Brazil Roundtable 2009: part one
IFR: What kind of second half can we expect locally and internationally in terms of spreads, volumes and quality of issuers? And what types of funding sources will be at hand? Will debenture issuance take off again once companies start fast-tracking deals by offering them to ultra-qualified investors only?
Denise Pavarina, Bradesco BBI Investment Banking: I am going to answer the last part of the question first. I believe that the possibility of being able to offer fast-track transactions to qualified investors will not change the local Brazilian debenture market, at least now for now nor the second half of this year. At the end of last year, banks were raising money very heavily when there was a restriction on liquidity. They squeezed private credit out of the market.
On the other side you have the pension funds, and Fabio can confirm this afterwards, those funds are now at the limits of just how much they can invest in private credit. When we go and speak to asset managers, their funds too are at the limit in such a way that if they buy more private credit, they will have to turn their mutual funds into credit funds and that would require a call to their investors to see if they agree to the risk and that is a thing that no asset manager would like to do.
So I would say, in terms of looking at the asset class itself, we are seeing some kind of demand for the types of names that we see here today at the Roundtable because there will always be demand for them, so we do not doubt at all the capacity or the distribution of such issuers. But today in fact we have more banks buying than investors, while retail investors are also starting to look for some paper that is safer to buy.
I would say that the safety of the market attracts investors but we have a technical question to be overcome and that is: what are the limits – irrespective of the quality of the issuer – that investors face today.
Maria Isabel Rezende Aboim, BNDES: On the other hand, the second half is going to see a very large number of maturities as many of the latest transactions were done with very short tenors. All of this year’s uncertainty prompted last year’s issuers to come with commercial paper transactions which will mature during the course of the second half.
So some rollovers should pop up during the second half. Uncertainty is still very high and the cost is still very high. And fast-tracking, which is being put forth by the [Brazilian market regulatory body] CVM still has a number of questions to be resolved.
If I am not mistaken, the social security ministry does not allow pension funds to buy paper that does not come with the securities regulator’s approval. This is something I believe is going to have to be resolved: I do not know how this is proceeding but there are still questions, there is still much uncertainty. I think it is still very difficult to make any kind of commentary.
Andre Silva, JP Morgan: Just changing the focus of the question and talking a little about the international market: it is impressive how against a backdrop of volatility, of such large economic uncertainty, we are seeing a fixed-income market still working very well abroad. That in itself is surprising.
I think that, looking ahead, we can expect in the second half a market that will continue to be very selective. There is going to be an opportunity for the best issuers in the region to access the market. But there is no event, or rather no catalyst on the horizon, that allows people to say: “No, we are going to wait for the second half to access the market because the second half is going to be better than the first.”
In fact what I am saying is the message that we are passing on to our clients: today there is a conflict between weak economic indicators and the technical position of a good market. I believe it is the technical position that is allowing issuers to access the market.
In the end, I believe the message is that I am unable to see anything that indicates the scenario is going to improve now or in the second half. As I said, you have a situation where the issuers are enjoying access to the market – the fixed-income market is the only one that is not closed – the others abroad are closed.
Fabio Moser, PREVI: Until recently, the interest rate curve was still wide and investors were able to get hold of excellent public-sector paper much to the detriment of private companies. So today I would say that an investor is very selective.
The big companies are avoiding issuing at the moment; they are waiting. Perhaps it would take merely an adjustment, but some have already come to market, like Bradespar or Brasil Telecom, which had to redefine its covenants because of a change of control.
Now it is all a question of cost. The cost has come out at around [reference rate] CDI plus 3.5%, which was the case for Brasil Telecom, which is around 128% of CDI, with Bradespar at 125% of CDI. This means the cost is high.
But you also have to consider that the cost beforehand was very low. In terms of bank loans and liquidity, companies are no longer using debentures as a financing instrument. Previously, companies that issued debentures were largely utilities or leasing companies. Now the market is realigning itself and now it is all about rating and competition. It is obvious that investors are going to prefer companies with a better rating and that they pay attractive rates.
In terms of CVM norm 476, pension funds can invest even if the issue is distributed privately. But pension funds have to liquidate via [clearing house] CETIP – they are obliged to do so – and CETIP does not yet have or yet know how to register a bond that is not issued publicly. So none of the pension funds are able today to engage in a deal via 476.
But, according to my understanding, and that of the social securities ministry, 476 can indeed be used. I think it is a bit of an operational issue.
Alexandre Aoude, Banco Itau BBA: I would like to make some points about the local market. I agree with Denise that the market in reality will not accelerate or stop accelerating because of the CVM’s rule. I believe we are seeing the market make a comeback and we are seeing a return of the top names, and the tenors are way shorter than what we have seen in previous years.
