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Tuesday, 21 November 2017

Top 250 2005 - To much applause, Brazil matures

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With some US$600m left in 2005 funding to go, the Federative Republic of Brazil has demonstrated an increasing maturity and care in the way it handles its deals and investors this year. Anthony Dovkants reports.

This became clear in January when Brazil kicked off a series of fairly-priced and cautiously-sized offers aimed at getting through much of its US$6bn funding programme. The highlight for the year, however, came last month when Brazil made the most of a window of opportunity and successfully priced a US$500m 2034 retap. The deal lured US$2.5bn in orders and the credit revived much interest in secondary.

Timing was a factor but it was not the single defining reason behind the deal's success. From the start, the sovereign said the issue would not grow and instead of pressing ahead with a standalone issue, Brazil retapped to help boost liquidity. "The market has been fragile this year so we have tried not to disrupt it by reconciling our interests with those of the investors," said Ricardo Moura, special adviser on external debt to the Treasury. "We put much emphasis on treating investors with respect and seriousness," he added.

During the last issue, Brazil was also active in allocations, taking a keen interest in the order book. It is an important screening process that has won Brazil the reputation of being one of the most sophisticated issuers in the region.

"We like to be busy when it comes to allocation because we think this is crucial to guaranteeing a good market performance for the bond after the break. On the other hand, we also have to follow the advice of the banks and trust them when they tell us an investor bids US$10m but really wants US$5m," said Moura.

To help solidify a broader process of building a relationship with real money players, Brazil has hit the road in Asia and Europe.

The credit is already starting to lure buyers from new quarters. During its last two issues, Brazil saw orders from Scandinavian investors for the first time. Asia, though, is proving to be tricky. Treasury secretary Joaquim Levy said in April Asian interest was enormous. But the time difference between Asia and the US means investors from the Orient miss out. Brazil deals are announced during New York hours and price when Asian markets are closed.

"The only solution we can see there is to open the offer during late Asia hours and keep it open until the end of the working day in New York when Asia is up again, but this would require flexibility from the issuer and investors on the amount of time a bond is open," a New York banker said.

Bankers believe a Samurai would be a better route for Brazil than a perpetual. But these are just some options on a table that could also include a first-ever Reais Global or a partial or total recall of a C-bond worth more than US$5bn. That said, Brazil has been keen on keeping it as simple as possible and has stuck to building out or increasing liquidity across its dollar or euro curves.

Last October, the credit began pre-funding with a US$1bn 8.875% 15-year offer after building a US$4.8bn book. Citigroup and JP Morgan were leads. By December, Brazil reopened its 2014 10.50% bond for US$500m at 114.75 after garnering US$1.7bn via JP Morgan and Morgan Stanley.

A month later, the credit successfully raised €500m of 10-year Eurobonds after navigating a weak market. BNP Paribas and Deutsche Bank were leads.

In early February, the sovereign picked up the pace and launched an opportunistic yet tempered 20-year US$1.25bn retap. Deutsche Bank and UBS handled the offer.

By March, the sovereign won applause from the market after conceding some ground on its 10-year 7.875% US$1bn offer amid collapsing US Treasury yield. Citigroup and JP Morgan led the deal.

By May, Brazil pressed ahead with a prudent US$500m reopening of its 8.875% global note due October 14 2019 via Goldman Sachs and Merrill Lynch.

For the rest of 2005, investors can likely expect another cautiously-sized offer before 2006 pre-funding gets under way. Provided market conditions hold up, bankers believe the sovereign can get another US$3bn done. But what happens next is yet to be decided.

"Once we finish this year's funding programme, meetings within various ministries at a senior level will begin about next year's programme, for now, no one knows what the size will be until a final decision is made," said Moura.

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