Brazil Roundtable 2009: part three
IFR: The time will soon come for a heavyweight to set up one or more points of reference for the local debenture market. But how can it assure accuracy in its pricing, should it try to innovate, and what are the risks if it ends up setting a new coupon floor that would be too rich for other issuers to follow?
Maria Isabel Rezende Aboim: This was exactly what I was talking about. In truth, the Treasury has a curve and it serves as a reference and in fact when we put together a syndicate that was anchored with banks and borkerages - about 40 if I am not mistaken - the result was a small spread above the local Treasury bonds. Today, this does not exist but I think it is possible to do something in line with current pricing. This would not be difficult.
Paulo Valle: Just to add, the Treasury Direct was mentioned here and really the objective of the Treasury over the last few years was to create a yield curve in Brazil. We have a very defined curve of fixed-rate local bonds of up to 10 years and inflation-linked paper up to 2045.
The point of Treasury Direct is exactly that. It is a cultural issue. We do not see Treasury Direct as a solution to funding for the public sector but it keeps us informed. Retail investors are starting to access public-sector bonds and understand how fixed-income bonds work. You can access Treasury Direct 24 hours a day online.
It is an important reference for the debenture market and now we are working closely with the BM&F to come up with a plan similar to the popularisation of the equities exchange via the slogan “Exchange goes with you, Exchange heads to the beach”.
This is a step toward creating a market by starting with public-sector paper and eventually debentures. Demand for BNDESPar’s offer is the best example. So the main objective is firstly to divulge [information] and educate people about the fixed-income market.
The second is to create a daily market, a secondary market, for retail investors including public-sector paper and debentures. People believe this could be the start to a more active secondary debentures market.
IFR: Just going back to question seven and referring to how to assure accuracy in its pricing - when we put this in we were thinking more about what Bradespar recently did with its debenture, as some investors said the pricing level was extremely attractive and that perhaps it could have come more aggressively. The question is this how can we find a better because references are scant today.
Denise Pavarina: When Bradespar gauged the market, the deal like any other debenture faced a series of problems in terms of timing. For example, you are obliged to define the price before you can file it at the local registry office. There are deadlines to meet. This is something that makes no sense whatsoever. At least in our view which is that of the seller.
There are obviously some legal questions. But we had to take a read of the market a month before it could be placed because the company wanted the deal to come with a firm guarantee. When the read was taken, there was no demand for the debenture.
It is not that there was no price – there was no demand, there was not enough to close the book. So the pricing was done with almost no way of knowing whether the deal would get publicly distributed - so much so that there was no bookbuilding. Why do it if you think you are not going to be able to close the book?
But asset managers, it seems, decided they could not afford to be left out, because if everyone is getting in then I too will have to buy - so many people who had said they would not buy the paper turned up at the last hour and practically offered to buy the [whole] deal. What I am trying to say is that the market‘s mood changed very quickly between December and mid-January when the deal got done.
When it came to the commercial paper, we left it to the last moment before pricing and we went out with CDI plus 113% and tightened to 110% because there was bookbuilding.
We are talking to the CVM about doing what you do with equities, where you register the deal the night before you step forward with the issue - why can you not do this with a debenture? Why can’t the CVM just accept a protocol with the pricing? These are things the market is going to have to refine.
IFR: Brazil’s ABS market has collapsed amid little sign of a comeback. What should the regulator do to revive this market and what will it take to lure investors back into securitised paper despite the likelihood corporates will pay more than 120% of CDI versus 106% of CDI in 2007? Isn’t it in the interest of investors that more funds get involved in ABS, RMBS and CMBS?
Dan Vallimarescu: One thing that we have to think about is that Brazil is obviously not living in isolation here, and so when you say that the ABS market in Brazil has collapsed, you need only look north, to the US, where I think a lot of this started, and then you have to look at other markets. In Mexico for example, it has equally collapsed.
