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Last year, total international issuance by Brazilian corporates amounted to US$38.68bn, its highest level ever. In 2009 only US$25.8bn had been issued internationally; and only US$6.58bn in 2008, according to ThomsonReuters data. Last year, there were 69 transactions against 35 in 2009 and 25 in 2008.
This year the trend has continued. By February 22 Brazilian companies had sold a total of US$11.1bn of debt overseas in 13 separate deals, including the US$6bn sold by Petrobras, Brazil’s state-controlled energy producer, the country’s largest corporate bond offering ever. The total figure is expected to rise and set a new record.
“It’s not unreasonable to think that overseas sales will hit US$40bn this year,” said Sandy Severino, the New York-based head of international debt markets at BTG Pactual, the independent Brazilian investment bank. “We got a very high figure last year without the Petrobras deal. There is also a chance that Petrobras will sell debt in other currencies later this year.”
Petrobras activity is supported by a growing number of issuers active in the market. “One thing that is notable at the moment is the sheer number of issuers,” said Severino. “Most are repeat issuers but we are seeing more and more new names.”
The hunt for returns
“There has been a very healthy level of DCM activity coming out of Latin America,” said Gustavo Ferraro, the head of Latin America debt capital markets at Barclays Capital. “It has been very attractive to investors as they have been searching for additional yield by focusing on attractive credit spreads to complement historically low Treasury rates.”
Things have started to change. “US Treasuries recently backed up and this is making issuers more realistic,” Ferraro said. “There has been a degree of external market volatility since November, so investors are becoming more selective about transactions from Latin America and emerging markets in general.”
In January, Petrobras sold US$2.5bn of five-year notes to yield 190 basis points more than US Treasuries of a similar maturity. It also issued US$2.5bn of 10-year bonds to yield 195 basis points over Treasuries and US$1bn of 30-year debt at 220 basis points over Treasuries.
Other important issuers this year have been Itau Unibanco, Brazil’s biggest retail bank; Votorantim Cimentos, South America’s largest cement maker; and BR Properties, the Brazilian property developer. Itau Unibanco and Bradesco, another large cap Brazilian bank, have also been active issuers.
International bond issuance by Mexican corporates also reached a record level last year, with US$26.4bn sold in 35 deals, compared with US$18.8bn in 2009 from 29 deals. In 2008, US$8.6bn was sold in nine deals, giving a sense of the rate of growth of this market.
Brazil and Mexico dominate overseas sales: international issuance for the whole of Latin America amounted to US$94bn last year, from 166 transactions. In 2009 the figure was US$68.9bn from 105 deals.
Most overseas issuers from Brazil come from sectors such as oil and gas and financials, which have been traditionally active in this market. However, increasingly exporters, including meat, sugar and ethanol producers, and electricity generation companies are tapping overseas markets.
In Colombia and Peru, banks cannot keep pace with demand from exporters and are also issuing greater sums abroad.
“Companies turn to overseas market because they want to extend their debt maturities,” explained Severino. “They cannot get seven- or ten-year tenors in the Brazilian domestic markets. They also do not want to saturate the local markets and to some extent want to diversify away from them. The key theme this year will be the growing breadth of issuers in Brazil. Global investors also have an appetite for new names out of Brazil; they do not want to concentrate on the traditional players too much.”
High grade issues are getting done, as well as Single B deals. There have been a number of transactions from Argentine corporates – with high beta yields – that have been well received. There has also been strong investor appetite for issuance from the mid-cap Brazilian financial sector.
Able to differentiate
“The market has demonstrated an ability to differentiate names within this group,” added Ferraro. “Away from Brazil, we have seen a lot of activity by financials from Colombia and Peru, where names such as Bancolombia, Interbank and BCP, have been active in the market.”
However, a recent fraud scandal at Banco Panamericano, Brazil’s largest provider of used car loans, could discourage global investors from buying issuance by mid-cap financials in that country. “I think we will see a knee jerk reaction from investors in the wake of this fraud,” said Severino. “The big banks will continue to be able to issue but investors have been put off small and medium banks.”
Last year, some 30% of all issuance in Latin America was by financial institutions, according to Citi.
“Brazil’s ECM market is the dominant one in equities in the region but it is too simplistic to say that Brazil is just an ECM story while Mexico is a DCM market,” said Chris Gilfond managing director and co-head of Latin America debt markets at Citi. “The two countries make up two-thirds of all DCM activity in Latin America. Mexico and Brazil’s DCM markets have both made great strides during the past five years. Brazil had a remarkable year for DCM activity last year. It broke all kinds of records. There was very strong sovereign activity and there was a groundswell of activity by corporates and banks.”
Itau BBA, the Brazilian investment bank, forecasts that volumes on the domestic Brazil market will be 20% up on the same period last year. Real estate, infrastructure and utilities are all important sectors tapping into the market.
“The overall market is a little bit different from last year,” said Joao De Biase, managing director and global head of DCM and syndication at Itau BBA. “International inflows into the Brazilian market are flat, as investors have turned slightly away from emerging markets into developed markets. We have seen some re-allocation of global portfolios.”
This, he argued, is not related to Brazil but to external factors. “It is a kind of pause like we saw last May and in September 2009. Spreads have tightened slightly and we will have to wait a bit to see the market return.”
Today, investors are happier to buy high-yield names in Brazil than in the past, said De Biase. They have previously shown considerable risk aversion against this type of issuer, but increasingly they are willing to consider them, in their hunt for ‘alpha’.
The Brazilian market has seen issuance from new names in the Single and Double B arenas increase threefold, according to Itau BBA. “These names take longer to come to the market,” said De Biase. “They are different from companies like Vale, the mining company, which can come to the market rapidly. They have been working on coming to the market since the middle of last year and I think we will see many more new names tap the market.”
Latin America - especially Brazil - should have buoyant international debt markets this year, with overseas debt sales by Brazilian corporates likely to surpass last year’s record.