Algodon Wines & Luxury Development Group: Riding The Young Argentinian Credit Bull
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Argentina: A Young Credit Bull is Born…
There are few better times to invest – period but especially in “higher risk” opportunities – than during a “leverage-on” part of the credit cycle. Put simply, very early credit cycle investments have something of a derisking inherent in them by way of credit expansion providing investment multiple expansion (for both real and financial assets) as well as leverage-driven demand of underlying assets (generally driven by inflows of capital which are generally driven by an availability of credit). It’s not uncommon for even “underperforming” assets to see drastic equity pricing and/or underlying asset value increases during credit cycle maturation simply from the factors mentioned prior (activist investor Nelson Peltz of Trian Fund recently used this argument, and overwhelming evidence of this argument, to win a forcing attempt of a merger between DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW)).
However, it’s a difficult task to be able to call the beginnings and ends of a credit cycle usually. This makes so called “bottom ticking” the “leverage-on” cycle nearly impossible to do. These axioms setting the foundation for this note, it should be noted that Argentina – because of a handful of factors including a recent regime shift, a resolution of a decade long sovereign default, a reformation of fiscal and monetary policy, etc. – is in the beginning of what is being forecast as what should be a decade long (if not longer) leverage-on cycle. It is now generally accepted that Argentina’s leverage-on cycle is in its infancy; that a young credit bull has been born.
As the title of this note implies, Algodon Wines & Luxury Development Group (OTCQB:VINO) could represent an attractive way to participate in the growth of Argentinian asset values in the years ahead.
Argentina: Back from the Abyss…
For those unfamiliar or with no prior exposure to investment in Argentina, Argentina has generally been considered toxic from an investment and capital inflows standpoint for the better part of the last decade. Argentina has been mired in default-caused issues of hyperinflation, fraud, tax evasion (which exacerbated capital inflow issues), zero credit availability, zero currency credibility, deteriorating infrastructure, etc. With a political regime that championed Protectionism, or the “protecting” of local businesses and jobs from foreign competition (via tariffs and quotas on imports and subsidies or tax cuts granted to local businesses), Argentina plummeted into depression-like economic activity levels. In summary: Argentina was forgotten in a lost decade of regression on all fronts. Effectively cut off from foreign investment for over a decade as overt, government-directed currency manipulation and lack of credit with global central banks made Argentina an “untouchable”, the country floated further into the financial abyss.
But, again, under a recent regime change, Argentina has seemingly become what is arguably the most attractive market in the world for domestic and foreign investment. A comprehensive reform effort, already underway and already showing signs of momentum, has shifted the global investor sentiment in an historic way. Many global banking institutions (including JPMorgan (NYSE:JPM) – which is now the top underwriter in Argentina – as well as Deutsche Bank (NYSE:DB), HSBC (NYSE:HSBC), Santander (NYSE:SAN), and Citi (NYSE:C)), foreign governments, and non-traditional capital sources [e.g. Private Equity, Pension Funds, etc.] have come out extremely bullish on Argentina in both rhetoric and action.
Banco Santander Rio CEO Enrique Cristofani recently said that he believes the Argentinian economy will grow next year by 4%, in a context that offers great opportunities to the country. Cristofani projected that the volume of loans in the Argentine financial system will double in the next three years. Cristofani also announced that loans in US currency already granted by the bank increased six-fold since last March while personal loans grew 77 % in the last three months. Cristofani noted pledge loans increased 80% in the last quarter alone.
HSBC Bank Argentina CEO Gabriel Martino is even more bullish than Cristofani. Martino believes that Argentina’s financial system will triple outstanding loans over the next four years as protectionism is further established with credibility as gone for good. Cristofani noted:
“Argentina’s financial industry is underdeveloped compared with neighboring Chile. While outstanding loans total $65 billion in Argentina, or about 13 percent of gross domestic product, in Chile they add up to $212 billion, or almost 90 percent of GDP”.
He sees it as an example of HSBC’s faith in Argentina in that the bank recently divested its operations in Brazil while holding and expanding operations in Argentina.
Bloomberg has recently reported that both UBS (NYSE:UBS) and Julius Baer (OTCPK:JBAXY), two Zurich-based banks, are among banks planning to go onshore in Argentina. Their plans come amid a tax amnesty program recently launched by new President Mauricio Macri. UBS and Julius Baer are mulling plans to acquire local brokerages to quickly acquire banking licenses, per the Bloomberg report.
