Roubini at Odds With Fraga Over Budget Cut Plan: Brazil Credit
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13 de janeiro de 2011The lowest corporate borrowing costs in eight months are paving the way for a surge in debut overseas bond sales by Brazilian companies.
The extra yield investors demand to own Brazilian corporate dollar bonds instead of U.S. Treasuries narrowed to 252 last week, the smallest gap since April, according to JPMorgan Chase & Co.’s CEMBI index. The yields compare with benchmark spreads of 307 basis points for Russian companies and 517 for Chinese issuers last week.
The number of Brazilian companies selling dollar debt abroad for the first time may jump to about 15 this year, according to Itau Unibanco Holding SA, the second-largest underwriter of the country’s bonds in 2010 after Banco Santander SA. There were eight first-time offerings last year, according to data compiled by Bloomberg. Brazilian companies sold a record $36.7 billion of dollar bonds in 2010 as near-zero interest rates in the U.S., Japan and Europe fueled demand for the Latin American countries’ higher-yielding assets.
“There’s a lot of appetite for new stories in Brazil and there are very few countries that have this combination of a huge appetite from investors and new companies ready to tap the market,” Joao de Biase, head of debt capital markets at Itau, Unibanco, said in a telephone interview from Sao Paulo.
The new corporate issuers will likely have credit ratings that are junk, or below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, according to Biase. The median rating on Brazilian corporate dollar debt sold last year was BBB-, the lowest investment grade.
Yield Gap
Grain-trading company Ceagro Agricola Ltda., which is rated B by S&P, sold $100 million of bonds to yield 11 percent in October, according to data compiled by Bloomberg. Property developer BR Properties SA, rated Ba3 by Moody’s, paid a yield of 9 percent on $200 million of notes in September. U.S. corporate junk bonds yield 7.68 percent, according to Bank of America Merrill Lynch’s U.S. High Yield Master II index.
Investors are migrating to corporate debt and taking on more risk as the yield gap with government notes narrows, said Luz Padilla, who helps manage about $6 billion at asset manager Doubleline Capital LP in Los Angeles. Brazil corporate bonds account for about 13 percent of the money Padilla manages, she said.
Brazilian corporate debt yields 74 basis points more than government bonds, down from a difference of 103 in October, according to JPMorgan. Corporate securities returned 11.1 percent in the 12 months through yesterday, compared with a 10.8 percent gain for government notes, data compiled by Bloomberg show. A basis point is 0.01 percentage point.
‘Played Out’
“People are looking at corporate debt and seeing there’s some additional spread pickup for not significantly more risk,” Padilla said in a telephone interview. “The spread attraction in the sovereign space has played out.”
The extra yield investors demand to own Brazilian government bonds instead of U.S. Treasuries narrowed 1 basis point to 168 at 7:05 a.m. New York time, down from 250 in July, according to JPMorgan data.
Itau’s Biase said the bank is working with as many as five companies that are seeking to sell bonds abroad for the first time this year. One of them is a single-B rated agriculture company, he said, without being more specific.
There have been six debut offerings from Brazilian companies since Sept. 30, according to Bloomberg data. There was only one new issuer in 2009.
Brazilian companies with low credit ratings are taking advantage of rising global demand for higher-yielding assets as central banks in developed countries keep interest rates low to bolster economic growth, according to RBC Capital Markets.
‘Lower Grades’
“There’s a lot of liquidity out there because the central banks in much of the developed world are using very loose monetary policy,” said Eduardo Suarez, an emerging-markets strategist at RBC in Toronto. “To get higher returns people started going to lower grades, but those yields compressed so now they’re turning to high yield.”
The cost of protecting Brazilian bonds against default for five years fell three basis points to 109, according to CMA 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 comply with debt agreements.
The real strengthened 0.2 percent to 1.6798 per U.S. dollar.
Yields on Brazil’s interbank rate futures contract due in January 2012 were unchanged at 12.23 percent.
‘More Challenging’
Rising U.S. Treasury yields, the benchmark for emerging- market borrowers, may limit Brazilian corporate dollar bond sales in 2011, according to New York-based brokerage MF Global Holdings Ltd. U.S. Treasuries will climb to 3.86 percent by the first quarter of 2012 from 3.34 percent, according to the median forecast of 50 economists surveyed by Bloomberg.
“It will be a good year, but more challenging to increase the volume of 2010 because of rising rates,” Michael Roche, an emerging-market strategist at MF Global, said in a telephone interview. “Corporates will look to frontload issuance during the first half of the year, and then the pace of demand will fall away because of rising rates.”
Debut junk bonds sales from Brazilian companies will account for a bigger share in overall issuance in the coming years, Biase said.
“I don’t think this is a one-year event,” he said. “We will continue to see this in the next couple of years. This is a trend that is going to happen.”
