurred (including a Euro bond), however the amounts have remained relatively small (in 2004 the amount outstanding of foreign issued bonds was only US$3.630 million (Table 2).

[Insert Table 2]

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Private fixed income securities In 2004 the amount outstanding of private bonds was near US$ 20 billion (21% of Chile´s GDP). The private bond securities can be divided into three categories depending from the issuer: i) mortgage bonds, ii) corporate bonds issued by the firms and iii) corporate securitized bonds issued trough a financial intermediate.

Mortgage bonds Mortgage bonds are issued by banks and financial institutions and their main purpose is house financing. After a long lasting period of relative repression, during the 1990’s the market experienced a phase of development both in terms of the amount of bonds outstanding and in terms of its transactions in the secondary market. While the market experienced a slight declining tendency after the Asian crisis of 1997, the amount of mortgage bonds outstanding rose from US$ 2 billions (8% of GDP) in 1990 to US$ 10 billions (12% of GDP) in 2004. The turnover ratio in the secondary market increased from 51% to more than 150% during the same period, whereas the share of mortgage transactions jumped from 4 to 30% of total traded fixed income securities (see Table 4 and Table 5).

Corporate bonds Corporate bonds can be divided into those issued domestically and those issued abroad. Among the former we should distinguish between i) standard corporate bonds and ii) securitized (asset-backed) securities. Companies willing to issue bonds have to be registered in the SVS and must fulfil the disclosure requirements implied (mainly by submitting quarterly balance sheets). Besides this limitation, there are no formal legal provisions setting minimum size or rating requirements when issuing bonds. Although the Chilean capital market as a whole began its expansion since the mid 1980’s, it is important to notice that the development of the corporate bond market dates only from the very end of the 1990’s. As showed in Table 3, up to 1999, both the number of indebted companies and the total amount outstanding (in US$) of corporate bonds remained 11

relatively stable, while representing on average nearly 4% of GDP. Since then the market expanded systematically (Figure 4). The number of bonds and indebted corporations increased, while the total amount outstanding expanded five times thus reaching more than 11% of GDP in 2004

[Insert Table 3]

Since the end of the 1990’s, the securitized bonds industry has also expanded. A series of reforms to the Securities Law introduced in 1994 and 1999, allowed a further development of the securitized bonds’ issued by financial intermediaries, especially during the last 5 years (Figure 5). Up to 2004, 13 different financial institutions were issuing securitized bonds, the total amount of debt outstanding being US$1700 millions or 2% of the GDP.

[Insert Figure 4] [Insert Figure 5] [Insert Table 4] [Insert Table 5]

Demand side: institutional investors

The main institutional investors in Chile are the private pension funds, the insurance companies and the mutual funds. In 2004, their combined financial assets represented more than 90% of the GDP (Figure 6); this accounts for nearly half of the outstanding financial liabilities of the Chilean economy. Since 1990, these institutional investors have held nearly 85% of the total amount outstanding of corporate bonds. 12

Other institutional investors, less important, are the local investment funds and the foreign investment funds (FICE). In 2004, there were 41 investing funds and 6 FICEs with total financial assets representing 1,6% and 0,8% of the GDP, respectively.

[Insert Figure 6]

Pension funds Private pension funds are the largest institutional investor in Chile. In 2004, their assets represented more than 50% of the GDP and were twice as large as the combined assets of insurance and mutual funds (Figure 6). During the 1990’s, pension funds held more than 50% of the total amount outstanding of corporate and mortgage bonds, and about half of the Central Bank bonds in circulation. However, the shares of these instruments have declined strongly in the recent five years in favour of Recognition Bonds. In 2004, the share of Central Bank, mortgages and corporate bond was below 40% of the total amount outstanding in circulation for each category of instruments. In contrast, recognition bonds held by the pension founds have jumped from nearly nil to 20% of the total amount outstanding in circulation (Figure 7). Figure 8 shows the portfolio composition of pension funds and reveals that the share of fixed income securities has declined during the last years. They represented more than 62% of the total assets of pension funds by the end of the 1990s, however, in 2004 they accounted for just 32%. Interestingly, this declining pattern was driven by a fall in the share of Central bank and mortgage bonds holdings but not from a decrease in the share of corporate bonds. While the share of the former declined from 30 to 12% and from 16 to 7% between 1998 and 2004, the share of the latter increased from 3,7 to 6,8% during the same period.

[Insert Figure 7] [Insert Figure 8]

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Two main regulatory modifications could explain the aforementioned pattern In March 2002, the so called voluntary pension savings scheme was reformed (“Ahorro provisional voluntario”). People willing to increase their pension contribution beyond the legal limit receive a series of tax benefits. Besides pension funds were not anymore the solely institution allowed to manage these voluntary funds. While they retained a market share superior to 80%, these voluntary savings could be done through a series of financial institutions including insurance companies (8%), mutual funds (8%) or banks. In August 2002 pension funds were allowed to manage five different risk profile funds instead of the two existing ones. Ranging from A to B, the level of risk of them was determined in terms of the proportion of the fund that could be invested in stock market related securities. The more risky found (A) was allowed to invest up to 80% in variable income securities whether for instance this kind of investment was precluded for less risky fund E. Since then the share of stocks to pension funds total assets grew from 9% in 2002 to 15% in 2004. More importantly, the declining importance observed for the fixed income securities in the portfolio of pension funds is associated with a big increase in the proportion of assets invested abroad. From 5,7% in 1998 the share of foreign assets has jumped to more than 27% in 2004. This change was largely the result of a series of regulatory modifications enlarging the foreign investment limits of pension funds. In 1999 the limit was raised from 6% to 12% of pension funds assets (depending of the kind of found) to 10% to 20%. in March 2004, the limit was extended again to 20-30% of the total assets of the funds. The latter suggests that financial openness could rule against the development of the domestic bond market, though it is not clear that corporate bonds are affected in the same proportion. Interestingly, from the total amount invested overseas, 90% was invested either in stocks or mutual funds, thus indicating that the pension funds were willing to hold riskier assets. True, diminishing the proportion of Central bank bonds and mortgage bonds appear to be a natural outcome in this context. But, why pension funds did not significantly increased the shares of corporate (riskier) bonds? Moreover, why the share of corporate bonds is so far below the maximum limit determined by the law? Regulation itself offers an explanation. Pension funds are precluded to buy bonds ranked below BBB. In practice, the latter determines that all eligible bonds (both private and public) are relatively close 14

substitutes in terms of their risk profile. Notice that found E, which is supposed to be the less risky, is allowed to invest up to 60% of its portfolio in corporate bonds whereas founds A-B and C-D can only invest 30 and 40%, respectively. The latter is likely to have critical implications for corporate bond issuance. Small or risky firms would find difficult to place their bonds when such a relevant institutional actor faces severe regulatory constraints to acquire them. According to the current Law ruling the pension funds (DL 3500), corporate bonds that do not fulfil the minimum risk criteria can only be acquired up to 3 and 1% of the fund value, in the cases of funds type A-B and C-D, respectively while this is forbidden for fund E. Insurance companies and mutual funds Insurance companies are the second main institutional investor in Chile. The combined assets of life and general insurance companies reached more than US$ 18 billion (20% of GDP) in 2004, though 97% of this amount is represented by life insurance companies. More important, during the last five years they have become the largest holder of corporate bonds. While during the 1990’s they held nearly 30% of the total amount outstanding of corporate bonds, in 2004 this share augmented up to 49%. Since 2000 their holdings of corporate bonds have increased from US$ 1.3 billion to more than US$ 6 billions. Interestingly, the comparison between Figures 7 and 9 reveals that the increase in the amount outstanding of corporate bonds held by the insurance companies almost exactly compensates the diminution in the share of corporate bonds held by the pension funds (this is also true for the mortgage bonds). The increase in corporate bonds holdings is largely the result of portfolio adjustments: the share of corporate bonds to total assets rose from less than 10% during the 1990’s, to 33% in 2004. In turn, the latter is associated with a decrease in the share of state bonds they hold (Figure 10). The recent observed modifications in the portfolio composition of the insurance companies is related with regulatory modifications introduced by Law 19.769 in 2001 to the specific law DFL 251, which rules insurance companies. This modification relaxed some of the investment restrictions previously faced by insurance companies and mutual 15

funds.

Insurance companies can invest up to 25% of their portfolio in corporate bonds

rated above BBB and up to 5% in bonds that do not compel with these risk criteria. Besides they can invest overseas up to 20% in bonds, stocks and mutual funds, including 5% of bonds rated below BBB.

Mutual founds are the third largest institutional investor. In 2004 they held 6,3% of the total amount of corporate bonds outstanding. They are subject to fewer restrictions than pension funds and insurance companies. As a general rule, they should hold at least 50% of their portfolio in the form of securities traded in the formal market, bank deposits, bank asset-backed securities, or cash. In general they are required to invest in securities rated B or above. Nonetheless, funds oriented to qualified investors are allowed to hold riskier securities as long as this information is disclosed to the investor and the SVS.

[Insert Figure 9] [Insert Figure 10]

Intermediaries Investment banks and risk rating agencies Corporate bonds (as well as securitized bonds) are normally placed by one of the existing investment banks. Since 2000, twenty six investment banks have been actively involved in placing corporate bonds. In Chile four private rating agencies and a semi-public agency operate in Chile. Among the former: Fitch Chile Clasificadora de Riesgo Ltda, Clasificadora de Riesgo Humphreys Ltda, Feller Rate Clasificadora de Riesgo Ltda, Duff & Phelps Chile Clasificadora de Riesgo Ltda. Besides a semi-public institution, the Comisión Clasificadora de RIesgos (CCR) was set up in 1985 with the purpose of classifying the domestic and foreign debt instruments and equity securities that are eligible for Pension Fund investment. Since 1990, the CCR exists as a legal entity in its own right and manages its own capital, consisting of

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contributions from the Pension Fund Administrators (AFP). The executive board of CCR is constituted by the Superintendents of Pension Funds, of Banks and Financial Institutions, of Securities and Insurance, and four representatives of the AFPs. In the past, ratings by private agencies were subject to revision by the CCR. Actually private ratings are not revised but the CCR can order a third rating if their ratings differ significantly. Stock markets and transfer process While three stock exchanges exist in Chile - the Santiago Stock exchange, the Valparaíso Stock Exchange and the Electronic Stock Exchange- almost all fixed income securities transactions are carried trough the Santiago Stock Exchange. For instance, in 2004, the Santiago Stock exchange accounted for nearly 99% of total transactions in fixed securities. The transfer of the ownership of local bonds is done domestically. The responsibility for both the payment and the transfer of the securities lies on the financial institutions that act as intermediates in the buying/selling process. These intermediaries are ruled by the general capital market and securities Law and should be registered at the SVS. The SVS is in charge of the registration and approval of the clearing and compensation institutions. It is mandatory for registered institutions to: 1) provide the SVS with quarterly financial statements as well as reports on capital variation and disclose any essential relevant acts (Title VII, Law 18.046); 2) holding a minimal capital ranging from US$500.000 (Art. 155, Law 18.045) for compensation chambers and US$1 million for Stock markets and the DCV (Arts. 18, Law 18.876 and Art. 40, Law 18.045). Institutions participating in the deposit of securities, clearing and compensation process are threefold. •

Central Deposit of Securities (Depósito Central de Valores, DCV): is a private

institution (supervised by the SVS) that receives the public offering securities in deposit and facilitate their transfer (art. 1 Law 18.876). DCV is in charge of the centralized process of clearing and liquidation (through electronic transfers) of the transactions.

