LAAD A DREAM CAME TRUE

Latin America Agribusiness Development Co.

LAAD’s mission is to promote the economic and social development of Latin America by financing small and medium-size companies and projects in countries which encourage trade, investment and economic growth.

On a broader scale, LAAD funds projects - but invests in the people who make those projects succeed.

Letter from LAAD's President

In 1970, twelve leading agribusiness and financial corporations founded LAAD as a private development institution dedicated to promoting the economic and social development of Latin America by financing private agribusiness projects. Thirty-five years later, LAAD’s mission remains the same.

LAAD started with a seed capital of $2.4 million, and from that modest beginning, has grown more than 25 times. More importantly, over the years, LAAD has invested more than half a billion dollars in more than 1,000 agribusiness projects in over 15 Latin American and Caribbean countries. We estimate that over these past thirty-five years, LAAD’s financial support to our clients has created more than 85,000 jobs and generated an increase in exports of over US$950 million. Fulfilling its developmental mission has not caused LAAD to lose track of its business bearings.

LAAD’s initial growth was financed using long-term funding from USAID. At the time, no private lender was willing to lend long-term funds to a starting development bank without a track record in lending and collecting loans. Add to this the fact that the Corporation’s untested corporate mission was to focus on granting agribusiness loans in a politically and socially convulsive region of the world, and their hesitancy was perhaps understandable.

Today however, after the hard and consistent work of its management and staff, and its supportive and participative Board of Directors, LAAD enjoys an excellent reputation and track record as a financial institution in Latin America . As a result, the Corporation no longer has to borrow from subsidized sources and all of its new funding comes from the open market, as well as its retained earnings. This is extremely important for our projected expansion in the coming years and to continue fulfilling LAAD’s mission.

By now we know well the tortuous roads as we have operated continuously in Latin America throughout these 36 years, even under the darkest days of the region’s various major crises. We look forward to the future ahead with anticipation. The challenge we undertook 36 years ago will continue through the decades ahead. As we look into the future, we foresee sustained growth, along with diversification into more countries, crops, technology and agribusiness innovations, driven by the increasing domestic and world demand for agricultural products and processed foods. Latin America has the natural resources and the business talent to move ahead and meet the demands of its people as population and income levels grow. LAAD will support this growth by committing more financial resources and its best assets: its dedicated and committed Board of Directors, its management team and staff, and most importantly, its hard working and risk-taking clients.

After more than 30 years, LAAD is a great example of what people with big dreams can acoomplish when they believe in them, and the pride of all Latin Americans.

THE BOOM GENERATION

The Boom GenerationSeventh Decade
By MICHAEL MILKEN

SANTA MONICA, Calif.—On July 4, along with more than 9,000 other American post-war babies, I turned 60. Our generation, the 78 million American baby boomers born between 1946 and 1964, has had a profound social and economic impact around the world for more than half a century. As we start moving into our seventh decade, it's logical to ask what effect baby-boomer retirements will have on real estate and financial markets. The question is logical, but it puts the emphasis on the wrong side of the equation. The real future value of U.S. assets won't be determined by retirements, but by policy decisions on education, taxation, regulation, immigration, international investment and the environment.

Baby boomer asset liquidation isn't really a financial market issue because (1) there's plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they'll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) as baby boomers live longer and healthier, their new mantra will become "Who wants to retire?" and (5) most assets won't need to be sold.

I will examine each of these points.

1. Large parts of the developed world are awash in liquidity—Japan has more than $10 trillion—and we're also seeing a buildup in several countries with small populations. Norway, the UAE, Taiwan, Singapore and others each have hundreds of billions of dollars available for investment beyond the immediate needs of their citizens—in some cases, as much as $50,000 per person. To put that in perspective, Hewitt Associates reports that the median amount in a U.S. 401(k) plan is just $27,100.

2. The "BRIC" nations—Brazil, Russia, India and China—will continue to grow faster than the U.S. and, with the U.S. and Japan, will become the world's major economic powers by mid-century. There are 600 million children in China and India whose future buying power will grow at least as fast as their rapidly improving educations. As the BRICs accumulate wealth, they will want to diversify their holdings globally. America stands to benefit as richly from that diversification as it did from European investment in the 19th century.

