Record Offerings Hinder Effort to Stem Real Gain: Brazil Credit

Record overseas dollar bond offerings from Brazilian companies are hurting the government’s effort to stem inflows that sparked the real’s 39 percent rally in the past two years.

Sales from Itau Unibanco Holding SA, Latin America’s biggest bank by market value, and state-run oil company Petroleo Brasileiro SA are pushing January issuance to $10.4 billion, the busiest month on record, according to data compiled by Bloomberg. International debt sales may eclipse last year’s record $36.5 billion, according to Banco BTG Pactual SA. Brazilian corporate bonds yield 6.2 percent, or more than 1 percentage point above U.S. corporate debt.

The real posted its biggest five-day advance in three weeks even as the central bank stepped up bets against the currency in the futures market through reverse swaps worth $1 billion, the latest government measure aimed at curbing the appreciation. Governments from Turkey to South Korea are trying to limit currency gains to make their exports more competitive and protect their economies as interest rates near zero in the U.S., Europe and Japan fuel demand for higher-yielding assets.

“The central bank is definitely challenged here in terms of flow,” Flavia Cattan-Naslausky, a currency strategist at RBS Securities Inc. in Stamford, Connecticut, said in a telephone interview. “What measures can you introduce at this stage that will deter the speculative flows without hampering the real economy flows? That’s a huge challenge.”

The central bank said in an e-mailed statement that it doesn’t comment on market speculation in response to a question about the impact of debt sales on the real. The Finance Ministry declined to comment in an e-mailed statement.

Tripled Tax

The real’s 39 percent gain against the dollar since January 2009, the biggest among emerging-market currencies, has helped push the country’s annual current-account deficit to a record $49 billion. It gained 0.4 percent last week. The central bank said it bought dollars in the spot market at 1.6721 reais per dollar. The central bank said it auctioned reverse currency swaps worth $1 billion yesterday for the third time in as many weeks to weaken the real.

The government said on Jan. 10 that it authorized the country’s sovereign wealth fund to buy dollars in the futures markets and in October tripled a tax on foreign investors’ fixed-income purchases to curb gains in the real.

Turkey last week unexpectedly cut interest rates while South Korea has revived taxes on overseas investors in domestic government bonds and tightened scrutiny of trading in foreign- currency derivatives to counter foreign capital inflows and pare currency gains.

‘Putting Pressure’

“The bottom line is that many of these countries are net recipients of foreign capital from initial public offerings, foreign direct investment, portfolio investment, debt-creating flows, and that is what is putting pressure on the currency and rightly so,” Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York, said in a telephone interview.

Central bank President Alexandre Tombini raised Brazil’s key interest rate by 50 basis points last week to 11.25 percent, compared with a rate of between zero and 0.25 percent in the U.S.

Brazilian companies may sell as much as $40 billion of debt in overseas markets this year, with Petrobras’s $6 billion offering last week pushing issuance above the total in 2010, Sandy Severino, the head of international debt markets at Banco BTG in New York, said in a telephone interview. They will also probably raise more than $33 billion through IPOs this year, a record for the nation, according to Edemir Pinto, head of the Sao Paulo securities exchange.

‘Complicates’

“Certainly this type of issuance impacts the currency in the sense that it will bring forth some appreciation pressure and it certainly complicates what the central bank and the Treasury want to do,” Bertrand Delgado, an economist at Roubini Global Economics LLC in New York, said in a telephone interview.

Petrobras, as the oil company is known, declined to comment on how the bond sale will affect the government effort to curb the real’s rally and on when it will bring proceeds of the offering onshore, according to an e-mailed response to questions. The Rio de Janeiro-based company said it will use funds from the sale, the largest by a Brazilian issuer, to fund part of its investment plan.

An official at Banco do Brasil SA, the Brasilia-based bank that sold 750 million euros ($1 billion) of bonds in international markets on Jan. 13, declined to comment.

The average yield on Brazilian corporate dollar bonds was unchanged yesterday at 6.18 percent, according to JPMorgan Chase & Co.’s CEMBI index.

The real rose 0.4 percent yesterday to 1.6708 per dollar.

Yield Spread

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries narrowed 4 basis points, or 0.04 percentage point, to 165, according to JPMorgan.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps was unchanged yesterday at 109 basis points, according to data compiled by CMA. 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 yield on interest-rate futures due in January 2012 rose 5 basis points to 12.42 percent.

Rising borrowing costs in Brazil and low interest rates abroad are prompting more companies to borrow overseas and swap the proceeds back into reais, said Felipe Brandao, a Sao Paulo- based emerging-markets analyst at ICAP Brasil SA, the third- largest currency broker at BM&F Bovespa.

The central bank and Finance Ministry will likely succeed in limiting gains in the real even as companies step up issuance, Vitali Meschoulam, a strategist at Morgan Stanley in New York, said in a telephone interview.

Itau Offering

“It’s difficult for me to see a breakout either way — because as soon as it strengthens, the government’s likely to come back in the market and create some problems for the foreign investors, which would take the dollar back up,” he said.

Itau Unibanco, based in Sao Paulo, sold $250 million of bonds abroad yesterday in the latest sale by a Brazilian company. Banco Safra SA, the Brazilian bank controlled by billionaire Joseph Safra, issued $500 million of 10-year bonds in international markets last week.

“You’re still getting flows and that’s still requiring aggressive action on foreign-exchange policy,” said RBS’ Cattan-Naslausky. “That’s the bottom line.”