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Stock Exchanges: along with their broker members they are allowed to undertake an

internal clearing process, informing daily of the resulting net position to the DCV. Only the Clearing house of the Santiago Stock Exchange (Clearing de la Bolsa de Comercio de Santiago) has registered to conduct this function. •

Compensation Chambers: are allowed to be established by stock exchanges (art.

154, Law 18.045). The only operating institution is the Compensation Chamber of the Santiago Stock Exchange.

III-Characteristics and development of the corporate bond market

In this section we analyze in more detail the recent evolution and the main characteristics of the corporate bond market. We rely on information coming from the SVS covering all corporate bond issued since 1990.

These data are analyzed along with

quarterly balance sheets for all the companies registered at the SVS (having or not having issued bonds) since 1990 as well as with the risk rating of the corporate bonds issued since 2000. In a first part, we try to determine when and where bonds were issued, what kind of companies issued them in terms of the economic sector they belong and their main financial characteristics, what kind of bonds did they issue in (principal, currency indexation and maturity), and finally which was the purpose of the issuance. The analysis allows us to propose a first set of explanations on why companies have issued or have not issued bonds. A second set of possible explanations comes from a survey we apply to companies and institutional investors. In a second part, we analyze the recent development of the corporate bond market seeking to understand whether the observed expansion obeyed or not to a structuralpermanent change in the industry. We first present a counterfactual analysis that seeks to 18

account for the recent development of the corporate bond market. The analysis allow us to understand which part of the expansion could be explained by the “natural” trend of the supply and demand factors, which part obeyed to exogenous-transitory changes, and which part could correspond to a structural-permanent change in the determinants of the bond industry. The aforementioned counterfactual analysis is complemented with a VAR analysis allowing us to discriminate the impact of cyclical variables (GDP growth, evolution of the yield curve, liquidity in the secondary market, evolution of the stock market, amount outstanding of state bonds, among others) on the recent development of the corporate bond market.

III.1- Characteristics of the corporate bond market 1- Corporate bond issuance: How much, when and where As mentioned in section II, the development of the Chilean corporate bond market is a relatively recent phenomenon. Table 6 and Table 7 show that during the last 15 years more than 70% of the number of corporate bonds placed and almost 90% of the amount issued were concentrated between 1998 and 2005. Interestingly, the latter is a period in which the Chilean economy slowed its growth rate from an average of 8,2% per year between 1990 and 1997, to 2,9% between 1998 and 2004 (Figure 11). While from 1985 to 1997 the total stock market capitalization rose from 14% of GDP to almost 100% of GDP, the amount of corporate bonds outstanding grew only from 1,5% of GDP to 2,9% of GDP. The latter is indicative that capital was a more attractive source of corporate external financing during that time.

[Insert Figure 11] [Insert Table 6] [Insert Table 7]

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Several different factors appear to be associated with the recent development pattern of the corporate bond market. Liquidity restrictions of corporate bonds could offer a first possible explanation for such a trend. Indeed, between 1990 and 1997 the average turnover ratio of corporate bonds in the secondary market was three times lower than the one exhibited between 1998 and 2004 (108% vs 311%). If, in order to capture the effect of new issuances on the turnover ratio, one excludes the amounts issued each year from both the total amount outstanding and the traded values, these figures do not change (104% vs 311%). Besides, from 1997, the share of corporate bond transactions over the total amount of fixed income securities traded in the secondary market rose from 3,5 to 14%. Finally, the turnover ratio exhibited between 1990 and 1997 was clearly below of the turnover ratio of private securities like the mortgage bonds (199%) or the one of public instruments like the Central bank securities (506%). In short, liquidity appears to be a relevant factor when explaining the “underdevelopment” of the corporate bond market before 1998. A second possible reason for the recent development of the domestic corporate bond market is associated with the evolution of the state bonds market. From 2000, while the amount outstanding of corporate bonds to GDP was rising, the one of central bank bonds was declining. Once again, this was the result of the relative more expansive monetary policy followed by the central bank. As seen in Figure 3, the amount outstanding of Central Bank bonds declined from 30% of GDP in 2000 to 20% in 2004. The latter suggests the existence of a crowding out effect from public bonds. Finally, as seen in section II, the capital market reforms undertaken by the end of the 1990’s could serve as another piece of explanation for the development trend experienced by the corporate bond market during the last years. Indeed, these reforms tended to lighten some of the investment restrictions faced by the institutional investors.

As regards to international corporate bonds, since 1993, 14 companies have placed 32 different bonds abroad, with a cumulative outstanding value of US$ 10,6 billions. This amount is quite significant. It represents nearly 75% of the total amount issued by Chilean companies (both domestically and abroad) since 1990. Issuances overseas were particularly 20

important until 1997, in an indication that the relative “depressed” market existing that time acted as a push factor for issuing bonds overseas. However, notice that the domestic expansion occurred afterwards does not appear to be related with the hypothesis of international markets becoming more closed for domestic firms (Caballero 2000). Indeed, while from 1993 to 1998, thirteen corporate bonds were issued abroad with a total amount outstanding of US$ 4.042 million, from 1999 to 2004 the number of new bonds increased to eighteen with an amount outstanding approaching to US$ 6.200. Table 8 details the amounts of foreign bonds issued each year.

[Insert Table 8]

2- Corporate bond issuers Tables 6 and Table 7, presenting the economic classification of corporate bond issuers (SIC classification, 2 digits) in the domestic market since 1990, reveals that the public utilities and transportation sector has been the largest issuer. During the last 15 years this sector has accounted for nearly half of the number of bonds issued and more than 40% of the average amounts raised. Moreover, up to 1998 public utilities and transportation companies were almost the unique issuers of bonds domestically. Besides, this sector has been the largest issuer of international bonds, accounting for roughly half of the amounts placed abroad (Table 9). From the end of the 1990’s, the construction, manufacturing and retail sectors have become relevant actors as well within the domestic market. Construction, mainly driven by the private concession scheme applied in Chile for financing the public infrastructure, has accounted for 22% of the total amount issued since 1998, whereas manufacturing and retail had a share of 13% and 10%, respectively. Besides, construction and retail had the higher proportion of issuers in relation to the total number of companies included in each of these categories (11, and 10% respectively, as compared to 8% for transportation and public utilities and 4% for the manufacturing sectors).

21

[Insert Table 9]

A critical point consists in comparing the characteristics of the issuing and the non issuing companies. The latter would allow us to detect the main common features of the issuers and thus to propose some determinants of corporate bond issuance at the firm level. Based on yearly balance sheet information for the totality of issuing companies and for all non issuing companies registered at the SVS, we compare these two categories of firms around some few key financial indicators just before the issuance. All in all, from 1991 to 2004 we dispose from near 3000 different observations. Table 10 depicts a first set of average indicators emerging from the time series analysis. Several interesting observations are in order. First, size appears to matter: the average assets of corporate issuers double those from companies that did not issue bonds, while issues have higher sales as well. Second, corporate issuers have higher leverage ratios than non-issuing companies. Between 1991 and 2004, the average value for the former was 22% compared to 16% for the latter. Interestingly, the relative distance of issuers and non issuers at these regards has tended to increase after 1998. Third, issuers appear to have more tangible assets. The three aforementioned results are significant at the usual confidence levels. In turn, we cannot reject the hypothesis that issuers and non issuers are similar in terms of their profitability, thus indicating that this is not a critical variable when issuing bonds.

[Insert Table 10]

In general, the aforementioned results are confirmed when looking at the cross sector financial indicators (Table 11). With the exception of companies from the primary sectors (agriculture, forestry and fishing), bond issuers have higher assets and sales than the companies of their economic sector that do not issue bonds. In all the cases, bond issuers have higher leverage ratios than non issuing firms. The results are mixed regarding asset tangibility. Issuers have higher tangibility ratios in the case of the public utilities and transportation sector. However, the relation is less clear in for the construction and retail

22

sectors, whereas it appears to go in the opposite direction for services, manufacturing and for the primary sector. All in all, a probit panel regression shows that companies having higher assets, sales leverage and tangibility have higher probability to issue bonds. Together, these variables explain 24% of the cross section variance, though the size (sales and assets) is by far the most significant variable.

[Insert Table 11]

Finally, the observed size effect when issuing domestically is even more relevant when deciding to issue bonds abroad. A “typical” Chilean firm that has placed bonds in the international market since 1993 has assets twelve times larger than firms that have not issued bonds abroad and nearly five times more assets than companies having issued bonds only in the local market (table 12). In short, if size matters to issue bonds domestically, it matters even more when wanting to issue bonds abroad.

[Insert Table 12]

3- Characteristics of the bonds issued: average issuance, currency, maturity and risk

Amount of a typical corporate bond During the last 15 years the value of typical a corporate bond issued domestically has increased from US$ 25 millions between 1990 and 1997 to nearly US$ 75 millions, with an average of US$ 63 million for the whole period (Table 7). The latter is five times lower than the value a typical bond issued overseas (Table 9). Moreover, in the case of companies having issued bonds abroad, the average size its bonds placed internationally was three times higher than bonds issued in the local market (US$115 million). The latter suggests that one important reason why companies decide to issue abroad is the relative small size of the domestic capital market.

Currency

23

Tables 6 and Table 7 also depict that almost all corporate bonds issued between 1990 and September 2005, have been CPI indexed. On average, CPI indexed bonds accounted for 94% of the cases and 93% of the total amount outstanding issued. In turn, bonds indexed to the US dollar represented 5% of the number of instruments and almost 7% of the amounts placed. With the solely exception of 1994, this composition has been quite stable in time.

Maturity The strong preference for CPI indexed instruments is probably associated with the extraordinary long maturities that corporate bonds exhibit in Chile. Between 1991 and 2005, the typical maturity of a Chilean corporate bond was 16 years. This figure is almost three times larger than the average maturity of corporate bonds in other developing countries7. Moreover, As Table 13 and Figure 12 shows this long term average maturity has increased during the corporate “boom” occurred in the last five years.

[Insert Table 13] [Insert Figure 12]

This long term average maturity was not the consequence of a possible bias introduced by a large economic sector having a natural preference for long term issuances. True, bonds issued by the construction and transportation and utilities sectors (which are the larger sectorial issuers) have, as expected, longer maturities than the average (21 and 17 years, respectively). However, maturities still remain significantly high at the remaining sectorial levels One could argue that the observed long term maturities have much to do with the quality of the issuer. Indeed, while any company would prefer to issue long term bonds, high end issuers are expected to have more chances to issue such a kind of bonds than weak issuers. In short, one should expect a negative relation between risk and maturity. However, this 7

See Chapter 1 of this research.

24

view is partially contradicted by the fact that since 1991 there has been no significant difference between the maturity of bonds issued by large (less risky) and small (more risky) companies (Table 14).