China and India combined to produce nearly half the world's economic output in 1820 compared to just 1.8% for the U.S. Our remarkable growth since 1820 has benefited from democratic institutions, a belief in capitalism, private property rights, an entrepreneurial culture, abundant resources, openness to foreign investment, the best universities, immigration and relatively transparent markets.

3. Recent U.S. financial innovations—including new markets for securitized mortgages and credit-card liabilities, collateralized loan and high-yield bond obligations, and financial derivatives—helped to spread risk and created tens of millions of jobs by freeing up investment capital for growing businesses. As these financial technologies are deployed throughout the world, they will increase prosperity by multiplying the value of human capital, social capital and real assets. They have the potential to create as much as $50 trillion to $100 trillion in worldwide liquidity.

In the U.S., the value of home mortgages equals 95% of the nation's gross domestic product. The ratio is considerably lower in other countries: mortgages in Germany total about 69% of GDP; in Japan, it's 36%; and in Russia, less than 1%. A worldwide securitized mortgage market alone could free up some $20 trillion for productive investment by unlocking the unused capital in residential real estate.

4. More baby boomers are asking themselves, Why retire? It's a cliché to say that 60 is the new 40, but it has some biological and psychological validity. Advanced biomedical research is leading to continued progress against cancer, heart disease, arthritis, dementia and other conditions that forced people out of the workforce before they wanted to quit. In the future, aging workers will be healthier and will use broadband technology to live and work from anywhere at the increasing proportion of jobs that involve knowledge rather than physical labor. They'll spend more years earning income, often in multiple careers, instead of selling assets.

Fewer people will retire in their 60s simply because they know that average life expectancy at birth is increasing at an astounding rate. Americans, who could expect to live an average of 47 years in 1900, now enjoy life spans approaching 80 years. (It already exceeds 80 for women.) An American who makes it to age 65 can look forward to living almost two decades more. Worldwide, the increase has been even more dramatic. In a single century—despite wars, AIDS and other scourges—the global average more than doubled to 66 years. Nobel laureate Robert Fogel believes it will exceed 100 years within this century.

More than just the length of life, the number of healthy years will also increase. When people are vibrant into their 80s and 90s, 65 will evolve from the traditional retirement age to a mid-career milestone for those who choose to keep working. Who wants to retire when you have fulfilling work, when you earn a good income, and when you feel great? According to a Yahoo! poll, 70% of people over 55 say it's never too late to start a new business.

5. Many baby-boomer assets won't be liquidated. The Federal Reserve reports that the wealthiest 5% of American households own about 60% of the nation's assets. Ninety percent of all stock is owned by 10% of investors. Debate continues about how this concentration of wealth affects our society, but what seems irrefutable is that the owners of most wealth will have no urgent need to raise cash. A retiree with a $10 million net worth doesn't sell stocks to buy groceries or pay the mortgage. He can easily live on dividends and interest while preserving assets for his grandchildren or a favorite charity. And if wealthy retirees don't sell their assets, they won't put pressure on valuations.

In the top 1% of households—which own a third of U.S. assets—net worth starts above $10 million and moves well into the billions. Rather than sell assets, these families endow non-profit institutions and give their wealth to foundations, which are growing in number and size.

If the top 5% of wealth holders won't be liquidating their 60% of U.S. assets, what about the remaining 40% of assets owned by 95% of the population? For most baby boomers, the biggest chunk of their net worth is the equity in their house. Many of these houses will be transferred to the next generation through inheritance. For those properties that will be sold, their future prices will be greatly influenced by policy decisions affecting social capital—things like good schools, clean air, cultural attractions, reasonable regulations and safe streets. A community that ignores the quality of its schools will eventually see that neglect reflected in its real estate market.

The best way to assure the future value of American assets is to focus on succeeding in the worldwide competition for human capital. We have some excellent preschool programs and the world's best system of higher education; but we need to shore up our K-12 educational infrastructure—especially in science—to help the next generation compete on a world stage.
When I went to Wall Street in 1969, the major providers of investment capital had adopted regression analysis and concluded that the future would be much like the past. So they financed yesterday's industries. Today's predictions of a coming asset liquidation problem seem to make the same mistake of projecting the past into the future. There's one thing I can predict about the future with complete confidence: it won't be anything like the past. It never is. But as long as we maintain asset values by enhancing human and social capital, I believe the future of the baby boomers—and their nest eggs—is secure.

