22 companies at risk from Latin America's nationalization trend

One time is a coincidence, two is a trend. After two nationalizations in Latin America in just a few weeks, this is cause enough for worry, sending country risks higher. 

We all know that Venezuela and President Hugo Chavez has been both a country and person to avoid, as the risk of losing your productive assets would increase the more profitable they became. So a pretty much lose-lose situation.

Argentina came on the nationalization map again the 16th of May when President Chistina Fernandez de Kirchner took over 51 percentage of shares in the oil company YPF SA. The market value of these shares were approximately USD 5bn. The rightful owner, Repsol SA (REP) in Spain, should not expect to revive the full value of the seized assets, as Argentina does not have any finances to back up this move. Repsol SA will likely get far less than 100 cents on the dollar. 

Yesterday we had the Bolivian President Evo Morales announce the nationalization of the local assets of Red Electrica (REE) Corp from Spain. The local assets earned approximately 3 percent of the company's total revenues.

The changed behaviour from the Latin American regimes is not welcomed by any investor but the responses from the American and European political arena have so far have been very muted. The risk is from an investor point of view that this is just the beginning, a test of the political landscape, and therefore you have to take precautions. It could get much worse!

A simple screening
I have done a very simple screening using the Saxo Bank stock screener just to get some idea of where to dig further. The screening is on the share of revenues from Latin America. This screening is not perfect but for any investor it is a place to begin the analysis, as you are able to find the companies engaged in the area, and afterwards chase the assets.

Let's start with Portuguese and Spanish companies. The vast majority of their growth comes from these regions, so supporting valuation in the long-run, this is especially worrisome. Last week we saw the two main Spanish banks reporting, Banco Santander (SAN) and BBVA (BBVA) and yet again, Latin American growth and earnings saved the overall Q1 results. Think also of Telefonica SA (TEF) where approximately 50 percent of revenues are from Latin America. This is an indication of the importance of the Latin American operations for Iberian companies. The Latin American risk will probably add on to the overall risk of IBEX35 and put downward pressure on the price- as if this index hadn’t suffered enough.

The screening selected companies with more than 25 percent of their revenues in Latin America and a market cap in USD above USD 3bn. This gave a selection of 47 companies. Secondly I looked at the sectors and graded them high to low risk. The more “important” a country can claim the sector is the more political leverage they will have in the public. This provided me with the final list in table 1 comprising of 22 companies with a total market cap of USD 538bn. As an experiment – what if the level of revenue matches the assets in Latin America? The matching amount of assets would be USD 182bn. Not a small number!

Conclusion
This is my first raw list of companies which could face risks because of the nationalization trend in Latin America. There will definitely be other companies which could potentially be at risk. Spain’s second largest bank BBVA (BBVA) is not included in this study.

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I write regularly about both Spanish debt and major oil companies for TradingFloor.com.  If you'd like to be notified by email whenever I write something new, become a member of TradingFloor.com - it's free - and "follow" me or the topics that interest you.  You can see all my stories about the crude oil business - and those of my colleagues - on TradingFloor.com's crude oil page.  You may also enjoy our coverage of Spain and the Spanish debt situation.