Brazil Roundtable 2009

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 sc

Alexei Remizov - HSBC Alexei Remizov is a senior vice president at HSBC’s Capital Markets, responsible for Brazil coverage. Remizov’s recent accomplishments are the IFR award-wining Brazil 2017 reopening in 2008 and Petrobras’s latest 2019 benchmark. Jose Franco de Morais - Brazilian National Treasury Head of external debt operations at Brazil’s National Treasury, Jose Franco de Morais has worked in the public debt management department since 2001. Andre Silva - JPMorgan Andre Silva is an Executive Director for LatAm Debt Capital Markets. Silva joined JPMorgan in 2008 to lead the Brazil DCM team. He was previously at Morgan Stanley and before that at HSBC. Paulo Fontoura Valle - Brazilian National Treasury Deputy Treasury Secretary Paulo Valle has taken care of Brazil’s debt since 2006 and last year oversaw its masterful 2017 bond reopening, which won the sovereign its first IFR bond of the year award. Stefan Alexander - Globo Stefan Alexander is Corporate Director of Finance and IR at Organizações Globo after joining in 2000. Alexander was previously Director of Capital Markets - Brazil at BofA. He also worked at BBA Creditanstalt and Unibanco in investment banking. Dan Vallimarescu - Santander Dan Vallimarescu is Santander’s DCM head for the Americas. Before joining Santander in 2006, Vallimarescu worked 13 years at Merrill Lynch. There he was LatAm‘s capital markets head. Maria Isabel Rezende Aboim - BNDES Maria Isabel Rezende Aboim joined the BNDES in 1975 and recently became the International Area‘s head after being responsible for the national development bank’s financial area as deputy CFO for three years. Alexandre Aoude - Banco Itau BBA Executive officer since March 2008 at Itau BBA, Alexandre Aoude is tasked with building out the investment bank’s fixed income businesses after he exited his post as president of Deutsche in Brazil. Fabio de Oliveira Moser - Previ Chief investment officer at Brazil’s biggest pension fund Previ, Fabio de Oliveira Moser has sat on the boards of more than 10 companies in Brazil and previously headed up the decision-making boards of Fundação Sistel, Fundação 14 and BrTPrev. Pedro Augusto Bonesio - Petrobras Corporate finance and treasury executive manager for Brazil’s biggest oil company, Pedro Augusto Bonesio has enjoyed a long career at Petrobras starting in 1979. Katia Bouazza - HSBC Managing director and head of global DCM for LatAm, Katia Bouazza runs all regional origination activities. Bouazza has 14 plus years of experience in the bond and syndicated loan markets. Denise Pavarina - Bradesco BBI Investment Banking Denise Pavarina is considered the most influential woman in Brazilian investment banking. With more than 22 years of experience in capital markets, the head of Bradesco’s BBI investment bank has also handled M&A transactions, privatisations, project and structured finance. Anthony Dovkants - Senior reporter, IFR Christopher Langner - Reporter, IFR Click here to see Part one of the Roundtable.

IFR: I’d like to ask Fabio: you mentioned before that 128% of CDI was too little. And even though we are talking about the global bond market, I’d like to know what is too rich for you. Fabio Moser: I did not say that. I said there were deals and that they got done. Some even enjoyed good demand and were oversubscribed. It is clear that you are going to demand a higher rate from companies with a lower rating. I believe that at the beginning of this year it is going to be important for companies to get back to economic values because there is uncertainty among certain companies about how they will perform. There are a number of unknowns. We have just gone through a first phase focused on the question of derivatives, the question about what is on the balance sheet and the impact on the financial result, and just how much is the global crisis impacting the company’s result and how it is going to deal exactly with the leverage it has, or rather, what are its cashflow needs. Now in terms of rates, you adjust along the way. For example, top quality banks are now issuing CDB and subordinated paper at 120% of CDI, with tenors of up to six years. You will probably end up asking more from a private-sector issuer. We tend to look at these parameters and select along the way, since you do not have the money to invest in everything, and you end up selecting the best paper. So there is much competition between companies – between companies’ debentures, between the sectors and the companies’ capacity to implement their business plans, and the evaluation you have – the risk. IFR: Why are Brazilian investors no longer buying local corporate paper at a time when companies are paying more than ever, at DI plus 5%? Why are they holding back when real money overseas has started increasing exposure again and under what conditions will the locals return again in full force? Has the market reached a turning point following a collapse in primary market liquidity in 2008? Fabio Moser: First of all, I think we investors, at least we at PREVI, have not stopped buying. It goes back to the same point. I was talking to the people at the Treasury, saying that at the end of the year we even bought Brazilian treasury notes yielding 17%, and inflation plus 12%. And, I believe for the first time, it was not the Treasury directly paying this yield. Who was paying this was people who needed liquidity. So, truly, competition at the end of the year was very fierce. If you have Brazil’s Treasury notes in the secondary market that you can buy at this yield, how much does a company have to pay you so you buy it instead of treasury notes? First-rank banks were paying 106% [of CDI], 105%, with daily liquidity. The competition became very fierce for corporates. I think now, with the interest rate curve tightening, the market is a bit more stable. I think things are starting to get back into place a bit more. I think there is room for companies to start seeking something. I think the end of year was really a time when the companies that needed funding and were tapping the market, were really going to the short-term, very short-term market. They have to wait for the dust to settle so they can really start managing their capital needs versus what the market offers. I would say that it was more the issue of competition, and not of you seeking, as was mentioned here, a level of DI plus 5%. We at pension funds have little experience of looking at foreign issues because pension funds in Brazil have restrictions on foreign investments today save a few companies. IFR: Local rates are tightening at the moment, do you think a fund like PREVI could change its strategy in terms of buying private-sector paper this year? Fabio Moser: I believe so. We have some limits as we already mentioned, but there is space for private-sector paper and I think they will start to test the equity market at some point. I think some companies at some point will have to go after this market. I think the w

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 talk