HIGHT YIELD BONDS

What Are High-Yield Bonds?


All bonds are debt securities issued by organizations to raise capital for various purposes. When you buy a bond, you lend your money to the entity that issues it. In return for the loan of your funds, the issuer agrees to pay you interest and ultimately to return the face value (principal) when the bond matures or is called, at a specified date in the future known as the “maturity date” or “call date.”

High-yield bonds are issued by organizations that do not qualify for “investment-grade” ratings by one of the leading credit rating agencies—Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings. Credit rating agencies evaluate issuers and assign ratings based on their opinions of the issuer’s ability to pay interest and principal as scheduled.

Those issuers with a greater risk of default—not paying interest or principal in a timely manner—are rated below investment grade. These issuers must pay a higher interest rate to attract investors to buy their bonds and to compensate them for the risks associated with investing in organizations of lower credit quality. Organizations that issue high-yield debt include many different types of U.S. corporations, certain U.S. banks, various foreign governments and a few foreign corporations.1


Who Invests in High-Yield Bonds?

A variety of investors participate in the high-yield bond market. They include individuals who invest in high-yield bonds through direct ownership and/or through mutual funds; insurance companies; pension funds and other institutions.

Individual investors purchase individual high-yield bonds, often as part of a well-diversified investment portfolio. They also participate in this market through high-yield bond mutual funds. Mutual funds pool the assets of investors to create portfolios of high-yield bonds. Three separate categories of mutual funds invest in high-yield bonds:

High-yield funds invest primarily in lower-rated bonds.

Income mutual funds invest in a broad mix of income-producing securities, including high-yield bonds, investment-grade bonds, preferred stocks and high-dividend stocks. High-yield bonds usually represent a small portion of their holdings.

Corporate bond funds invest mainly in investment-grade corporate issues, with a smaller allocation to high-yield bonds.

Insurance companies invest their own capital in high-yield bonds. They also participate in the market through “separate accounts” offered in variable insurance and annuity products.

Pension funds invest in high-yield bonds to earn higher rates of return than those available from investment-grade bonds, or as an alternative to investing in an issuer’s stock. Pension fund trustees are fiduciaries that must invest within “prudent man” guidelines and other considerations, which vary from state to state. Recently, in some cases, these guidelines have allowed increased pension fund participation in high-yield bonds.

Collateralized bond obligations (CBOs) are debt instruments that offer many benefits of investment-grade bonds, including current income and a high quality rating. The collateral behind these bonds often consists of a pool of high-yield bonds diversified by issuers and industries, which enables the pool to obtain a higher rating than any individual bond in the pool. CBOs may include several “tiers,” which offer different maturities, or levels of risk.

All information and opinions contained in this publication were produced by The Bond Market Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, The Bond Market Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.


Who Issues High-Yield Bonds?

Over the last decade, diversity has grown among issuers that tap the high-yield market. In the late 1980s, high-yield bonds were generated by a few participants and heavily used to finance merger and takeover activities. Today, the market has broadened to include many dealers and issuers with diverse needs. Issuers of high-yield bonds can be grouped into the following categories:

“Rising stars” are emerging or start-up companies that have not yet achieved the operational history, the size or the capital strength required to receive an investment-grade rating. These companies may turn to the bond market to obtain seed capital. Although start-ups can be risky, credit rating agencies consider their lack of a track record when issuing ratings. So a start-up company that qualifies for a single-B rating should have about the same risk level as a going concern with the same rating. In some cases, bonds may offer the first chance to participate in start-ups, before these companies offer their initial public offerings (IPOs) of stock to the public. Eventually, many rising stars grow to become larger companies with top credit ratings.

“Fallen angels” are former investment-grade companies that are experiencing hard times, which cause their credit to drop from investment-grade to lower ratings. If their prospects improve, some fallen angels can regain their investment-grade status.