[Insert Table 14]

Together, the aforementioned observations are indicative that long maturities are inherent to the Chilean economy. A possible explanation to such a pattern is related to the demand structure of the corporate bond market which is dominated by pension funds and insurance (life) companies. As previously seen, these two institutional investors hold nearly 80% of the total amount outstanding of corporate bonds. Because of their business, these institutional investors are more likely to have a long time oriented investment profile, thus inducing companies willing to issue bonds to place long term securities that compel with the needs of the largest buyers. In other words, one important reason why Chilean companies decide to issue very long term bonds appear to be associated with demand side constraints. Eventually, the high rating requirements (BBB or above) of eligible bonds for pension funds and insurance companies, can be part of the explanation as well. Indeed, as presented in Table 15, companies having issued bonds hold more financial liabilities (in relation to assets) and have a higher proportion of long term financial liabilities than companies having not issued bonds.

[Insert Table 15]

Risk Relying on the risk classification of the corporate bonds issued since January 20008, Figure 13 shows that one of the main characteristics of the recent development of the corporate bond market is the raising share of bonds rated AAA and AA. Together these bonds accounted for nearly 75% of the amount outstanding of corporate bonds in 2004 and, 8

Risk classification obtained from the CCR and the four private rating agencies operating in Chile.

25

since 2000, almost every new issuance was rated in one of these categories. Part of the explanation of this observed pattern comes from bonds issued by the private construction industry participating from the private public works concession scheme developed since the end of the 1990s. Because their cash flows have a State guarantee, most part of the bonds issued by these companies were rated AAA. Moreover, AAA issuances from building companies represented nearly 70% of the total amount of AAA bonds issued since 2000.

[Insert Figure 13]

4- Purpose of issuance: use of funds The issuance prospectus of the bonds placed domestically allows us to compute the main declared use of the funds obtained by the companies. Table 16, reports these results for the period 1991-2005. The main reasons to issue bonds are related to refinancing long term liabilities and to financing new investments9. Bonds issued exclusively for one of these two purposes explain more than 60% of the total number of bonds issued. Besides, a quarter of all the bonds served exclusively to refinance long term liabilities while the proportion of bonds in which at least part of the funds served to this purpose was beyond 45%. Investment financing, as a unique use of founds, is associated with 21% of the bonds, while the proportion of cases in which at least part of these funds served to this goal is close to 50.

[Insert Table 16]

Table 17 presenting the historical evolution of the use of the funds obtained complements the previous results with some very interesting new observations. First, 9

Infrastructure financing (FOI) can be taken as part of the investment financing item. Indeed, FOI is a special category of financial investments which is given to companies participating from the infrastructure private concession scheme applied in Chile since the late 1990’s (highways, ports, airports).

26

although on average refinancing long term liabilities appears to be an important reason to issue bonds, until 1999 it was not a relevant motivation. Indeed, from 1990 to 1998 no company declared it will use the funds obtained with the solely purpose to refinance long term liabilities. In turn, the main reasons to issue bonds during that period were to refinance short term liabilities as well as to finance new investments. The aforementioned pattern of te use of external funds is not surprising. As showed in Figure 14 what basically happened after 1998 was that the yield curve shifted downwards, thus, inducing firms to refinance their previous -more costly- long term financial liabilities. The question on whether the drop in the interest rate was a factor inducing firms to issue more bonds is discussed later. [Insert Figure 14] [Insert Table 17]

5- Survey analysis : Perceived characteristics and limitations of the bond market We present the main conclusions emerging for a survey we applied to firms (issuing and not issuing bonds) and to institutional investors. The details are presented in the Appendix.

Firms The main perceived problem with bank financing, both locally and abroad, is the existence of collateral requirements. Among the firms with some experience in issuing bonds the main perceived problem of the domestic market is its small size and the existence of high credit fess from underwriters. The major trouble faced by firms without experience in issuing bonds is the existence of heavy disclosure requirements. While banking loans appear to dominate bonds in terms of the speed of access to financing as well as in terms of information requirements, bonds dominate in terms of available long term maturities. Besides, domestic bank loans appear to have a relative advantage over international loans and bonds in terms of the possibility of renegotiation. Domestic bonds dominate 27

foreign bonds and banking credit as regards of the possibility of indexation and having access to long maturities. The main perceived advantage of bonds issued abroad is related to the size of the market.

Investors The three main factors limiting the corporate bonds investors are liquidity, the absence of a complete benchmark yield curve and a low market capitalization, while insolvency risk or the quality of legal recourse in case of default are not perceived as determinants. Most investors declare that they face regulatory constraints on their portfolio allocation. These constraints are mainly related with limitations when investing in corporate bonds. Indeed, if there were no regulatory constraints, about two thirds of investors declared that they would have increased the share of corporate bonds they hold in their portfolios. Finally, investors tend to believe that a large stock of public bonds is important for the development of the corporate bond market, while they do not think that these instruments are close substitutes in their portfolio.

III.2- Accounting for the recent corporate bond expansion 1- A Counterfactual experiment Three critical observations regarding the recent evolution of the domestic corporate market emerge from our previous analysis. First, the expansion of the domestic market is a recent phenomenon starting in 2000 (Figure 4). Second, most part of new bonds issued were rated AAA and AA Third, the average maturity of new bonds issued increased significantly. In this section we try to account for these changes.

From January 2000 to December 2004, the amount outstanding of corporate bonds expanded by almost seven times or 7.000.000 million Pesos (from 1.370.000 million Pesos

28

to 8.360.000 million Pesos). As previously mentioned, this expansion is associated with downward shift of the real yield curve of the economy (Figure 15). From 1998 to 2004, the real yield on issuance of Central Bank bonds diminished from 7,5% to 3,5%. This trend obeyed to a relaxation of the monetary policy seeking to reactivate the economy. During the same period, the yield of corporate bonds with similar maturity traded in the secondary market diminished from 8% to 4%. [Insert Figure 15]

From the previous evidence, one would be tempted to conclude that lower interest rates could have been the driving force behind the observed recent expansion of the corporate bond market. Notice, however, the real interest rate for banking long term lending exhibited the same pattern. One way to test this hypothesis is to compare the evolution of bonds and banking long term loans as external sources of financing. If interest rates were causing the aforementioned increase in the amount outstanding of corporate bonds, they should also have produced a similar relative increase in the corporate banking debt. However, Figure 16 shows that this was not the case. From 2000, the share of bond debt over the sum of long term banking liabilities and bonds increased. Indebted companies substituted bonds for banking loans as source of financing. So, a cyclical element like the drop in the domestic interest rate does not appear to be the reason of the recent expansion of the corporate bond market. Do the latter mean that a structural or permanent change was the explanation? Based on a counterfactual experiment, we argue that main part of the answer is no. [Insert Figure 16]

In accounting for the expansion of corporate bonds one should consider structural changes in both the demand and the supply side. On the demand side, let first consider the “natural” evolution of the two major institutional investors: the pension funds and the insurance companies which historically have held nearly 80% of the total amount outstanding of corporate bonds. From December 1999 to December 2004 the total assets held by the pension funds augmented 85%, from 18.287.000 million Pesos to 33.889.000 29

million Pesos, while the ones of the insurance companies doubled from 5.620.700 million Pesos to 11.228.000 million Pesos. Assuming constant the share that corporate bonds historically had in their portfolios - this is 6% for the pension funds and 11% for the insurance companies- the latter implies that the “natural”, but not structural, change in the demand for corporate bonds should have accounted for an increase of nearly 1.500.000 million Pesos. So, from the 7.000.000 million Pesos the corporate bond market expanded between December 1999 and 2004, 5.500.000 remain to be explained. Let’s now consider the supply side of the story. As mentioned in section III.1, an important change occurred since the late 1990’s was the introduction of a private concession scheme financing the public infrastructure. Firms granted with these concessions (mainly highways) largely issued bonds to finance the construction of the public infrastructure. Because these firms were granted with a State cash flow guarantee, almost all (96%) the bonds they issued were rated AAA. As Figure 17 depicts, the amount outstanding of this kind of corporate bonds jumped from nearly nil at the end of the 1990s to more than 2.000.000 million Pesos in 2004, thus representing nearly 25% of the total amount outstanding of corporate bonds. The important point to notice here is that this supply effect is not likely to be permanent but exogenous and transitory as the most part of the concession scheme is already concluded. In other words, in the future we should not expect to observe such a radical shifting supply pattern. The latter means that, from the 5.500.000 million Pesos of the recent expansion to be explained, this supply factor would account for nearly 2.000.000. [Insert Figure 17]

A second major change occurred in the supply was the important decline in the supply of Central Bank CPI indexed bonds. From December 1999 to December 2004, the stock of Central Bank Bonds diminished from 6.520.000.000 million Pesos to 4.340.000.000 million Pesos (a drop of 2.180.000.000 million Pesos). Needless to say this change should be seen as exogenous instead of structural.

In equilibrium, this “vacuum” should have been

“naturally” fulfilled by some kind of close bond substitute. We argue that corporate bonds

30

undertook this supply substitution effect. Having taken into account the expansion of AAA bonds associated with the construction sector, now notice in Figure 18 that corporate bonds rated AA heavily expanded as well. Besides, the of AA bonds almost completely overmatched the decline in the supply of the bonds from the Central Bank. All in all, we can assume that the aforementioned supply substitution effect -but not a structural changeshould have accounted for nearly 2.200.000 million Pesos of the increase in the corporate bond market. In that sense, the “unexplained” or “real” expansion of the corporate bond market would be only close to 1.300.000 million Pesos. All in all, it appears that nearly 80% from the 7.000.000 million Pesos increase in the amount outstanding of corporate bonds would not obey to any structural change.

[Insert Figure 18]

2- Regression Analysis In order to explore the issues raised above in a more formal manner, we conducted a regression analysis on quarterly data. The dependent variable was defined as the change in the log of UF-denominated corporate bonds real stock. The independent variables included two sets of variables: supply and demand related. Among the former we included the yield of Central Bank instruments, the risk spread, the term spread, the difference between the long term bank rate and the yield on corporate bonds, and the inverse of the stock market’s price-earnings ratio. The demand variables include the assets of institutional investors, a real activity index (Imacec), and the stock of Central Bank bonds. As shown in the first column of Table 18, these variables together with the lagged value of the dependent variable and a time trend do a relatively good job in explaining the growth rate in the real stock of corporate bonds. The dependent variable is quite persistent. The risk, term, and bank spread, and the stock market yield turn out with the expected sign,

31

though not significant. The assets of institutional investors turn out with a positive sign, consistent with them being a big part of the demand for corporate bonds. Interestingly, the stock of Central Bank bonds enters negative and significantly suggesting an important degree of substitution between these and corporate bonds. Demand and substitution are important for explaining the evolution of the stock of corporate bonds. Column 2 shows an important drop in explanatory power when we exclude these variables from the model. Column 3 runs the full model for the sub sample ending in 1999:04. Although not very significant individually, the independent variables do an even better job in explaining the growth rate of the stock of corporate bonds. Figure 19 compares the actual stock with the dynamic predictions of the full model using pre-2000 data (Table 18, column 3). Notice that aside from a big jump in the stock in 2000:01, the prediction of the model is only around 20% smaller than the actual figure. In fact, when we exclude the stock corresponding to the construction sector, there is virtually no prediction error with respect to the stock at the end of 2004. Cusum and Cusum squared tests confirm that cannot reject the no-structural change hypothesis on the full model of Table 18 (see Figures 20 and 21).

