The Pandemic, Investment Funds, Corporate Bonds and Private Lending
Investment funds are still on the hunt for profitable finance investments in Costa Rica, albeit in a slightly more cautious manner than before 2020. And captivating opportunities have been found in some industries.
As with the rest of the world, the COVID-19 pandemic has had an impact on the economy of Costa Rica. Some companies have seen their revenues affected by “soft” lockdowns and mobility restrictions, and, of course, cash flow has been tight for some. Although there have been some recent signs of recovery, the turnaround period is not yet here, but this has led to interesting financing and investment options for both companies and investment funds.
It is important to mention that an exception to the economic unrest can be detected in the Free Trade Zone regime, under which companies are experiencing strong growth, despite the pandemic. Projections here seem even stronger, making this an engaging sector.
On the other hand, offers of privately issued bonds have decreased considerably during 2021. Firstly, this is because investors are more careful with their investments as a consequence of the economic crisis. Secondly, corporate bonds are being watched more thoroughly by the Costa Rican authorities. Investors have responded with more careful consideration, prompting companies to slow down their efforts to finance through them and to seek other financing opportunities.
Finally, because of the decrease in opportunities with corporate bonds, private lending has increased despite the pandemic, in comparison with the banking sector. Private lending has been particularly important in the real estate sector, with developers choosing it over bank lending. There are many interesting financing options available through private lending, for both creditors and debtors.
Cryptocurrencies are being publicised more in the country than before the pandemic, especially after neighbouring El Salvador announced their acceptance as legal tender. There has been some increase in their usage in recent months, but there is still space for them to grow. This market is still pretty much unexplored, and interesting options may soon arise and early adapters may find engaging opportunities with cryptocurrencies.
A handful of crowdfunding start-ups have also emerged. At the moment, their visibility is limited, and the public is curious but still hesitant. However, this might also change in the near future as companies with financing needs resort to crowdfunding. There is plenty of room for this financing option to grow if it is exploited correctly.
On another front, a group of fintech companies have succeeded and seem to have a bright future. For example, Monibyte (a fintech founded in 2013) has encountered success by allowing its users to control their expenses online through credit and debit cards. The company is currently growing at a magnificent pace, and has obtained extensive publicity and clients.
Fintech companies are still in the early stages in Costa Rica but the public has shown a good response to them. Creativity and solving problems that traditional companies did not solve are attractive factors for new users.
Finally, some fintech start-ups have decided to tackle financing through private lending. Although there is currently a limited level of success, there is enough space for the market to grow. As with crowdfunding start-ups, there are financing needs that are not being addressed by financial institutions.
The Economy and the Banking Sector
The pandemic has had a negative effect on credit portfolios in Costa Rica. Some loan facilities that were current before the pandemic and used to have a good credit rate have begun to deteriorate, falling into arrears in spite of efforts to prevent doing so. However, dramatic levels of collections and foreclosures have not yet been seen.
The economic crisis caused by the pandemic has prompted regulators to soften up some rules to analyse the capacity of debtors' payment and credit rates. Furthermore, they have allowed banks to refinance loans more often and with fewer requirements, aimed at preventing clients from moving towards an arrears situation.
The aforementioned new rules have implied that, although some new credits have been signed during the pandemic, most tasks during these times have been directed at refinancing existing operations through special new and beneficial conditions. Of course, this is aimed at assisting companies in a burdensome situation and not at increasing the percentage of portfolios in arrears.
In new credit facilities of some importance, New York law continues to be the first choice as governing law. Local law is only used primarily for collateral agreements, even when New York law is used for the main credit agreement. Contrary to larger credit facilities, Costa Rican law is used for smaller facilities.
The refinancing operations are mostly aimed at lowering interest rates, granting extensions and modifying existing guarantees. Also, some adjustments are targeted at improving the cash flow of some debtors to overcome the pandemic.
Along with refinancing, in some other cases designing outside-the-box strategies and structures to assist debtors in their efforts to overcome the crisis has been a very important task for the banking sector. Collateral that was previously overlooked is no longer being immediately discarded.
Overall, banks and financial institutions have considerable liquidity at the moment, which translates into the adoption of aggressive strategies seeking to place new credits in the market. However, despite all their efforts, credit has not substantially varied from April 2020 to April 2021.
Moreover, credit facilities in US dollars have decreased over recent months, although this was the most attractive option before the pandemic. On the other hand, credit in Costa Rican colones has slightly increased, having once been considered the second option. This may be a result of companies’ and individuals’ precaution to get financed in foreign currency in times of economic crisis.
Crisis: Opportunities Are yet to Be Found
To summarise, the pandemic has hit the local economy but that does not translate into a lack of interesting opportunities. These chances may be found mainly through private lending and fintechs, with outside-the-box thinking and structures being the key to finding them.