One thing that is impacting the market heavily is the increase in the cost of funding for banks, as Denise also mentioned, and the other reason is a lack of perspective. No one knows what is going to happen. What we lost in this crisis was predictability. You do not know what is going to happen in the next 12 months.
I believe this has impacted investor demand a touch, though I believe there were a number of withdrawals from one market and movements into another, and this created a certain aversion to risk and because of this I believe tenors are increasingly reduced.
In terms of the international market, I tend to agree with Andre. I believe the market is coming back, it has reopened as a conservative market for quasi-sovereign names. It is not a market that is open for super private-sector names. I think it will eventually reopen for the others, the pockets of money are already there, and people believe there will be a little more activity as of March, bringing a touch of health to a market that today is not that good.
I think we are also going to start to see debentures placed with private-sector investors, private bankers and so on in the short term as banks have already started looking for pockets of demand locally.
For now there is a degree of uncertainty and distrust in such a big market and the market is going to have to play it by ear. In terms of what we have seen at Itau BBA, it is a far more focused type of demand than what we have seen before. It is unlike the irrational type that we have seen in previous years.
The rise in cost is a question of necessity and I believe it is only natural that the biggest companies start to reopen the market so that mid-sized players can also come, as Maria Isabel said, and finance themselves in the short term.
So I believe both markets today are reopening, but they are still far away from being able to absorb the names that we saw in 2007. I think we are going to need much more stability for that to happen, instead of it just being a window of opportunity.
Pedro Bonesio, Petrobras: Looking from an issuer’s point of view, I agree with what Alexandre said in terms of what types of tenors are possible in the local market for companies like Petrobras, and the volume that an issuer can hope to raise in this market.
We always keep the debenture market in our portfolio of local market opportunities but I believe the last time we did one was in 2002 or, if I am not mistaken, 2004. Since then, we have been a company highly sensitive to cost and this is one of the points that always guides our decision and also the amount of volume that we can raise, and this is associated with the tenor that we can get.
I also do not have great expectations about the first half of this year: perhaps something may transpire in the second. We have received pitches from banks telling us about the potential type of investor who could buy into the Petrobras name with tenors that are compatible with our needs. We always look at the timing and completion of our projects, which is usually eight years on average. So a 10-year bond is what would be the most convenient for us and we have a certain difficulty in imagining raising such volumes here in this country with such characteristics.
Stefan Alexander, Globo: The discussion about the rules of an issue has an importance that transcends the question that we are looking at today. It could define the development of the future local debt market. In terms of fixed income, there are limitations that should be discussed. For example, privately-owned companies are unable to do long-term debentures. This is unlike the international market, where listed private-sector companies like ours are able to issue with long tenors.
This is a waste, because such companies keep investor relations teams and prepare fully disclosed prospectuses that are fully audited. The same companies also engaged in the whole mechanism of communication and transparency, but in the end they do not access the local market because of its restrictions.
Such improvements could be attractive also for multinational companies’ subsidiaries. While those companies would not be listed in Brazil, they may have an interest in reaching the local debt market if it is efficient. This may not be the case in the short term, given that current domestic interest rates are high. But we should work on the structural changes to create a stronger market, which would provide a competitive environment attractive to issuers in the future. This should be on the agenda.
I believe the banks here at this table have a very important role in these talks. Changes may only be resolved in the second half of this year, but it could prepare the way for the market over the next 10 years. So, this is in your hands.
Denise Pavarina: In fact, a regulatory norm allowing privately-owned companies to issue debentures is already being debated publicly.
Stefan Alexander: Irrespective of what comes out now, I think this is work that you are always going to be able to use and I hope it can be concluded. But if not – if for example, we do not arrive at the perfect framework – then at least it is a step in the right direction, because for so long we have talked about equities but now the level of interest rates in Brazil today has created an incentive for people to talk about fixed income. This is a market that has always been in development but it has never completely formed.
Denise Pavarina: Another thing that we could also stimulate – and now we would be getting the Treasury involved here, well not exactly the Treasury – would be a reduction in the tax load for those bringing money from abroad and investing locally in private-sector bonds. This would certainly help in the same way that it has for public-sector debt.
Paulo Valle, Brazilian National Treasury: Nothing has yet been defined, at least not by the Ministry of Finance, but I also think that the timing is perfect. The idea of increasing liquidity and reducing taxes for the private-sector would be much in line with what the government has done with public-sector debt. This includes last October’s decision to remove the IOF financial transactions tax on public-sector debt investments. The government moved quickly to remove this tax. The government has come up with a number of measures to help the private sector during this crisis. In terms of debentures, it was initially discussed in early 2006 when Congress decreed the exemption of a 15% withholding tax on public-sector investments made by foreign funds.