[In progress]

Concluding remarks Several interesting results have emerged from this first prospective analysis of the Chilean (corporate) bond market. First, while the development of the Chilean capital market started during the mid 1980’s, the one of the corporate bond market only began by the end of the 1990´s. The latter is true in terms of an increase of issuances (and a raise in

32

the total amount outstanding), an enlargement of economic sectors having issued bonds and a raise in the liquidity of the corporate fixed income securities market. Regarding specific determinants of corporate bonds issuance, we provided evidence that the latter is closely linked to the kind of firms. The size of the issuer is the more relevant factor in determining the probability of issuance and this is even more important when deciding to issue bonds abroad. Since the main Chilean institutional investors - pension funds and insurance companies- are almost precluded to acquire low rated bonds, this size effect is expected to be even more important in Chile than in other countries. Needless to say, the latter is likely to have critical implications for the development of the corporate bond market for small (risky) firms. Rating requirements, in combination with the tremendous importance institutional investors have, could explain one of the puzzling questions of the Chilean corporate bonds, namely the extraordinary long maturities bonds have. On the macroeconomic side, the expansion trend observed in the Chilean corporate bond market during the last five years was associated with a declining phase of the Chilean business cycle and an expansive monetary policy shifting the yield curve downwards. However the decline of long term interest rates does not appear to be the reason why companies decided to issue more bonds. Moreover, most part of the expansion appears to be related with exogenous supply factors instead of a real structural change on the determinants of bond issuance. In particular, one part of the recent development is due to a one shot development of the bond issuance from firms participating in the private public works concession scheme applied during these last years. A second major explanation of the expansion appears to be associated with an exogenous declining supply of central bank bonds which were substituted by the corporate bonds.

33

References [To be completed]

34

Tables, Figures and Templates

Figure 1: Historical Stock of Financial Liabilities over GDP 200% Public Bonds

180%

Stock Market Capitalization

160%

Bank Deposits Mortgage-backed

140% 120% 100% 80% 60% 40% 20%

1997

1987

1977

1967

1957

1947

1937

1927

1917

1907

1897

1887

1877

1867

1857

1847

0%

Source: Braun, Braun, Briones, Díaz, Luders, and Wagner (2000).

Figure 2 Chilean Financial Market Size (% of GDP) 4,3%

Treasury Bonds Corporate Bonds Mortgage Bonds Central Bank bonds Bank deposits Recognition Bonds Stock Market Capitalization

200%

150%

1,0%

100%

1,7% 1,5%

1,4% 2,0%

3,7%

2,4%

3,5%

4,6% 5,3%

11,2% 11,4%

5,1% 9,3%

3,2%

11,5% 2,9%

4,7% 4,4%

3,4%

1,5% 1,5%

0,2%

50%

0,3%

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

0%

Source: Central Bank of Chile, SVS and Budget Department of the Chilean Government (DIPRES) 35

Figure 3 Central Bank Bonds Outstanding (%GDP) 40% 35% 30% Long term bonds (> 1 year) Short term bonds (< 1 year)

25% 20% 15% 10% 5%

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

0%

Source: Central Bank of Chile

0

valorparmilBCORPUF 2.00e+09 4.00e+09 6.00e+09

8.00e+09

Figure 4: stock corporate bonds

12feb1990

36

08nov1992

05aug1995 01may1998 fechastata

25jan2001

22oct2003

Figure 5 Securitized Bonds in Chile 500

50

450

45

350

35

Number of New Bonds Issued

300

30

50

5

0

0 2004

10

2003

100

2002

15

2001

150

2000

20

1999

200

1998

25

1997

250

Source: SVS and Central Bank of Chile

Figure 6 Financial assets held by Institutional investors (% of GDP)

100% 90% 80% 70% 60%

mutual Funds Insurance Companies Pension Funds

50% 40% 30% 20% 10%

19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0%

Source: Superintendency of AFP (SAFP) and SVS

37

# o f b o n d s is s u e d

40

Amount issued (Million US$)

1996

A m o u n t Is s u e d (M illio n U S $ )

400

Figure 7 Assets of the Pension Funds (% total market amount outstanding) 70% 60% 50% 40% Central Bank Bonds Recognition (pension) Bonds Mortgages Stocks Corporate Bonds

30% 20% 10%

19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0%

Source: Superintendency of AFP, SVS and Central Bank of Chile

Figure 8 Portfolio Composition of the Pension Funds (% of their total assets) 100 90 80 70 60 50 40 30 20 10

19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0

Central Bank Bonds Mortgages Corporate Bonds

Treasury Bonds Banking Deposits Investment Funds

Source: Superintendency of AFP

38

Recognition (pension) Bonds Stocks Overseas Investment

Figure 9 Corportate bond holdings of Insurance Companies (% of total market amount outstanding)

60%

State Bonds Corporate Bonds Mortgage bonds

50%

40%

30%

20%

10%

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0%

Source: SVS and Central Bank of Chile

Figure 10 Corportate bond holdings of Insurance Companies (as % of their total assets)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

State Bonds stocks Overseas Investment

Source: SVS

39

Mortgage bonds Banking deposits

Corporate Bonds Real Estate

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0%

Figure 11

CHILE: Real GDP growth rate (%) 14 12

Growth rate (%)

10 8 6 4 2 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -2

Source: IMF

0

.05

.1

shvalorparmil20pUF .2 .3

.1 .15 .2 shvalorparmil1319UF

.4

.25

.5

Figure 12: share of corporate bonds with time to maturity >13 years

05aug1995

01may1998

25jan2001 fechastata...

shvalorparmil20pUF

40

22oct2003

18jul2006

shvalorparmil1319UF

0

.4

.5

shareAAA_AA .6

2.00e+09 4.00e+09 valorparAAApAA

.7

.8

6.00e+09

Figure 13. Share of bonds rated AAA and AA

13sep1999

25jan2001

09jun2002 fechastata...

22oct2003

shareAAA_AA

05mar2005

valorparAAApAA

Source: For corporate bonds, Santiago Stock Exchange. For the Central Bank bonds, the source is the Central Bank of Chile. Up to 2001 we took the yield on issuance of PRC (10 years) and, since then, the one of the socalled BCU (10 years) which replaced the PRC. Both bonds are CPI indexed.

Figure 14 REAL YIELD CURVE ( from transactions in the secondary market) 10 9

Yield (%)

8 7 6 5 4 3

> 15

12.1 - 15.0

10.1 - 12.0

8.1 - 10.0

5.1 - 8.0

2.1 - 5.0

0- 2

2

Years to Maturity 2004 1994

2003 1993

2002 1992

2001 1991

Source: Santiago Stock Exchange

41

2000 1990

1999

1998

1997

1996

1995

tasabk3p/(mean) tirmed/(mean) tirmedBCUF 0 5 10 15

Figure 15: Corporate and Central Bank bonds yield to maturity vs Banking long term interest rate

May87

Nov92

May98 fechastata

tasabk3p (mean) tirmedBCUF

Oct03

Apr09

(mean) tirmed

Source: For corporate bonds Santiago Stock Exchange. Data for the Central Bank bonds and the average banking lending rate for more than 3 years comes from the Central Bank of Chile.

Figure 16 Indebted Companies: Bonds/Bonds + Long term banking loans 75% 70% 65% 60% 55% 50% 45% 40% 35%

19 90 19 01 90 19 03 91 19 01 91 19 03 92 19 01 92 19 03 93 19 01 93 19 03 94 19 01 94 19 03 95 19 01 95 19 03 96 19 01 96 19 03 97 19 01 97 19 03 98 19 01 98 19 03 99 19 01 99 20 03 00 20 01 00 20 03 01 20 01 01 20 03 02 20 01 02 20 03 03 20 01 03 20 03 04 20 01 04 03

30%

Source: balance sheets of indebted companies

42

0

.05

shvalorparmilConstructionUF .1 .15 .2

.25

5.00e+08 1.00e+09 1.50e+09 2.00e+09 Construction valorparmil

Figure 17: Market share (over corporate bonds) and amount outstanding of construction bonds

05aug1995

01may1998

25jan2001 fechastata...

shvalorparmilConstructionUF

22oct2003

18jul2006

Construction valorparmil

0

AA valorparmil/stockBCPRCBCUmils 2.00e+09 4.00e+09 6.00e+09 8.00e+09

Figure 18: Amount outstanding of CPI indexed Corporate bonds (AA) and CPI indexed Central Bank bonds

13sep1999

25jan2001 AA valorparmil

43

09jun2002 fechastata

22oct2003 stockBCPRCBCUmils

05mar2005

20.5

21

21.5

22

22.5

Figure 19: Corporate Bonds Stock: Actual vs. Predicted (1995-2004)

1995q3

1998q1

2000q3 Date, quarterly

Actual Predicted w/out 2000:01

2003q1

2005q3

Predicted pre 2000 Actual w/out Construction

Figure 20: Cusum Test

CUSUM

CUSUM

44

0

0

1998q2

fechastataq

2004q3

Figure 21: Cusum-squared Test

CUSUM squared

CUSUM squared

1

0

1998q2

45

fechastataq

2004q3

Table 1: Main bonds issued by the Central Bank of Chile Type and Name of Bond Short Term Bonds PDBC

Currency Unit

Maturity

Ch. $

General Characteristics

PRBC Long Term Bonds PRC

UF (CPI indexed)

30,60,90 and days 360 days

360

UF (CPI indexed)

8 and 20 years

Cero PTF

UF (CPI indexed) and US$ indexed UF (CPI indexed)

Coupons stripped out from PRC 1 to 15 years

PRD

US$ indexed

2,3 and 4 years

Zero

US$ indexed

BCP (1)

Ch. $

Coupons stripped out from PRD 2,5 and 10 years

BCU (1)

UF (CPI indexed)

5,10 and 20 years

BCD (1)

US$ indexed

2 and 5 years

No coupons No coupons Semi-annual coupons interest and capital Traded upon request

of

Floating interest rate and semi-annual coupons of interest and capital Semi-annual coupons of interest and capital Traded upon request Semi-annual coupons interest and capital Semi-annual coupons interest and capital Semi-annual coupons interest and capital

of of of

Source: Central Bank of Chile (1) Since September 2002, these bonds replaced the PDBC, PRC and PRD, respectively

Table 2 : Sovereign Bonds outstanding as of 2004 Date of issuance

Currency

28/01/2004 USD 15/01/2003 USD 23/04/2002 USD 25/04/2002 Euro 10/11/2001 USD 28/04/1999 USD Source: Bloomberg and Larraín Vial Corredores de Bolsa

10

Amount (millions)

Maturity

600 1000 600 300 75010 500

28/01/2008 15/01/2013 23/07/2007 25/07/2005 11/01/2012 28/04/2009

The issuance of 2001 was of US$650 million but new US$100 millions were issued within the same bond in 2002.