So far, regarding Macri’s tax amnesty program, about 100,000 citizens of Argentina have told their authorities that they owned hidden, never taxed assets, with 58,000 of those holding offshore accounts. Because of the ramifications of the tax amnesty plan, coupled with how this is expected to exponentiate the economics of the young credit bull, BNP Paribas (OTC:BNPZY) (which already has an asset management asset in Buenos Aires) is thinking about expanding its unit to capitalize on the expected growth of the fund industry after the repatriation of assets. Swiss banks so far have lost some 1.45 billion francs after the launch of a similar tax amnesty in Brazil. Argentina’s tax amnesty program is expected to bring up to $500 billion in inflows to the country – equal to one year’s Argentinian GDP (per the Economic and Financial Center for the Development of Argentina (CEFIDAR)), dwarfing prior tax amnesty programs in scope and in success.
Mauricio Macri’s Legacy: The Tax Amnesty Plan…
Separate from the positive developments that have led Argentina out of the darkness in which it inhabited for the last decade, the newly elected president, Mauricio Macri, has launched the most ambitious tax amnesty plan in the history of global finance. Macri’s strategy is to provide untaxed, potentially illegal, and/or general assets to flow back into domestic Argentina on a one-time, time-parameter having basis. That is, the tax amnesty – which will still apply a potential 15% tax to any inflows and/or require that inflows be invested in preselected vehicles (including government bonds, CEFs, etc.) – is not indefinite in offering; it does have an expiration. This, of course, provides a defined period in which investors know inflows will be high and in which investors know will shortly after spark the largest reinvestment boom in the country’s history (thus the leverage-on/credit bull).
But it isn’t just that onlooking investors and/or Argentina bulls can bank on inflows and reinvestment? It’s that investors know where the money is going. Macri’s tax amnesty requires either a tax penalty (good for government balance sheets and government-led investment to which Macri has promised will be plentiful) purchase of government bonds that pay zero interest and have trading restrictions (as noted above; also, good for government balance sheets and reinvestment), or investment into CEFs (closed-end funds with specific purposes of investment). The CEFs will have primary focuses on either infrastructure, housing, or agriculture. CEF capital deployment into these sectors is expected to drive asset values across the classes, for both real and financial assets. Again, normally a function of a leverage-on cycle within a credit cycle maturation.
Federico Tomasevich, the chairman of Puente Hnos SA, believes outside, speculator investments could reach $10 billion in four years as money from tax dodgers is supplemented by investors looking for higher returns so long as interest rates worldwide remain low. In Colombia, CEFs have grown from a $900 million industry in 2010 to $13 billion at the end of last year as the government undertook a building push (per a report by Bancoldex and the Inter-American Development Bank). Already, in the tax amnesty programs infancy, Argentina has already attracted $4.6 billion in undeclared cash holdings (1% of the top-end expectation).
Finally, Macri – who is being championed across the globe by leadership teams across government systems (i.e. political theories) – is also working with private corporations to further the investment and development of Argentina (based off government/tax amnesty program investing). For instance, Siemens AG (OTCPK:SIEGY) will work with Argentina on 5 billion euros ($5.6 billion) worth of infrastructure projects. Plans over the next five years include creating high-efficiency gas power plants and wind-based renewable energy, automating rail transportation systems to improve traffic flow, and working to make Buenos Aires municipal buildings more energy-efficient. In another instance, Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) recently announced plans to invest $300 million a year in Argentina through 2020 in exploration as well as refining, distribution, and marketing; the company said in a statement September 29 (via Reuters).
Argentina: Back to the Markets…
All this progress hasn’t gone unnoticed by the ratings agencies. Global ratings agency Fitch recently affirmed Argentina at “‘B’; Outlook Stable” from a credit standpoint, noting:
“Argentina’s ratings balance the improved consistency and sustainability of its policy framework, reduced external vulnerability, and the easing of external and fiscal financing constraints against relatively weak external liquidity, continued macroeconomic underperformance compared with peers, and deterioration of public finances. Argentina’s ratings also balance structural strengths such as GDP per capita and social indicators against a weak debt repayment record. The central bank has focused its policy actions on addressing rising inflation in the first half of 2016 and containing inflation expectations. It has also announced moves toward an inflation targeting framework. Moreover, the introduction of a budget with realistic guidelines could improve the predictability of fiscal policy. Finally, the government is making progress in rebuilding the credibility and reliability of official statistics. The resumption of the IMF Article IV reviews supports greater transparency. International reserves have increased to USD32.5 billion in early October, up 30% from end-2015 levels. The increased flexibility of the Argentine peso should contribute towards improving the capacity of the economy to absorb external shocks and relieve pressure on international reserves. In addition, balance of payments pressures are likely to remain in check due to moderate current account deficits, access to external financing, and the discontinuation of using reserves for sovereign debt payments.”
