Rousseff Confidence Spurs Record Corporate Sales: Brazil Credit

Brazilian companies are selling a record $8.7 billion of international bonds this month in a sign investors are confident President Luiz Inacio Lula da Silva’s successor will continue his economic policies.

Sales by Vale SA, the world’s largest iron-ore producer, and Gerdau SA, Latin America’s biggest steelmaker, helped make September the busiest month since Bloomberg started collecting the data in 1999 and the most active before an October election. September offerings were 29.4 percent of issuance in 2010, compared with 15 percent in September 2006 and zero in 2002, data compiled by Bloomberg shows. Dilma Rousseff is the leading candidate in polls ahead of the Oct. 3 vote and Lula’s chosen heir.

“Dilma means the continuation of Lula’s government, which in the eyes of investors outside Brazil is fine,” said Natalia Corfield, a corporate debt analyst at ING Groep NV in New York. “Investors have cash that they have to put to work and the companies are taking advantage of that.”

Investors are snapping up Brazilian corporate bonds on growing speculation Rousseff will preserve fiscal policies that are helping fuel the fastest economic expansion in two decades. Brazilian debt sales are part of a global push by issuers to take advantage of record-low interest rates in Europe, Japan and the U.S., the benchmark for emerging-market debt. Companies have sold $124.3 billion in the U.S. market this month, on pace to beat the $125.1 billion issued last September, the most on record.

Lula Concerns

The extra yield investors demand to buy Brazilian corporate debt rather than U.S. Treasuries shrank 23 basis points, or 0.23 percentage point, this month to 329, according to JPMorgan Chase & Co. indexes.

The yield difference swelled nine basis points in the month before the last election in 2006 and 299 before Lula’s victory in 2002, when concern he would default upon taking office drove borrowing costs to a record 26 percent. The yield tumbled by mid-2003 after Lula shored up investor confidence by cutting government spending.

Latin America’s biggest economy will grow more than 7 percent this year for the first time since 1986. The annual inflation rate has declined to 4.6 percent from 17 percent in 2003 as Lula pared the budget deficit as a percent of gross domestic product to 43 percent from 52.4 percent and the currency rallied 102 percent against the dollar.

‘Evolved’

Rousseff, Lula’s former cabinet chief, maintained her 27 percentage point lead over opposition candidate Jose Serra, according to a Vox Populi poll, reported Sept. 23 by TV Bandeirantes. The nationwide poll of 3,000 people was taken between Sept. 18 and 21 and has a margin of error of 1.8 percentage point, according Bandeirantes.

“Brazil has evolved,” said Sara Zervos, who oversees $10.5 billion in emerging-market assets, including Brazilian dollar- and real-denominated debt, at Oppenheimer Funds Inc. in New York. “The market believes that the institutional framework is strong enough that it won’t be changed by political change. Throw in the fact that the Federal Reserve, Japan, and Europe all have near-zero interest rates, and Brazilian companies can issue at record-low levels.”

The yield gap on Brazilian government bonds over Treasuries shrank seven basis points last week to 205 on Sept. 24, according to JPMorgan.

Credit Default Swaps

The cost of protecting the nation’s debt against non- payment for five years with credit-default swaps was unchanged at 116 last week, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real rose 0.6 percent to 1.7109 per dollar for the week ended Sept. 24 as Petroleo Brasileiro SA’s $70 billion share sale attracted foreign investment. It was the sixth consecutive weekly gain for the currency, the longest winning streak in 11 months.

The yield on Brazilian interest-rate futures contracts due in January climbed nine basis points last week to 11.54 percent after touching a six-week high of 11.56 earlier in the week.

Brazilian companies have issued a record $29.6 billion this year, compared with $22 billion in all of 2009, according to data compiled by Bloomberg.

Vale’s Sale

Vale, based in Rio de Janeiro, was the biggest corporate borrower this month, issuing $1.75 billion of 10- and 30-year bonds in its largest offering since 2006, according to data compiled by Bloomberg. Gerdau, in Porto Alegre, sold $1.25 billion of bonds that mature in 2021 last week.

Issuance is set to rise further as Braskem SA, Latin America’s largest petrochemicals producer, plans to sell perpetual bonds overseas as soon as this week, said a person familiar with the transaction who declined to be identified because the terms aren’t set.

BR Properties SA, the Brazilian property developer that sold shares to the public for the first time in March, and Votorantim Participacoes SA, a Sao Paulo-based industrial conglomerate are meeting with bond investors, according to two people familiar with the discussions.

“Unlike all previous times in history, the election is not causing a blip,” Zervos said. “The fundamentals that are driving the flows will not change for a long time — U.S. rates are low and the fundamentals are great in emerging markets.”