46

Table 3

Corporate bonds (amount outstanding) # Indebted Companies

# bonds

28 35 37 39 43 46 42 35 35 35 36 67 82 65 74

47 65 71 70 82 87 81 75 125 133 151 215 235 260 254

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Debt Debt outstanding outstanding (%GDP) (Million USD) 4,4% 5,2% 4,7% 4,6% 4,2% 3,4% 3,1% 2,3% 2,8% 3,5% 4,8% 8,5% 10,1% 11,4% 11,2%

1386 1910 2070 2179 2340 2441 2316 1889 2216 2576 3642 5845 6764 8393 10538

Mean debt per instrument (Million USD) 29 29 29 31 29 28 29 25 18 19 24 27 29 32 41

Source: Authors database. Numbers exclude the securitized bonds; see the next figure.

Table 4 Transctions of Fixed Income Securities

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Weighted Average

47

Volume traded (million US$)

Share of corporate bonds

Share of Central Bank Bonds

Share of Mortgage Bonds

Share of Banking Bonds

Share of Leasing Bonds

Share of Recogniti on Bonds

Total

15.707 13.166 23.937 26.917 47.852 83.782 81.571 91266 93.083 49.301 45.144 63.684 68.492 74.626 116.293

3,8% 3,0% 1,8% 1,2% 1,7% 1,7% 2,7% 3,5% 5,3% 6,3% 11,3% 23,0% 22,6% 19,7% 13,8%

77% 86% 80% 78% 80% 79% 73% 68% 57% 47% 53% 44% 48% 55% 67%

4% 8% 14% 14% 10% 14% 16% 19% 24% 30% 27% 23% 21% 21% 13%

3% 2% 5% 4% 5% 3% 3% 3% 6% 7% 4% 4% 4% 1% 1%

8% 0% 0% 2% 1% 1% 3% 4% 5% 7% 3% 2% 1% 1% 0%

0% 0% 0% 1% 2% 1% 1% 1% 2% 3% 3% 4% 4% 3% 4%

95,9% 99,3% 99,9% 99,9% 99,9% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99,0%

59.655

9,3%

63,6%

18,5%

3,5%

2,5%

2,5%

100%

Source: Santiago Stock Exchange

Table 5 Turnover Ratio of Fixed Income Securities Corporate bonds 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Weighted Average

Corporate bonds (1)

78,5% 37,5% 38,5% 26,9% 78,5% 110,2% 180,1% 315,4% 377,5% 229,3% 276,8% 288,0% 249,4% 161,0% 133,8%

Mortgage Bonds

75,7% 15,4% 36,0% 18,1% 74,1% 110,4% 181,5% 321,7% 524,3% 275,0% 382,2% 400,8% 281,7% 174,7% 141,4%

183,8%

205%

Central Bank Recognition Bonds Bonds

Average

51% 75% 196% 189% 214% 294% 281% 297% 368% 275% 243% 186% 201% 181% 158%

245% 294% 381% 328% 644% 822% 696% 640% 487% 278% 313% 214% 269% 271% 460%

0% 0% 1% 3% 13% 13% 13% 15% 20% 18% 18% 27% 31% 22% 35%

193% 260% 330% 282% 535% 695% 559% 506% 386% 228% 262% 205% 228% 218% 348%

237%

438%

15%

227%

Source: Santiago Stock Exchange, SVS, Central Bank of Chile and DIPRES. (1) Excludes the amount of new bonds issued from both the amount outstanding and from the traded values registered in each year

Table 5: Number of bonds issued domestically

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 TOTAL Share

Agriculture, Forestry, And Fishing

Mining

1 3 1 5 2%

1 1 1 2 1 6 3%

Construction Manufacturing

1 2 2 2 1 1 3 5 3 1 21 9%

4 8 2 5 1 4 10 3 2 2 4 45 20%

Public Utilities and Transportation

Retail

Finance, Insurance and Real Estate

Services

Total Bonds Issued

5 7 4 3 8 3 1 3 5 6 10 20 9 4 7 8 103 46%

2 2 6 1 6 4 2 23 10%

1 1 4 1 3 3 1 14 6%

1 1 3 5 2%

9 16 7 4 15 4 1 3 7 13 21 39 19 24 19 21 222 100%

CPI US$ # Different indexed Indexed issuers (%) (%) 9 15 7 3 12 3 1 2 5 9 14 26 13 14 13 13 159

100% 100% 100% 50% 87% 100% 100% 100% 86% 77% 95% 100% 95% 88% 100% 95% 94%

(*) Source: Authors database. Financial sector excludes leasing, factoring and securitized operations

48

0% 0% 0% 50% 13% 0% 0% 0% 14% 23% 5% 0% 5% 4% 0% 0% 5%

Table 7: Amount of bonds issued domestically

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 TOTAL Share

Agriculture, Forestry, And Fishing

Mining

13 171 226 411 3%

28 10 219 244 223 725 5%

CORPORATE BONDS ISSUED DEMESTICALLY (Million USD) Finance, Public Utilities Insurance Services Construction Manufacturing and Retail and Real Transportation Estate 60 94 251 216 40 16 24 223 26 92 282 26 13 41 54 151 628 79 92 183 74 40 209 234 486 136 362 197 473 1341 349 13 9 417 146 501 48 698 91 357 342 81 26 831 118 678 380 240 184 300 689 52 88 104 2833 1874 5825 1380 836 139 20% 13% 42% 10% 6% 1%

Total 154 495 81 234 400 39 41 54 779 688 1427 2382 1369 1766 2247 1867 14023 100%

Average CPI US$ amount per indexed Indexed bond (%) (%) issued 17 100% 0% 31 100% 0% 12 100% 0% 58 9% 91% 27 97% 3% 10 100% 0% 41 100% 0% 18 100% 0% 111 48% 52% 53 45% 55% 68 97% 3% 61 100% 0% 72 99% 1% 74 95% 2% 118 100% 0% 89 98% 0% 63 93% 7%

Source: Authors database. Financial sector excludes leasing, factoring and securitized operations

Table 8: Corporate Bonds issued abroad 1993

1994 1995

1996

1997

1998 1999 2000 2001 2002 2003 2004 2005 Total

3

1

4

3

2

4

1

2

2

6

3

Amount issued (million US$)

321,85

300

1370

1400

650

960

300

865

725

2450

900

Share of total bonds issued (1990-2005)

138%

# of bonds issued

1

32

400 10642

776% 3319% 2578% 83% 140% 21% 36% 53% 139% 40% 21%

76%

Source: Authors database. Financial sector excludes leasing, factoring and securitized operations

Table 9: Economic classification of corporate bonds issued abroad Total amount issued abroad (million US$)

# of issuances

Agriculture, Forestry, And Fishing Mining Construction Manufacturing Transportation and Public Utilities

550 1875 250 2760 5207

2 5 1 9 15

1 2 1 3 7

275 375 250 307 347

Average amount per bond issued domestically (million US$) 226 156 368 73 101

TOTAL

10642

32

14

333

115

Average amount per # of different bond issued abroad indebted companies (million US$)

Source: Authors database. Financial sector excludes leasing, factoring and securitized operations

49

Table 10: Characteristics of the domestic issuers and non issuers during the period preceding the issuance (average values per company) Assets (Th. USD)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Average

Issuers

Non Issuers

518287 110663 1150023 411978 94182 607714 402754 1708579 444500 801027 1043511 515259 454028 691518 672836

102903 149930 147324 153722 212677 227446 260359 264534 305269 307492 273182 323698 342944 388949 259386

Leverage

Tangibility

Issuers

Non Issuers

0,22 0,15 0,19 0,22 0,30 0,21 0,37 0,22 0,17 0,23 0,28 0,25 0,26 0,35 0,25

0,14 0,14 0,15 0,14 0,14 0,14 0,14 0,15 0,17 0,17 0,17 0,17 0,17 0,17 0,16

Log Sales (Th. USD)

Issuers

Non Issuers

Issuers

Non Issuers

0,65 0,58 0,82 0,56 0,71 0,77 0,76 0,42 0,34 0,40 0,33 0,55 0,38 0,42 0,47

0,48 0,48 0,45 0,44 0,43 0,42 0,40 0,39 0,39 0,37 0,39 0,37 0,37 0,36 0,40

11,32 10,19 11,33 10,91 10,49 10,90 10,74 12,24 10,94 11,58 10,90 11,00 10,65 11,52 11,09

8,70 9,09 9,25 9,24 9,58 9,58 9,67 9,49 9,48 9,37 9,37 9,44 9,53 9,38 9,40

Profitability

Sample

Issuers

Non Issuers

Issuers

Non Issuers

0,07 0,07 0,03 0,08 0,10 -0,04 0,03 0,02 0,03 0,02 0,02 0,04 0,01 0,01 0,03

0,06 0,07 0,07 0,06 0,05 -0,48 -0,02 0,04 0,03 0,03 0,02 0,02 0,02 0,02 0,00

13 5 3 10 3 1 2 5 7 13 21 12 14 14 9

137 150 174 176 188 206 218 227 227 231 230 238 230 237 205

Source: Authors database.

Table 11: Characteristics of issuers and non issuers by economic sector during the period preceding the issuance (average values per company) Assets (Th. USD) Leverage Non Non Issuers Issuers Issuers Issuers

Tangibility Non Issuers

Issuers

Construction

196660

119244

0,34

0,31

0,59

0,58

Finance, Insurance and Real Estate

Log Sales (Th. USD)

Profitability Non Issuers

Issuers

Non Issuers

Issuers

9,13

8,58

0,02

0,04

Sample Non Issuers

Issuers 15

125

564079

124260

0,14

0,08

0,16

0,27

9,03

6,27

0,01

0,01

9

565

Manufacturing

472770

212593

0,26

0,16

0,23

0,29

11,02

10,11

0,04

0,06

27

744

Mining

107732

457366

0,25

0,21

0,76

0,59

10,97

9,40

-0,03

-1,66

1

81

Agriculture, Forestry, And Fishing

416812

279287

0,00

0,12

0,00

0,29

9,37

0,00

0,03

2

243

760622

318900

0,14

0,09

0,20

0,20

13,45

11,40

0,02

0,02

8

74

83275

24710

0,74

0,17

0,01

0,66

9,80

8,18

0,05

0,03

2

331

928383

479091

0,25

0,20

0,67

0,55

11,30

10,59

0,04

0,08

59

651

Retail Services Public Utilities Transportation

and

Source: Authors database. Financial sector excludes leasing, factoring and securitized operations

50

Table 12: Characteristics of issuers and non issuers abroad during the period preceding the issuance (average values per company) Assets (Th. USD) Issuers 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Average

1480979 2634157 1922024 2641353 3707211 3533728 4397982 4903111 3572471 3636438 3050003

Leverage

Non Issuers

Issuers

138819 147744 141911 169551 197085 198289 228754 264230 266592 319631 316949 335260 269717 370711 251741

Tangibility

Non Issuers

Issuers

0,14 0,15 0,14 0,15 0,15 0,14 0,15 0,15 0,17 0,17 0,18 0,18 0,17 0,18 0,16

0,21 0,25 0,26 0,18 0,19 0,25 0,25 0,28 0,30 0,49 0,28

Non Issuers 0,50 0,48 0,45 0,45 0,43 0,42 0,40 0,39 0,39 0,37 0,39 0,38 0,37 0,37 0,41

0,45 0,35 0,61 0,39 0,28 0,35 0,18 0,15 0,25 0,39 0,37

Log Sales (Th. USD) Issuers

13,06 13,16 11,75 12,99 13,18 12,14 13,17 13,22 11,19 15,00 12,58

Non Issuers 8,93 9,11 9,23 9,35 9,54 9,58 9,63 9,52 9,48 9,48 9,49 9,53 9,54 9,44 9,44

Profitability Issuers

Sample

Non Issuers

Issuers

Non Issuers

0,06 0,07 0,07 0,06 0,05 -0,49 -0,02 0,04 0,03 0,03 0,02 0,02 0,02 0,02 0,00

0 0 3 0 1 4 3 2 3 1 1 0 6 3 2

148 156 174 186 191 204 217 229 232 243 250 250 239 247 212

0,08 0,05 0,06 0,06 0,01 0,03 0,03 0,05 0,03 0,04 0,05

Source: Authors database.