So I think what we have to look at is that these are not Brazil-specific issues: they have to do with the macro environment in which we are operating. We have in the US, for example, seen a slow resurgence of certain securitisations that are going to come back and I would think that the same is going to apply to Brazil as well with time. But it has to be sequenced so that liquidity has to come back and then over time I think that’s going to evolve into securitisations as well.
Denise Pavarina: I would like to say the market is already coming back fast for such paper. The sizes are not big. I am not talking about R$1bn, but R$100m-$200m. I believe this is going to be a strong year for FIDCs [ABS funds]. I am far more optimistic about this and the possibility of a reduction in cost.
Fabio Moser: Selection today is very rigorous. Everybody wants to look, analyse the risk of all the securities. But, in my opinion, as it was stated, there is indeed a market. I think when you talk about mitigating risks, CCB [bank loan ABS], CRIs [CMBS] and FDICs are ways of offering collateral to reduce risk for the investor and to attract the investor now.
The question of resolving the issue on pricing accurately amid a dearth of benchmarks will still take a while, before stability seeps in and resolves this problem. Despite the high levels, I am still seeing a large number of companies working on their next deals.
The issue is that the crisis caught everyone off-guard. Everybody is waiting to see who will be the first to stick his head out. Nobody wants to be the benchmark. No one wants to be the one who ends up paying a high yield. But when one starts…
We look very much to the market abroad, because normally the Treasury – the sovereigns – will test the market overseas so that nobody specific has to be exposed. Then corporates will go there, as Brazil has gone, as Mexico has gone, to test the market and start to reopen it. I think it is going to be that way in the local market as well.
IFR: Brazil has created new 10- and 30-year benchmarks and continues to take out off-the-run bonds, but where should the sovereign go from here? Should it create new 15- and 20-year points, creating intermediary points for corporates unable to tap 30 years or venture into euro-denominated paper again?
Paulo Valle: Our strategy is well-known, we have been using the same one in previous years. We have a strong buyback programme, a programme that was much stronger in prior years. It reduced our foreign debt to 10% of total debt, a level we consider to be spot on. And our goal is to have a well-defined curve and market.
But what would that be? First, our goal is to have very liquid benchmarks that serve as a good reference point. So we always work with benchmarks of at least US$1.5bn before increasing their size. In practice, our last 10-year bond, which used to be the 2017s, already has US$2.5bn outstanding. The 2037s have US$2bn – more than US$2bn. And now we have issued the 2019s. The first goal is to have this, a 10-year and a 30-year that are well-priced and very liquid.
And on top of that, we have the buyback programme. We still have a lot of points in the curve that have very high coupons, high dollar prices – the 2030s, 2020s for example, which have coupons over 12%. So we continue with the strategy of daily buybacks to reduce the amount of paper on the curve while putting an emphasis on our benchmarks.
Plus, it is not necessary for us to create a 15 or a 25-year benchmark because we have bonds on the curve that serve as such references. The 2034 notes, which used to be a good benchmark, are now a good 25-year. The 2017s – the former 10-year – are a good benchmark at the eight-year point for example.
As for the Euro market, we always discuss that internally. Our focus is the dollar market, because it is harder to do liability management and buybacks in the euro market. But it is a market that we follow very closely.
Our ideal goal would be to use the same dollar market strategy in other markets around the globe. But it is harder to execute the same strategy in other markets because there is a lot of waiting for the right moment to tap.
So our focus is the global markets, but we do not dismiss the possibility of a euro market deal or of a deal in the Japanese market, which is a market that was closed for a long time, a market that is very focused on retail, a market that after the Argentine crisis suffered a lot but has lately started to reopen.
The profile there is changing a bit. It is becoming less retail and more oriented to institutional investors. But we continue to focus on the dollar curve. And if we can do a good deal that will serve as a benchmark for corporates in other markets, we will do it.
Jose Franco de Morais, Brazilian National Treasury: Just to add, aside from on-the-run bonds having 10- and 30-year tenors, as Paulo mentioned, there are other points that are very liquid too on the curve, principally at the short end, which could be interesting to private-sector issuers because the market is not yet ready for a longer-dated issue or because issuers do not want to have to lock in a too expensive cost.