The timing back then for such a discussion was not so good for many reasons – the most important being the Real’s appreciation. But the scenario has changed and the time has come to talk about this.
And it is not just this; there is also the tax question about external issuance, the payment and withholding tax on such transactions. The time has also come to debate this publicly, as this has now been analysed by our people on a very technical level. But I think the channels must open between the private-sector and the public to get these issues on the agenda.
IFR: How is the mandate process changing, now that the banks are in the driving seat? Are bankers really tying loans to future mandates and is that positive or negative for the market?
Katia Bouazza, HSBC: I think there’s a negative connotation around the banks providing liquidity to their top clients and facilitating their access to the market. It is as if the banks were in control. We are not in control. This is a market full of volatility, and if anything, it seems the investors are in control these days. In this scenario, it makes sense for the banks and the issuers to partner up and find the best solution to deliver their objectives within a calendar year or longer.
So I think in that sense, it is a very positive development that we have seen in the market. Whether the banks are tying clients – tying is not the appropriate word – I think companies need to maximise their success in accessing the market these days so they should probably go with the best qualified partner, in the sense that the best qualified partner should be the bank that gives them access to global distribution. So it should be the strongest bank, and a bank that can facilitate their access to the market in terms of whether they have a balance sheet and are using it.
So yes, it is positive for the market, it is positive for issuers and investors, because issuers do not have to just jump in at any time. They know they have liquidity from their partner and that will provide comfort to investors. In addition, partnering up with the right banks, which are those that are strong in global distribution and are able to support their paper in the secondary market, is key to the investor these days.
So I think you should look at it as picking a bank that has the best platform, whether it’s for local and global international distribution, and balance sheet. And why not? Why not go with the strongest partners these days? These are difficult times so you want to maximise your chances of success. So seen in that light, it is definitely a positive development in the market. I think the question is put in a little bit of a different tone – I’d just like to point that out.
Dan Vallimarescu, Santander: If I can add to that, I think the question is put in an interesting tone because the banks clearly do not control the issuers. I think the issuers control the banks to a large measure or maybe we are bridging the gap and both of us are aligned in terms of going to the markets and lending money and raising financing.
I think in this environment there are going to be survivors, both in the banking world and the corporate world, and surviving is going to require access to liquidity, for sure. I think that what companies are doing is very thoughtfully ensuring they are not relying too heavily on just one market – the bond market.
So I think when they go to banks, they want to go to banks that are able to accompany them as partners both in terms of lending as well as capital markets.
So to me, it just seems like a very prudent approach the companies are taking. But it is true that there is an increasing link between loans and the bond takeouts, which did not exist before.
Pedro Bonesio: I think both sides need to find a common point of interest. On the one hand you have the companies trying to flee a highly volatile market that can come or go and can cost x or y, and on the other hand you have the banks, which are suffering from a lack of capital and are wanting to lend to companies that can provide them with better rates of return. As long as this makes sense to companies, then I think it is perfect. I believe this is a moment where this could be happening but not something that will translate into a trend.
While I still believe a lot in relationship banking, or rather, a relationship bank that supports a company in various segments at different moments, I believe that this is a business that is far from simple, and the market is very competitive. When the market is liquid, the battle for a mandate is huge, but I believe that the price is quite reasonable at the moment and that it should happen as long as both sides feel comfortable about what is being proposed. For me, I believe it is quite natural but not a trend.
Maria Isabel Rezende Aboim: This has already happened several times in other situations in the past. I totally agree with Bonesio on this. It is more important to have relationship banking and in times of crisis that has turned out to be a far more relevant factor. This has all happened before but this is not new.
Andre Silva: This is the nature of change. Today, the banking sector as a whole is being questioned and is transforming itself. What makes an investment bank, a pure investment bank, is being strongly questioned and today they are asking for licences to become fully-formed banks. While I perhaps agree that this has happened in the past, perhaps the perception is that this change is more structural and perhaps permanent and not temporary.
IFR: Does it pay for issuers to hold back and wait or should they go and tap in dollars while they still can? Which works best – the US issuer model of tapping when possible or the Brazilian one of waiting for better times? And just how much a premium should issuers pay over US Treasuries and the sovereign? How much is just too much?
Alexei Remizov, HSBC: It is not size, but it is hard to find out what is the right premium over Treasuries obviously and the situation, you know, is definitely very dynamic. But I think what is important is that we are in very different times: you know, it is definitely a buyer’s market, not a seller’s market, so investors do control timing and the type of assets they are willing to acquire, which in general I think depend on the individual companies or sovereign’s situation.
Obviously if you have a fairly steady debt profile, you know, you do not foresee liquidity problems in the medium term, but obviously you do have the luxury of waiting. However, if you want to plan in advance, which in this market I think is again quite unpredictable, it probably pays off to tap the market as opportunities appear.