Table 13: Maturity of corporate bonds issued domestically AVERAGE MATURITY OF CORPORATE BONDS ISSUED DOMESTICALLY (years) Finance, Agriculture, Public Utilities Insurance Forestry, Mining Construction Manufacturing and Retail and Real And Fishing Transportation Estate

Services

Average

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

10 8 10

12 8 8 10 20

12 16 9 18 20 20 20 22 24 15

14 13 15 6 12 12 11 10 14 18

15 13 11 15 15 30 22 13 20 15 15 16 23 21 20

16 10 13 7 12 11 18

12 25 10 6 20 12 8

5 5 11

14 12 10 15 14 30 22 12 14 14 14 15 18 19 17

Average

9

12

21

13

17

12

12

9

16

Source: Authors database. Financial sector excludes leasing, factoring and securitized operations

Table 14 Size of issuers and Average maturity of bonds issued (years) 1991

1992

1993 (*) 1994 (*)

With sales below the median

12,3

13,0

15,5

With sales over the median

15,2

10,3

10,0

1995

1996

1997

1998

1999

2000

2001

2002 (*)

2003

2004 (*)

8,8

13,0

30,0

30,0

25,5

21,0

13,5

14,7

21,5

15,8

21,4

17,5

12,0

12,0

15,5

27,5

12,2

14,3

10,4

18,9

11,0

Source: Authors database. Financial sector excludes leasing, factoring and securitized operations

51

Table 15 Non issuing companies Bonds / Long term financial liabilities Long term financial liabilities / Financial liabilities Financial liabilities / Assets Banking debt / Financial liabilities Banking debt / Long term financial liabilities Issuing companies Bonds / Long term financial liabilities Long term financial liabilities / Financial liabilities Financial liabilities / Assets Banking debt / Financial liabilities Banking debt / Long term financial liabilities

Obs

Mean

Std. Dev.

Min

Max

1375 1833 2584 1833 1307

0,00 0,57 0,13 1,00 5,26

0,00 0,41 0,17 0,01 31,38

0,00 0,00 0,00 0,78 1,00

0,00 1,00 1,28 1,00 9,73

719 719 719 719 719

0,71 0,92 0,29 0,34 0,49

0,29 0,15 0,17 0,30 0,74

0,00 0,09 0,00 0,00 0,00

1,00 1,00 0,88 1,00 12,29

Source: Authors database. Financial liabilities includes: short and long term banking debt, short term bonds and long term bonds (both expiring within the next year and after)

Table 16: Corporate bond issuance 1991-2005: uses of funds (% of the number of bonds issued, average values for the whole period) RP 25% 17% 0% 0% 1% 2% 45,8%

RP FI CMP FG FOI other TOTAL

FI 17% 21% 6% 1% 0% 4% 49,2%

CMP 0% 6% 7% 1% 0% 1% 14,5%

FG 0% 1% 1% 7% 0% 0% 9,4%

FOI 1% 0% 0% 0% 4% 1% 5,7%

other 2% 4% 1% 0% 1% 2% 10,1%

Source: Authors database. RP: debt substitution; FI: investment financing CMP: refinancing of short and medium term debt ; FG: general uses; FOI: infrastructure financing.

Table 17: Corporate bond issuance 1991-2005, uses of funds (% of the number of bonds issued, in each year) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

RP

FI

FI-RP

FI-CMP

CMP

FG

FOI

52% 25% 33% 17% 34% 13% 23%

38% 25% 50% 21% 46% 13% 3% 30% 14% 13% 17% 23%

17% 19% 20% 23% 21% 35% 30%

6% 25% 29% 25% 5% 17% 8% -

31% 25% 43% 50% 67% 9% -

25% 6% 12% 29% 14% -

15% 10% 9% 5%

ot her

25% 25% 25% 7% 25% 100% 33% 38% 17% 38% 26% 20%

TOTAL

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Source: Authors database. RP: debt substitution; FI: investment financing CMP: refinancing of short and medium term debt ; FG: general uses; FOI: infrastructure financing.

52

Table 18: Corporate bonds stock: Regression Analysis (1995-2004) Dependent Variable: Δ log(Stock BCorp) t

Δ Tir BCentral t

(1) 0.008 0.017

0.016

0.009

Δ Risk Spread t

-0.014

-0.020

-0.002

0.035

0.024

0.020

Δ Term Spread t

-0.059

-0.018

-0.030

0.053

0.042

0.039

Δ Bank Spread t

0.031

0.031

0.010

0.023

0.018

0.017

Δ 1/P-E Ratio t

-1.649

-2.083

1.750

2.120

1.686

3.280

Δ log(Imacec) t

(2) 0.009

-0.127

(3) 0.001

-0.154

0.494

0.224

Δ log(Institutional Inv.) t

0.191

0.354

0.427

0.407

Δ log(Stock BCentral) t

-1.591

-0.050

Δ log(Stock BCorp) t-1

0.372

0.496

0.187*

0.151***

0.483

Trend t

0.000

0.002

0.002

0.001

0.001*

0.003

Constant

0.074

-0.260

-0.345

0.283

0.148*

0.393

0.463 38

0.389 46

0.565 19

0.849*

R-squared # Obs. * Significance: *** 1%, ** 5%, * 10%. (1) & (2) Full Sample (3) Pre 2000:01

53

1.145

0.403

Template 1: Level and Composition of Central Government Bonds (as a percentage of GDP)

Foreign

DOMESTIC BONDS

FOREIGN BONDS

(debt issued using domestic law)

(debt issued under foreign law)

a

Domestic currency

Currency

TOTAL Indexed

Nominal

Long Term Short Term Short term Long Term

Foreign Currency a

DOMESTIC

Real Real Banking BONDS Overnight lending rate Short-term Long term Interest rate (30-90 days) Prices

TOTAL GOVT. BONDS

Domestic currency Nominal

Long Term Short Term

TOTAL FOREIGN BONDS

Indexed Prices

Overnight Interest rate

1985

0,0%

0,0%

0,0%

0,0%

0,0%

54,8%

NA

10,0%

54,8%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

54,8%

1986

0,0%

0,0%

0,0%

0,0%

0,0%

53,3%

NA

8,0%

53,3%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

53,3%

1987

0,0%

0,0%

0,0%

0,0%

0,0%

52,2%

NA

7,5%

52,2%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

52,2%

1988

0,0%

0,0%

0,0%

0,0%

0,0%

49,0%

NA

8,0%

49,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

49,0%

1989

0,0%

0,0%

0,0%

0,0%

0,0%

49,9%

NA

9,6%

49,9%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

49,9%

1990

0,0%

0,0%

0,0%

0,0%

0,0%

68,4%

NA

13,3%

68,4%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

68,4%

1991

0,0%

0,0%

0,0%

0,0%

0,0%

63,8%

NA

8,8%

63,8%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

63,8%

1992

0,0%

0,0%

0,0%

0,0%

0,0%

60,8%

NA

8,4%

60,8%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

60,8%

1993

0,0%

0,0%

0,0%

0,0%

0,0%

57,9%

NA

9,2%

57,9%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

57,9%

1994

0,0%

0,0%

0,0%

0,0%

0,0%

56,1%

NA

9,3%

56,1%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

56,1%

1995

0,0%

0,0%

0,0%

0,0%

0,0%

51,2%

15,8%

8,3%

51,2%

0,0%

0,0%

0,0%

0,0%

15,8%

0,0%

51,2%

1996

0,0%

0,0%

0,0%

0,0%

0,0%

51,8%

14,1%

9,0%

51,8%

0,0%

0,0%

0,0%

0,0%

14,1%

0,0%

51,8%

1997

0,0%

0,0%

0,0%

0,0%

0,0%

52,6%

13,5%

8,2%

52,6%

0,0%

0,0%

0,0%

0,0%

13,5%

0,0%

52,6%

1998

0,0%

0,0%

0,0%

0,0%

0,0%

49,4%

17,2%

11,7%

49,4%

0,0%

0,0%

0,0%

0,0%

17,2%

0,0%

49,4%

1999

0,0%

0,0%

0,0%

0,0%

0,0%

51,1%

8,6%

8,0%

51,1%

0,7%

0,0%

0,0%

0,0%

8,6%

0,7%

51,8%

2000

0,0%

0,0%

0,0%

0,0%

0,0%

50,8%

10,1%

7,4%

50,8%

0,7%

0,0%

0,0%

0,0%

10,1%

0,7%

51,5%

2001

0,0%

0,0%

0,0%

0,0%

0,0%

49,5%

5,7%

6,2%

49,5%

1,8%

0,0%

0,0%

0,0%

5,7%

1,8%

51,4%

2002

0,0%

0,0%

0,0%

0,0%

0,0%

47,4%

1,2%

4,6%

47,4%

3,2%

0,0%

0,0%

0,0%

1,2%

3,2%

50,6%

2003

0,0%

0,0%

0,0%

0,0%

0,0%

41,6%

1,6%

4,7%

41,6%

4,3%

0,0%

0,0%

0,0%

1,6%

4,3%

45,9%

2004

0,0%

0,0%

0,0%

0,0%

0,0%

34,9%

-0,5%

3,5%

34,9%

4,0%

0,0%

0,0%

0,0%

-0,5%

4,0%

38,9%

2005

0,0%

0,0%

0,0%

0,0%

0,0%

NA

-0,2%

4,1%

NA

NA

0,0%

0,0%

0,0%

-0,2%

NA

NA

54

55

Template 2: Level and Composition of Local Government Bonds (as a percentage of GDP) DOMESTIC BONDS

FOREIGN BONDS

(debt issued using domestic law)

(debt issued under foreign law)