Argentina held a record $16.5 billion bond sale in April, which marked the country’s return to overseas credit markets after its 2001 default.
Algodon Wines & Luxury Development Group: A Decade-Long Investment Thesis Finally Playing Out…
Algodon Wines & Luxury Development Group, referred to as VINO going forward, is one way to play the unlevered assets and the credit expansion of Argentina, and it took some digging to find this name. VINO, while having been put together over the last decade, is newly public – the timing of the go-public transaction no doubt much more than purely coincidental (with the political regime change, Argentinian structural reform, etc.). VINO, while being valued at ~$125 million in market cap, also trades “by appointment” at this point so it’s public (again, at this point) only in name and in reporting. This is important to take into consideration when prospecting an investment. An investment in VINO should be thought of as an investment into a private enterprise; something which I find attractive when investing (thus why I’m covering this name).
VINO is a U.S.-based public company that owns and develops luxury real estate assets in Argentina. VINO is among the first real estate developers in Argentina to report on a U.S. stock market and its non-levered assets provide one of the few public vehicles for participating in the anticipated growth in value of Argentinian real estate. VINO is also the only publicly-traded luxury development brand with unlevered real estate, premium wines, and luxury lifestyle assets currently focused on Argentina.
Again, all provide unique deployment opportunities for speculator capital (i.e. U.S. investors looking to accumulate VINO common stock). Especially considering the above outlined investment inflows to all sectors of the Argentinian economy (driven by government spending, CEF investment, foreign speculator investment, in-country credit expansion, etc.). Doubly so when considering the high visibility of increased ancillary drivers: tourism, a resetting of the in-country currency to the U.S. dollar, a resetting and/general expansion of in-country wealth, etc.
VINO seeks to become the LVMH-Moet Hennessy Louis Vuitton (OTCPK:LVMHF) of South America. It has a general strategy of using its access to the public markets to further its aggregation of Argentinian luxury assets – primarily its access to equity markets (in potentially using equity to acquire in-country assets from older generations looking to exit the business but still wanting participation in the upside recovery of their country), to debt markets, and the usage of its being a proxy for Argentinian investment to drive ancillary capital raises – to expand its brand and market share capture. Ultimately, VINO sees itself being the single largest luxury brand in South America – at least this is what I take from public filings.
VINO’s current luxury portfolio includes:
- The vineyards and winery of Algodon Wine Estates in San Rafael, Mendoza, which has received international accolades for Algodon Fine Wines, and which includes 325 acres (131 hectares) of vines dating back to 1946, as well as a 2,050 acre (830 hectare) luxury real estate development with over 400 estate lots (ranging from .5 to 7 acres);
- Algodon Wines & Wellness Resort, a developing premier wine, wellness, culinary, and sport resort that includes golf and tennis facilities;
- an all-suite boutique hotel in Buenos Aires, called Algodon Mansion, located in the heart of the city’s luxury residential and embassy district; and
- Algodon Olive Oil, the estate grown and award-winning EVOO that has been blended to “complement its portfolio of wines.”
In my opinion, and the opinion of those in which I’ve taken consult from, VINO’s asset of highest value is its acreage position comprising its vineyard and luxury real estate developments. Its most readily monetizable asset if you exclude incremental luxury real estate sales (to which VINO is off to a hot start in monetization so far) is its Algodon Mansion. Its highest scale asset in speculation is its wine brand, which is being well reviewed by even the harshest of critics. It should be noted that VINO’s wine brand recently won a prestigious importing agreement with Seaview Wine Imports (to sell Algodon wines in the U.S. through Sherry Lehmann). Sherry Lehmann, for those unfamiliar, is one of NYC’s (and the U.S.’s for that matter) most iconic wine retailers. Reiterating, VINO’s wine brand has incredible potential for scale.
Other bullish developments taking place or having been executed at VINO (trailing 12 months):
- VINO is undergoing comprehensive optimizations, including renegotiating with vendors, divesting a legacy broker/dealer business (0estimated annual savings of approximately 1.5 million USD), etc.