I think also what is important, as Andre mentioned, is that we have a clear rotation from equities into high grade bonds, obviously because high grade bonds now are a very good investment in relative value terms. I do not see the equity market coming back in any meaningful way, so investors will look for opportunities in high grade corporates.
So I think, if you are a high grade corporate, with a fairly decent set of financials, you can be viewed by investors as being able to survive through the downturn of the cycle. But you do have risk, or refinancing needs I should say, the sooner you come, the better.
In the case of Brazilian issuers I think the idea of paying a fairly high spread has been sinking in. It has taken a while for that to happen and, if you recall, even 12 months ago Brazilian issuers paid spreads that were comparable to US triple A corporates – I mean very tight spreads on a global basis. Again, the reality has kicked in and I think it is definitely something that the issuers are willing to accept. We are in a situation where investors are requiring higher premiums, so waiting for premiums to compress I think is a little bit risky. So, if you have financing needs in the next 12 to 18 months, I would say: come to market when and if you can, as soon as possible. It probably pays off to move quickly.
IFR: Back to that question on “how much is just too much?”. Perhaps that’s to the issuers. In terms of Petrobras creating a floor for a number of issuers, most probably there’s only one company that anyone believes could attempt to come through Petrobras, and that’s Vale, so for the other issuers, would more than 8% be too much?
Stefan Alexander: I believe this has to be seen from the point of view of each company, each industry and in terms of its investment plan. In our case, for example, we obviously have a high level of liquidity with more reserves than debt. For example, 75% of my debt matures after 2022 at low costs.
Now if someone is facing a more accelerated investment programme with certain challenges ahead then it is more important to look at the question of return on the investment and at the project at hand. For liability management, though, the level seems high, but it depends on how you are going to use the funding. For companies seeing interesting returns, 8% could be a good rate.
Pedro Bonesio: Sometimes it can seem difficult. A little while back, we issued paper with a coupon of 5-7/8% and on the last deal we issued at 7-7/8% for the same tenor. We had to look at the return we would make on such an investment and evaluate it and make a call.
Our parameters are established by comparison of the spreads for the Republic itself and also triple B issuers, which we can compare to what is being offered to us and see if they are within market levels. But what is too much? ‘Too much’ is whatever is above what the market can give us as an indication, or what could be more expensive than what I would expect from the return on the investment that I am making with these proceeds.
Stefan Alexander: The tenor and structure can also create uncertainties to the point that you decide not to make the investment. And this is a problem when we also talk about the debenture market, when you try to fund a long-term project with just short-term paper.
Pedro Bonesio: Exactly.
Katia Bouazza: Just to add to that, it may be a little bit short-sighted for companies – depending on their returns and what they are saying they are going to use the investments for – to focus on just one point and try to finance at the lowest cost possible in terms of yield without ensuring that the maturity profile is appropriate for its business and investments.
I think right now we are seeing a number of companies that thought maybe 5.5%-6% was too expensive and went for two- to three-year funding, when actually their business model encouraged a longer-term maturity profile and now the re-financing is what is causing a lot of the headache.
So, again, 8% can be interpreted in various ways depending on whether you have a strategic long-term objective or you are in an industry that requires longer-term funding.
Stefan Alexander: What you described are exactly the types of dilemmas that we were facing during last year when the company was awarded its second investment grade status. We received various offers to reduce our costs and reduce maturities, bringing them into the short term. Our strategic direction was exactly the opposite and we believed that we had achieved investment grade exactly because we were looking at the long term and not the short term.
Alexander Aoude: I think this matter of absolute yield is irrelevant when you should be looking at the company’s curve, right? As Bonesio, Stefan and Katia said, this issue very much depends on each company’s goals. However, I think that what we have to look at in today’s market is that it is very hard for us to set the tone. We cannot do that. We will have to follow what is happening to other high-grade issuers abroad.
What you see is that the frequent issuers are issuing at much wider spreads in relation to their curves. I think the people at the banks can tell us about that. The problem is much more a matter of supply and demand than simply looking at the curve. When you are not a frequent issuer in a high liquidity market, the curves start suffering a lot. So you end up completely without a benchmark. So when the question is about a window, or an opportunity, I think we have to look, as Stefan and Bonesio put it, to the needs of each company or their timing.
We are certainly seeing a window of opportunity. And, as with any window, it can close. So if we had to make a recommendation, it would be to jump in now because you do not know what is going to happen further ahead. So I think what matters most today is that if you find demand, you should access the market if you need it, and access it with the tenor that fits your cashflow and that fits your project. Otherwise, I think pushing your way through now would be a gross mistake, because liquidity is very low.
Click here for Part two of the Roundtable.