First-Time Borrowers Grow on Junk Bond Demand: Brazil Credit

 International bond offerings by first-time Brazilian issuers are picking up as investors seek higher-yielding securities after companies sold a record $10.6 billion of debt last month.

Ceagro Agricola Ltda., a Campinas, Sao Paulo-based grain- trading company, and Banco BVA SA, a Rio de Janeiro-based bank that specializes in loans to mid-sized companies, plan to issue debt in debut sales. Three first-time borrowers sold debt so far this year, including BR Properties SA, a Sao Paulo-based property developer, which issued $200 million of bonds last month. There was only one new issuer in all of 2009, according to data compiled by Bloomberg.

Investors are taking on more risk, giving lower-rated Brazilian companies a chance to access debt markets, as they seek higher-yielding alternatives to bonds offering record-low rates in the U.S., Europe and Japan. Ceagro is rated B, or five levels below investment grade, by Standard & Poor’s while BVA hasn’t received a credit rating. By comparison, the companies that sold bonds abroad last month had a median rating of BBB-, the lowest investment-grade level.

“Investors are looking for yield and it creates an opportunity for first-time issuers,” Bevan Rosenbloom, an emerging-market debt strategist with RBS Securities Inc. in Stamford, Connecticut, said in a telephone interview. “With yields so scarce across the globe, first-time issuers can afford bonds.”

‘Low’ Premium

Pedro Daltro, chief financial officer of BR Properties, said he opted to sell perpetual bonds instead of 10-year notes on Sept. 30 after receiving stronger-than-expected demand from mutual funds and other institutional investors in the U.S. and Europe. BR Properties issued the bonds, which have no set maturity, to yield 9 percent, or about 100 basis points more than the company would have paid for 10-year debt, Daltro said.

“The premium over a 10-year note was low,” he said in a telephone interview from Sao Paulo. The company is rated B+ by Fitch Ratings, or four levels below investment grade.

While the average Brazilian corporate dollar bond yield declined to a record low of 5.79 percent yesterday, it remains over 300 basis points, or 3 percentage points, above the rate on benchmark 10-year U.S. Treasuries.

Yields on two-year Treasuries fell to an all-time low of 0.375 percent yesterday. In Japan, the 10-year yield dropped to 0.83 percent, the lowest level since 2003, one day after policy makers cut the benchmark interest rate to a range of 0 and 0.1 percent, from 0.1 percent.

Magnesita, BM&FBovespa

The $10.6 billion of bonds that Brazilian companies sold abroad in September marks the busiest month since Bloomberg began collecting the data in 1999. They have issued a record $30.9 billion this year, up from $21.9 billion in all of 2009, according to data compiled by Bloomberg.

Magnesita Refratarios SA, a Brazilian maker of specialty tiles used in steel-making furnaces, sold $400 million of 10- year bonds in its first-ever sale on March 25 while BM&FBovespa SA, the owner of Latin America’s biggest securities exchange, sold $612 million of 10-year debt in a debut offering on July 9.

Ceagro plans to sell $100 million of bonds due in 2016 and is meeting with investors through Oct. 15 to drum up demand, according to a person familiar with the transaction. A company official didn’t return e-mail and telephone messages seeking comment.

Banco BVA may sell as much as $300 million of bonds maturing in two to three years before year-end, bank President Benedito Ivo Lodo Filho said in an Oct. 4 telephone interview from Sao Paulo.

“It’s our first international bond sale, so we are testing the market with a short-term issue,” Lodo Filho said.

Default Swaps

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell two basis points yesterday to 202, according to JPMorgan Chase & Co. indexes. The gap is down from 251 on June 8.

The cost of protecting Brazilian bonds against default for five years fell two basis points to 106, according to CMA DataVision prices. 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.

Yields on Brazil’s interbank rate futures contract due in January 2012 rose three basis points to 11.44 percent. The real fell 0.9 percent to 1.6788 per dollar, paring its advance this year to 3.9 percent.

‘Rising’ Demand

Itau Unibanco Holding SA, Brazil’s biggest bank by market value, is lining up overseas bond offerings by five speculative- grade companies by year-end, Joao de Biase, head of debt capital markets at the bank, said in a telephone interview from Sao Paulo.

Most of the companies are “mid-sized” exporters looking to sell debt with maturities ranging from five to seven years, de Biase said. He declined to name the companies. Many first- time issuers hadn’t arranged credit ratings in time to take part in the September surge in offerings, he said. There have been no sales so far this month.

“We’ll gradually see more new companies selling bonds,” Gustavo Alvares, a debt capital markets banker in Sao Paulo with JPMorgan, the biggest underwriter of Brazilian overseas bond offerings this year, said in an interview. “Demand for high- yield assets is rising, with more funds dedicated to these bonds.”