I would say the four, six and eight-year points, as well as the 10 obviously, have plenty of liquidity. Now, the most liquid paper is the 2040, because it is traded in fact as a 2015 because of its call. The 2017, which was the old 10-year benchmark and is now the eight-year, has plenty of liquidity too. These are all interesting alternatives and for private-sector issuers they are good points of reference.
Alexei Remizov: I think from the bankers’ point of view, Brazil is in a position where it does not need to be a frequent issuer, so clearly it needs to focus perhaps on one main curve, which is the dollar curve, as Paulo mentioned. I agree with the strategy of cultivating its main benchmarks. But depending on future funding trends of Brazil – perhaps if Brazil becomes a more frequent issuer in the international market – then obviously some of these alternative markets perhaps should be explored, such as even euro and Japanese yen.
But maintaining liquid benchmarks would require a lot of issuance volume. In the current context, I think at this point efforts should be focused on those key benchmarks in the dollar market. From the corporate perspective, as far as the reference for the corporate sector, we think the curve is adequate enough to serve as a price reference. For corporates to tap markets at different points of the curve, for that particular purpose, I don’t believe additional benchmarks are necessary.
IFR: Despite the 2017s enjoying much liquidity, have you already started buying back this bond or will you leave it as it is?
Jose Franco de Morais: We are not yet thinking about buying it back, but there will come a point.
IFR: Last question – is equity financing ever going to be a viable alternative again? What’s needed for that?
Dan Vallimarescu: We are living through a period that is difficult for all of us to evaluate because we haven’t lived through anything quite like this before. But it is not as though all of the world as we knew it has totally come to an end.
Inevitably, I think everybody believes equity markets will resurface. Right now fixed-income is where all the liquidity has been cycled and recycled. It is the equivalent now of the equity world that people used to invest in. I think people are likely to get yields of 7%, 8%, and 9% but invariably, inevitably, the equity markets are going to come back and I think all of us would probably differ in terms of the timing on when it will come back.
Katia Bouazza: We have several investors on the sidelines and they are not ready to reengage until there is a stronger sign of lasting stability across the markets. Liquidity is the willingness to put the cash to work and there is cash but investors are not jumping in regardless of how cheap assets may be.
The higher yields that investors are locking in the bond market are actually for solid names (BBBs at 8% or higher). Therefore, investors are being quite risk-averse, which is achievable in the bond market but less so in the equity markets. We need to see a certain level of confidence return before the equity market as a whole can become attractive again from a risk-reward perspective.
Dan Vallimarescu: Do you want a date? As to when this is going to happen? And a time?
IFR: It wouldn’t hurt! Fabio, when are you going to look at equity?
Fabio Moser: We predict to be above our allocation limits in equities this year. We continue to be. We managed to reduce 12% but we are still at around 58%. And the national monetary council gave us another two years to comply with the allocation limits.
So we have limited our equity activities to stakes in companies that we already have and have worked on in some restructurings. And we also have private equity investments, which is a market in which we have invested and are interested in investing as a way toward developing it.
Today, PREVI has two main funds: one with around R$117bn, which has been closed for 10 years and is already nearing the maturity stage, and we have another one that has R$1.2bn and has over 50,000 investors. For the continuity of the pension fund system itself, which needs investments, we are worried and as a rule we must work toward developing the markets.
Our focus recently has been more on private equity. We have around R$1bn [invested there]. And I think this is a market that is now in an even better condition to be developed, considering the repricing of assets. Assets were too expensive – it was too hard for private equity funds to invest. I think it is now much better and I think it is one of the funding alternatives even for smaller companies to seek partnerships with PE funds. And I think that is the path we intend to work a bit more to help develop this market.
Now, in terms of stocks, as I have said here, I think this year we will already see the market reopening. There will be companies who will come to market. People are just waiting to see who will be the first.
IFR: Well, that’s it. Thank you everyone for coming.