- The company is converting part of its New York City office into a Wine Sales Office and Algodon Lot Sales Showroom/Office to introduce wines to the trade and real estate opportunities to local real estate interests.
- It is currently in discussions to create a sales and marketing partnership with Sotheby’s International Realty (NYSE:BID) and Keller Williams; and potentially others in the U.S.
- VINO is adding Algodon Extra Virgin Olive Oil to its product line on a more commercial basis for 2017.
- Its winery expansion is expected to be completed in Q4/2016.
And:
- VINO anticipates that its first 12 lots sold (regarding its luxury real estate acreage) will be deeded in Q4 of 2016; the deeding of these lots represents 1.8 million USD in revenues.
- The company anticipates that its second tranche of lots deeded (19 in number) will be sold in Q1/2017. This may generate up to an additional 2.5 to 3.0 million USD in lot revenues to be recognized.
From the standpoint of financials, VINO recently executed a capital raise, which is hugely meaningful to its next round of investors (speculators considering an investment in its common). The capital raise – assuming term sheets for lots sold but expected to close in Q4/2016 (12 lots in total) and lots sold but expected to be deeded and closed in Q1/2017 (19 in total) prove out – will be enough to fund the enterprise for ~18 months. In the immediate-term and mid-term, this completely negates VINO’s dilution risk (ex. potential acquisitions). Potentially, this takes dilution risk off the table entirely (although this requires the assumption of VINO’s legacy broker/dealer asset being sold and cost reductions being realized).
Prior to this successful funding round, given that VINO is only now monetizing with anything of scale (having its Argentinian macro constraints removed), it appeared highly likely that VINO would need to raise capital in both the immediate-term and in the mid-term. Currently, VINO is expecting ~$4.8 million in full-year revenues (this doesn’t account for ~$2 million in lot sales as deeds have not completed the transfer process). I had anticipated several capital raises, excluding any acquisition and/or asset-monetization activities, prior to VINO ultimately reaching cash flow breakeven, which would have been a risk to investors in that this would be dilutive. This was my reluctance to investing in and/or covering the name prior.
However, with a successful capital raise on the books, (again) these risks are negated for the time being (maybe permanently). In addition, if VINO’s assets “reflate” with a resetting of currencies (peso to U.S. dollar) and/or with a general bull market for real assets, the company might be able to finance all or a portion of its capital needs with non-dilutive vehicles (leveraging its assets as collateral and/or leveraging its then larger revenue stream for traditional debt financing). There’s also that VINO could enter joint development agreements with non-traditional capital sources looking to purchase not fully levered asset valuations, etc.
I could see a scenario in which an investor, again non-traditional capital, might consider a large acreage purchase of VINO acreage for SubCo or NewCo formation, allowing the non-traditional capital to lever up the acreage (i.e. to pull growth forward by deploying large CAPEX; CAPEX which VINO’s balance sheet doesn’t currently possess for deployment) in a “land grab” attempt (developing the VINO acreage quickly and moving on to the next project, in this scenario). Keep in mind, with a large balance of NOLs (~$41 million as of 12/31/2015; most of these NOLs do not expire until 2025 and beyond), any SubCo formation NOT considered a “change of control” and/or a NewCo would have the benefit of leveraging the NOLs into NOT being a cash-tax payer. That’s a huge monetization benefit to any non-traditional capital looking to develop assets with a tax protection asset. With the huge amount of current CEF formations in Argentina as well as the huge CEF funding currently taking place, I don’t find this scenario to be too fantastical in theory. Again, we know where the macro, tax amnesty program fund flows must be deployed; VINO’s acreage would be program approved.
Even with anything of growing pains, VINO is an investment worth consideration. The Argentinian credit bull should lead to several macro factors assisting in what has been to this point impressive internally driven VINO growth and maturation. Over time, and this is already happening to a marked extent, VINO should be the beneficiary of asset inflation (per the Statistics and Census Bureau of the City of Buenos Aires (via “Dynamics of the Apartment Market”), land pricing is already up ~9% in 1H/2016). It should also be the beneficiary of overall improving economic health within Argentina, which will lead to higher utilization rates (and likely pricing inflation) of the luxury brands assets (e.g. its wines, its clubs, etc.). All would do well to decrease the current cash burn rate at VINO and to increase the long-term viability of the name. VINO is early stage, to be sure, but so too is the young Argentinian credit bull.
Source: Investor Presentation
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