Foreign a

Domestic currency

Currency

TOTAL

Nominal

Long Term Short Term

Short term

Indexed

Long Term

Prices Short-term

Long term

Foreign Currency a

Overnight Interest rate

BONDS

Domestic currency Nominal

DOMESTIC

TOTAL GOVT. BONDS

Long Term Short Term

TOTAL FOREIGN BONDS

Indexed Prices

Overnight Interest rate

1985

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1986

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1987

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1988

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1989

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1990

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1991

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1992

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1993

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1994

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

0,0%

1995

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

15,8%

0,0%

0,0%

0,0%

0,0%

0,0%

15,8%

0,0%

0,0%

1996

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

14,1%

0,0%

0,0%

0,0%

0,0%

0,0%

14,1%

0,0%

0,0%

1997

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

13,5%

0,0%

0,0%

0,0%

0,0%

0,0%

13,5%

0,0%

0,0%

1998

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

17,2%

0,0%

0,0%

0,0%

0,0%

0,0%

17,2%

0,0%

0,0%

1999

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

8,6%

0,0%

0,0%

0,0%

0,0%

0,0%

8,6%

0,0%

0,0%

2000

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

10,1%

0,0%

0,0%

0,0%

0,0%

0,0%

10,1%

0,0%

0,0%

2001

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

5,7%

0,0%

0,0%

0,0%

0,0%

0,0%

5,7%

0,0%

0,0%

2002

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1,2%

0,0%

0,0%

0,0%

0,0%

0,0%

1,2%

0,0%

0,0%

2003

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1,6%

0,0%

0,0%

0,0%

0,0%

0,0%

1,6%

0,0%

0,0%

2004

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

-0,5%

0,0%

0,0%

0,0%

0,0%

0,0%

-0,5%

0,0%

0,0%

2005

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

-0,2%

0,0%

0,0%

0,0%

0,0%

0,0%

-0,2%

0,0%

0,0%

56

Template 3: Level and Composition of Central Bank Bonds (as a percentage of GDP)

Foreign

DOMESTIC BONDS

FOREIGN BONDS

(debt issued using domestic law)

(debt issued under foreign law)

a

Domestic currency

Currency

TOTAL Indexed

Nominal

Long Term Short Term Short term Long Term

Prices Short-term Long term

Foreign Currency a

DOMESTIC

Real Real Banking BONDS Overnight lending rate (90 days)

TOTAL GOVT. BONDS

Domestic currency Nominal

Long Term Short Term

TOTAL FOREIGN BONDS

Indexed Prices

Overnight Interest rate

1985

NA

NA

0,0%

0,0%

2,4%

NA

NA

10,0%

9,7%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

9,7%

1986

NA

NA

0,4%

0,0%

4,1%

NA

NA

8,0%

11,2%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

11,2%

1987

NA

NA

0,2%

0,0%

6,4%

NA

NA

7,5%

13,3%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

13,3%

1988

NA

NA

0,6%

0,0%

9,0%

NA

NA

8,0%

15,6%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

15,6%

1989

NA

NA

0,0%

0,0%

3,7%

NA

NA

9,6%

17,3%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

17,3%

1990

7,5%

0,0%

0,5%

0,0%

5,9%

20,8%

NA

13,3%

34,8%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

34,8%

1991

2,6%

0,0%

1,0%

0,0%

12,7%

16,7%

NA

8,8%

33,0%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

33,0%

1992

1,8%

0,0%

1,0%

0,0%

10,8%

18,6%

NA

8,4%

32,3%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

32,3%

1993

1,6%

0,0%

0,1%

0,0%

6,3%

22,6%

NA

9,2%

30,7%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

30,7%

1994

1,3%

0,0%

0,3%

0,0%

7,0%

22,5%

NA

9,3%

31,1%

0,0%

0,0%

0,0%

0,0%

NA

0,0%

31,1%

1995

1,1%

0,0%

0,0%

0,0%

7,0%

20,8%

15,8%

8,3%

28,8%

0,0%

0,0%

0,0%

0,0%

15,8%

0,0%

28,8%

1996

1,0%

0,0%

0,0%

0,0%

8,2%

20,7%

14,1%

9,0%

30,0%

0,0%

0,0%

0,0%

0,0%

14,1%

0,0%

30,0%

1997

0,9%

0,0%

1,2%

0,0%

8,4%

21,1%

13,5%

8,2%

31,6%

0,0%

0,0%

0,0%

0,0%

13,5%

0,0%

31,6%

1998

2,5%

0,0%

2,0%

0,0%

3,2%

20,9%

17,2%

11,7%

28,6%

0,0%

0,0%

0,0%

0,0%

17,2%

0,0%

28,6%

1999

2,2%

0,0%

4,7%

0,0%

3,6%

19,8%

8,6%

8,0%

30,3%

0,0%

0,0%

0,0%

0,0%

8,6%

0,0%

30,3%

2000

2,1%

0,0%

4,0%

0,0%

6,2%

18,8%

10,1%

7,4%

31,1%

0,0%

0,0%

0,0%

0,0%

10,1%

0,0%

31,1%

2001

7,2%

0,0%

6,4%

0,0%

0,7%

16,8%

5,7%

6,2%

31,0%

0,0%

0,0%

0,0%

0,0%

5,7%

0,0%

31,0%

2002

9,1%

0,0%

7,2%

0,0%

0,1%

13,4%

1,2%

4,6%

29,9%

0,0%

0,0%

0,0%

0,0%

1,2%

0,0%

29,9%

2003

7,5%

0,0%

4,1%

2,9%

0,0%

11,2%

1,6%

4,7%

25,7%

0,0%

0,0%

0,0%

0,0%

1,6%

0,0%

25,7%

2004

5,6%

0,0%

2,9%

3,3%

0,0%

9,4%

-0,5%

3,5%

21,2%

0,0%

0,0%

0,0%

0,0%

-0,5%

0,0%

21,2%

2005

NA

NA

NA

NA

NA

NA

-0,2%

4,1%

NA

0,0%

0,0%

0,0%

0,0%

-0,2%

0,0%

NA

57

Template 4: Level and Composition of CORPORATE Bonds issued by the Private Sector (as a percentage of GDP) DOMESTIC BONDS

FOREIGN BONDS

(debt issued using domestic law)

(debt issued under foreign law)

Domestic currency Nominal

58

Foreign Currency

Total

Indexed to the Interest rate NA

NA

1,5%

Domestic currency Nominal

Foreign Currency

Total

Total corporate bonds

1985

NA

Indexed to Prices NA

0,0%

Indexed to Prices 0,0%

Indexed to the Interest rate 0,0%

0,0%

0,0%

1,5%

1986

NA

NA

NA

NA

1,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1,0%

1987

NA

NA

NA

NA

1,4%

0,0%

0,0%

0,0%

0,0%

0,0%

1,4%

1988

NA

NA

NA

NA

2,0%

0,0%

0,0%

0,0%

0,0%

0,0%

2,0%

1989

NA

NA

NA

NA

3,4%

0,0%

0,0%

0,0%

0,0%

0,0%

3,4%

1990

0,0%

4,0%

0,0%

0,3%

4,4%

0,0%

0,0%

0,0%

0,0%

0,0%

4,4%

1991

0,0%

5,0%

0,0%

0,3%

5,2%

0,0%

0,0%

0,0%

0,0%

0,0%

5,2%

1992

0,0%

4,4%

0,0%

0,2%

4,7%

0,0%

0,0%

0,0%

0,0%

0,0%

4,7%

1993

0,0%

3,9%

0,0%

0,6%

4,6%

0,0%

0,0%

0,0%

0,7%

0,7%

5,3%

1994

0,0%

3,7%

0,0%

0,5%

4,2%

0,0%

0,0%

0,0%

0,6%

0,6%

4,9%

1995

0,0%

3,0%

0,0%

0,4%

3,4%

0,0%

0,0%

0,0%

0,9%

0,9%

4,3%

1996

0,0%

2,7%

0,0%

0,3%

3,1%

0,0%

0,0%

0,0%

2,8%

2,8%

5,8%

1997

0,0%

2,1%

0,0%

0,2%

2,3%

0,0%

0,0%

0,0%

4,1%

4,1%

6,4%

1998

0,0%

2,3%

0,0%

0,5%

2,8%

0,0%

0,0%

0,0%

5,1%

5,1%

7,9%

1999

0,0%

2,3%

0,0%

1,2%

3,5%

0,0%

0,0%

0,0%

6,9%

6,9%

10,4%

2000

0,0%

3,7%

0,0%

1,2%

4,8%

0,0%

0,0%

0,0%

7,0%

7,0%

11,9%

2001

0,0%

7,2%

0,0%

1,3%

8,5%

0,0%

0,0%

0,0%

9,0%

9,0%

17,5%

2002

0,0%

8,7%

0,0%

1,3%

10,1%

0,0%

0,0%

0,0%

10,2%

10,2%

20,3%

2003

0,1%

10,4%

0,0%

1,0%

11,4%

0,0%

0,0%

0,0%

12,7%

12,7%

24,2%

2004

0,1%

10,9%

0,0%

0,3%

11,2%

0,0%

0,0%

0,0%

10,9%

10,9%

22,1%

2005

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

NA

NA

NA

Template 5. Asset-backed securities (Banking Mortgages) Mortgage-Backed Securities (Banks)

Securitization of Receivables

Other

TOTAL ASSETBACKED SECURITIES

Nominal Domestic Currency

59

Inflation

Foreign

Indexed

Currency

Total

Commercial

Credit Card

Other Consumer

Debt 1/

Debt

Loans

Other

Long

Short

Long

Short

Long

Short

Long

Short

Term

Term

Term

Term

Term

Term

Term

Term

1985

0,0%

7,9%

0,0%

7,9%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

7,9%

1986

0,0%

7,4%

0,0%

7,4%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

7,4%

1987

0,0%

6,6%

0,0%

6,6%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

6,6%

1988

0,0%

5,9%

0,0%

5,9%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

5,9%

1989

0,0%

6,0%

0,0%

6,0%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

6,0%

1990

0,0%

6,5%

0,0%

6,5%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

6,5%

1991

0,0%

6,8%

0,0%

6,8%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

6,8%

1992

0,0%

6,9%

0,0%

6,9%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

6,9%

1993

0,0%

7,7%

0,0%

7,7%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

7,7%

1994

0,0%

9,2%

0,0%

9,2%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

9,2%

1995

0,0%

10,4%

0,0%

10,4%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

10,4%

1996

0,0%

12,1%

0,0%

12,1%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

12,1%

1997

0,0%

13,4%

0,0%

13,4%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

13,4%

1998

0,0%

13,4%

0,0%

13,4%

NA

NA

NA

NA

NA

NA

0,0%

0,0%

0,0%

13,4%

1999

0,0%

14,3%

0,0%

14,3%

NA

NA

NA

NA

NA

NA

0,1%

0,0%

0,0%

14,3%

2000

0,0%

13,8%

0,0%

13,8%

NA

NA

NA

NA

NA

NA

0,2%

0,0%

0,0%

13,8%

2001

0,0%

14,2%

0,0%

14,2%

NA

NA

NA

NA

NA

NA

0,7%

0,0%

0,0%

14,2%

2002

0,0%

13,3%

0,0%

13,3%

NA

NA

NA

NA

NA

NA

1,4%

0,0%

0,0%

13,3%

2003

0,0%

12,4%

0,0%

12,4%

NA

NA

NA

NA

NA

NA

1,7%

0,0%

0,0%

12,4%

2004

0,0%

10,5%

0,0%

10,5%

NA

NA

NA

NA

NA

NA

1,8%

0,0%

0,0%

10,5%

2005

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

0,0%

NA

Template 6. Corporate Securitized (asset-backed) securities Corporate Securitized Bonds

Nominal Domestic Currency

60

Inflation

Foreign

Indexed

Currency

Securitization of Receivables

Total

Commercial

Credit Card

Other Consumer

Debt 1/

Debt

Loans

Other

Long

Short

Long

Short

Long

Short

Long

Short

Term

Term

Term

Term

Term

Term

Term

Term

1985

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1986

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1987

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1988

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1989

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1990

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1991

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1992

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1993

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1994

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1995

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1996

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1997

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1998

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

1999

0,0%

0,1%

0,0%

0,1%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

2000

0,0%

0,2%

0,1%

0,2%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

2001

0,0%

0,7%

0,1%

0,7%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

2002

0,2%

1,1%

0,0%

1,4%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

2003

0,3%

1,4%

0,0%

1,7%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

2004

0,4%

1,4%

0,0%

1,8%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

0,0%

2005

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

Appendix 1: Survey analysis 1. Sample Description for firms and investors We defined a sample of 142 companies divided into the 84 bonds indebted corporations existing up to 2005 and a control group of 58 non-issuing bond company registered at the Chilean Security Exchange Commission11 (SVS). The latter allows us to select 58 control companies belonging to the same economic sector and/or having a relatively similar size than the issuing company . The investors sample corresponds to all the existing institutional investors operating in Chile. The latter corresponds to 86 financial institutions registered at the SVS and divided according to the following classification: Pension funds (6), Insurance companies (29), Banks -commercial and investment- (25), and Mutual and Investment Funds (26). The exhaustive list is presented in the Appendix. Both in the case of companies and investors, the survey was addressed to the CEO, financial or investor managers of these institutions. Having concluded the survey process, we dispose from 40 complete corporate surveys (28% of the defined sample) and 32 investor surveys (35% of the defined sample)..

