Brazil is on the cusp of becoming an investment grade credit. The sovereign has never looked better and its corporates never healthier. Many enjoy cash-rich positions and a few are able to cross the seas and engage in major acquisitions and vie among the world’s biggest players in sectors such as mining and commodities.
Spreads are gradually tightening again but remain wide to all-time records. Healthy new issue premiums are the order of the day while structures have changed locally as investors and issuers engage in a tug of war over prices.
But potential is being lost in the capital markets as regulators hurt ABS instruments, subordinated debt and perpetuals for the banking sector, while taxes weigh on local and international issuance and bureaucracy hinders the nation’s key debt capital markets. Only M&A and ECM are truly coming good.
It is against this backdrop of robust economic health and lost potential that five issuers and five banks convened for the IFR’s second Brazilian Roundtable to discuss such issues.
Corporates have largely led the way in Latin American external bond issuance but the local market has failed to perform and is unlikely to return to record levels seen in 2006.
For now, it is clear the sovereign is sitting pretty as it consolidates its local fixed-rate curve after removing a withholding tax on its public-sector paper for foreign investors, continues to buy back more than US$10bn worth of expensive paper and looks to extend its external local currency curve to 30 years. For corporates, it is more of the same as many engage in local and external liability management.
But the playing field is far from fair as the government is yet to remove withholding tax on debenture investments as it first needs to develop further its local curve before opening the gates to competing transactions coming with a pick-up from quality issuers like Telemar, AmBev and CVRD.
The liquidity pool also continues to lack depth as participants largely agreed a drop in interest rates will be key to helping local DCM revive its fortunes. But they added it will not be the end-game solution as overregulation, excessive red tape and over taxation needs to be eliminated and simplified sooner rather than later if the nation is to create a robust debt capital markets backbone within the nation’s fast-growing universe of borrowing.
These hurdles will involve much discussion between Brazil’s Treasury, Inland Revenue, Finance Ministry and other key bodies such as the National Association of Investment Banks. But the solution will not come from the companies as they are more concerned about getting the best deal instead of worrying about how to develop further the local capital market. In short, it is up to the banks to demand such changes and keep increasing pressure on Brasilia for a removal of taxes on local and international issuance.
Once that happens, international banks will be able to compete against locals creating a more sophisticated primary and much-needed secondary local market and a boom in external Real-denominated corporate issuance.