High-debt companies (which may be blue chip in size and revenues) leveraged with above-average debt loads that may cause concern among rating agencies. Companies refinancing debt sometimes turn to high-yield bonds to pay down bank lines of credit, retire older bonds or consolidate credit at attractive rates of interest. Companies also turn to the high-yield bond market for capital to fund acquisitions or buyouts, or to fend off hostile takeovers.

Leveraged buyouts (LBOs) create a special type of company that typically uses high-yield bonds to buy a public corporation from its shareholders, often for the benefit of a private investment group that may include senior managers. Some corporate assets or divisions may then be sold to pay down the debt.

Capital-intensive companies turn to the high-yield market when they are not able to finance all their capital needs through earnings or bank borrowings. For example, cable TV companies require large amounts of capital to acquire, expand or upgrade their systems.

Foreign governments and foreign corporations, often less familiar to domestic investors, may rely on high-yield bonds to attract capital. Bonds issued by foreign entities have not been addressed in this booklet in any detail and are not included in the statistical tables throughout. Also, it should be noted that there are other risks—currency risk and political risk—that are unique to bonds issued by a foreign government/corporation and have not been covered in this booklet.

INTERAMERICAN DEVELOPMENT BANK

What Is the IDB?

A long-standing initiative of the Latin American countries, the Inter-American Development Bank was established in 1959 as a development institution with novel mandates and tools. Its lending and technical cooperation programs for economic and social development projects went far beyond the mere financing of economic projects that was customary at the time.
The IDB’s programs and tools became the model on which other regional and subregional multilateral development banks were created. The IDB is the main source of multilateral financing for economic, social and institutional development projects and trade and regional integration programs in Latin America and the Caribbean. It is the oldest and largest regional development bank.

In its Charter, the founders of the Inter-American Development Bank defined its mission to be to ”contribute to the acceleration of the process of economic and social development of the regional developing member countries, individually and collectively.”
Though its statement of purpose was written almost half a century ago, the IDB continues to work toward that primary objective, adjusting the focus of its activities and operations to meet the shifting development needs of its member countries in the Latin American and Caribbean region.

The Inter-American Development Bank helps foster sustainable economic and social development in Latin America and the Caribbean through its lending operations, leadership in regional initiatives, research and knowledge dissemination activities, institutes and programs.

The Bank assists its Latin American and Caribbean borrowing member countries in formulating development policies and provides financing and technical assistance to achieve environmentally sustainable economic growth and increase competitiveness, enhance social equity and fight poverty, modernize the state, and foster free trade and regional integration.

By the end of 2006, the Bank had approved over $145 billion in loans and guarantees to finance projects with investments totaling $336 billion, as well as $2.2 billion in grants and contingent-recovery technical cooperation financing.

Public entities eligible to borrow from the Bank include national, provincial, state and municipal governments, and autonomous public institutions. Civil society organizations and private companies are also eligible.

How Does the IDB Operate?

Operations of the IDB are guided by general operational policies, common to financing activities in all fields, and sector policies, which provide guidance in specific fields of activity. The Bank also has a procurement policy and an information disclosure policy.
The IDB's lending program is guided by strategies. It has an institutional strategy as well as sector strategies.

The Bank obtains its financial resources from its members, borrowings on the financial markets, funds it administers and loan repayments. It uses those resources to finance loans, grants, guarantees and investments for development projects in Latin America and the Caribbean.
Profit is not the IDB's main goal, but it does operate under financial principles similar to those of private banks. Its administration and asset management activities include receiving interest income from its loans and using cash management strategies to invest funds not immediately needed for disbursements.

The IDB accepts comments and opinions from the public on drafts of selected strategies and policies via periodic public consultation and participation exercises. The Bank also promotes the use of participation programs to encourage project beneficiaries to become involved in project preparation and implementation activities. It has an information disclosure policy that governs access to information on its operational activities.

The IDB has numerous committees and mechanisms in place to ensure sufficient audit and oversight for its projects and administration. The Bank also evaluates its activities to systematically assess the results of the activities it finances and related processes. Finally, it has initiatives, systems and organizational mechanisms in place to measure development effectiveness in its projects and its own operations and practices.