2. Implementation of the survey The surveys were implemented through two complementary ways. In a first round, the surveys were carried out by a team of 17 students, all of them from the Master of School of Business at the UAI. A second round of data gathering was performed during the last three months (Marh-May, 2006). Here the survey was sent and collected using the services of a private courier (TNT).

3.1- Firms level 11

Because any listed firm at the SVS has to disclose its financial statements, the latter allows us to have access to the balance sheet of the company. 61

3.1.1-Description of the sample (IADB, Table 7)

Number of firms surveyed

CHILE

40

Percentage that has issued bonds

Percentage with some experience with bonds*

75%

78%

Average size (nr of employees)

Issuers 4264

Non issuers 345

3.1.2- Firm that no longer issue bonds (IADB, Table 8) Q3(d)- If you issued in the past and you are no longer issuing, what is the main reason?” In the case of Chile, we have not enough answers to make a significant statement: high emission costs (1 out of 2); high interest rate (2 out of 2). Basically what is happening is that most companies that have issued bonds in the past are also issuing at the present time (or planning to do it). So the question does not apply to these companies. 3.1.3- Problems with bank financing Q4- In what way do the following factors are a problem for your ability to finance your operations by borrowing from banks? [0=it is not a problem; 1 = it is a problem]

62

3.1.4- Problems with bond financing (IADB, Table 9) Q5- In what way do the following factors are a problem for your ability to finance your operations by issuing bonds? [0=it is not a problem; 1 = it is a problem] Among the firms with some experience in issuing bonds, the main problem associated with the domestic bond financing is related to the small size of the domestic market (29%). High fees from credit rating agencies also appears to matter domestically (19%), but specially when deciding to issue abroad (32%). While the underwriter fees do not appear to be a problem when issuing locally, they are relevant when issuing foreign bonds (32%). Finally, one of the major perceived problems to issue abroad is a minimum size requirement (32%), whereas this is not a problem in the local market. The latter is in line with a result we already showed: the biggest bonds are issued abroad by the biggest companies. Regarding the firms without experience in issuing bonds, the main perceived difficulty is related with disclosure requirements (22%).

Firms with Experience Issuing Bonds

All Firms

Underwriters’ fees Credit rating agencies’ fees Disclosure requirements Minimum issue requirements Other regulatory requirements The market is very small The is no junk bond market OTHER

Firms without Experience Issuing Bonds

DOMESTIC BONDS

FOREIGN BONDS

DOMESTIC BONDS

FOREIGN BONDS

DOMESTIC BONDS

10% 15% 10% 13% 13% 23% 10% 8%

25% 28% 18% 28% 15% 0% 8% 5%

13% 19% 6% 13% 16% 29% 13% 10%

32% 32% 13% 32% 19% 0% 10% 6%

0% 0% 22% 11% 0% 0% 0% 0%

3.1.5- Relative advantages of bond and bank financing (IADB Table 10) Q6- In what way do the following factors are a problem for your ability to finance your operations in the domestic market? [0: it is not a problem, 1: it is a problem] Almost 1/3 of the surveyed firms believe that bank loans dominate bonds in terms of the speed of access to the required financing, while only 8% think that the contrary happens. However, 62% see no significant relative advantage from any of these sources of financing. Information requirements appears to be a second source of relative advantage of banking loans over bond financing. Maturity is the main advantage of bonds. Finally, it is not clear 63

whether the existence of guarantee requirements is a source of relative advantage of one source of financing over the other one: 25% of the firms surveyed believe that bonds dominate bank loans on that matter, while 25% thing that the contrary happens.

Speed of access to required financing Maturity of financing Interest rate Minimum amount required for loans or issuance Guarantee requirement Information requirement Other [please specify]

Bonds Dominate Loans in terms

Loans Dominate Bonds in terms

8%

30%

28% 18%

5% 18%

5%

15%

25% 5% 0%

25% 20% 0%

Q7- What are according to you perception the relative advantages of each form of financing? [ For each attribute work row by row and rank the following 5 forms of financing with 1=best alternative…5=worst alternative] Domestic banks loans are perceived as having a relative advantage in terms of the availability of lending in local currency and the probability of renegotiation, while bonds issued domestically lead in terms of the availability of long term lending and indexation alternatives. Bonds issued abroad have a relative advantage in terms of the size of the potential market but appear as the as the worst alternative in most of the remaining categories, including interest and non interest rate costs, renegotiation, disclosure requirements and, of course, the availability of local currency and indexed lending.

64

Ranking [1 to 5] (Mean Values) Banks Located in Chile

Domestic Bonds

Banks located outside Chile

Bonds issued abroad

Suppliers’ Credit

Interest rate cost Availability of local currency lending

1,6

2,0

3,3

4,2

2,6

Available indexation alternatives (CPI, others)

1,8

1,8

3,2

3,9

3,1

Availability of long term lending

3,1

1,5

3,0

2,2

4,4

Non interest rate costs (*)

2,0

2,5

2,9

4,2

2,2

Tax treatment Possibility of renegotiation in case of economic difficulties Costs related to disclosure requirements

2,4

2,4

3,2

3,8

2,2

1,8

3,3

2,7

4,5

2,0

2,0

2,8

2,9

4,2

1,9

2,9

2,4

2,4

2,0

3,7

Size of potential market relative to firm’s financing needs

3.2- Investors level 3.2.1-Description of the sample Number Investment Commercial Mutual fund of firms Bank Bank administrator surveyed CHILE 32 9% 25% 13% 3 8 4 n 32

Pension fund

Insurance company

Other

Average domestic assets (%)

9% 3

41% 13

3% 1

93% 30

3.2.2- Main Factors that limit the demand for Corporate Bonds Q4- Do you think that the following characteristics of the local corporate bond market limit your demand for this kind of asset? The existence of i) liquidity problems, ii) a low market capitalization and iii) the absence of a complete benchmark yield curve appear to be the three main factors limiting the investors demand for corporate bonds. On the other side, the three main elements which have little to do with the investors interest are i) the insolvency risk, ii) the quality of legal recourse in case of default, and iii) the regulatory constraints.

65

1. Low Returns 2. High Insolvency Risk 3. Low liquidity/ functioning of the secondary market 4. Unfavorable Tax treatment 5. Lack of timely information about issuer 6. Low quality of legal recourse in the event of default 7. Excessive regulatory/legal constraints 8. Low Market capitalization (stock of outstanding bonds) 9. Absence of a complete benchmark yield curve 10. Absence of a benchmark market index to track 11. Low quality (or absence) of the clearing and settlement system 12. Low quality (or high cost) of the credit rating system

YES

NO because is not an important factor in our decision on asset allocation

NO because this is not a characteristic of the local market

# answers

59% 3%

3% 0%

38% 97%

32 31

74%

6%

19%

31

10%

23%

68%

31

25%

9%

66%

32

19%

3%

77%

31

22%

6%

72%

32

61%

4%

36%

28

61%

3%

35%

31

55%

3%

42%

31

26%

10%

65%

31

28%

6%

66%

32

3.2.3- Regulatory constraints Q5- Does the current regulatory framework (laws governing your sector, state regulator for your sector…) impose any restriction on the allocation of your assets? YES 29 91%

NO 3 9%

Q5(a)- Please, range these regulatory constraints from very restrictive [1] to non restrictive [5] The main restriction is related with limitations for investing in non financial (corporate) private bonds

66

Restrictions on the kind of instrument Restrictions on the issuer Risk restrictions Restrictions on private non financial bonds

Mean

Median

# of valid answers

2,8

3,0

25

2,3 3,1

2,0 3,0

26 23

3,3

3,5

24

Q6- If the regulatory framework did not impose any restriction on the allocation of your assets, how would you change the shares of the following items in your portfolio? Please mark which assets would increase importance (weight) in your portfolio and which would decrease their importance The aforementioned observation is in line with the fact that, if there were no regulatory constraints, 63% of the investors would increase the share of corporate bonds in their portfolio. Besides, almost half of the investors would increase their investment in foreign assets. Increase

Unchanged

Decrease

# of valid observations

24% 15%

72% 56%

4% 30%

25 27

63%

30%

7%

27

48%

52%

0%

29

A. Domestic assets A.1 Domestic stocks A.2 Domestic government bonds A.3 Domestic corporate bonds (either issued by financial or non financial institutions) B. Foreign assets (cash, bonds or equities)

Q7- Suppose that your portfolio is increased by 50%. How would you allocate the new resources compared to your current portfolio allocation? Please mark which assets would increase importance (weight) in your portfolio and which would decrease their importance. (If the holding of a given assets increases by 50 percent then its weight would remain unchanged) Increase

Unchanged

Decrease

# of valid observations

A.1 Domestic stocks

25%

57%

18%

A.2 Domestic government bonds

19%

58%

23%

28 26

A.3 Domestic corporate bonds (either issued by financial or non financial institutions)

59%

41%

0%

27

B. Foreign assets (cash, bonds or equities)

50%

40%

10%

30

A. Domestic assets

67

4- Importance of the public bonds in the corporate bonds market Q9--Do you agree or disagree with the following statements [Rate each 1-5, where 1 = strongly agree… 5 = strongly disagree] Investors tend to believe that a large stock of public bonds is important for the development of corporate bonds as well as for pricing them, while they are less inclined to believe that they are substitutes in their portfolio. Mean

Median

# of valid observations

A large stock of public sector bonds is important for the development of the corporate bond market.

1,8

1,0

30

The yield curve provided by public bonds is crucial for pricing corporate bonds.

1,9

1,0

31

Government and corporate bonds are substitutes in your portfolio.

3,3

3,0

32

If the yield on government bonds were to increase significantly and that of private bonds remains constant I would sell private bonds and buy government bonds.

1,8

1,0

31

68

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