Bonds sold by Odebrecht SA, the construction company planning Brazil’s biggest overseas debt sale this year, are outperforming the country’s corporate notes on bets it will benefit from government infrastructure projects.
The yield on Odebrecht’s bonds due in 2020 sank 40 basis points, or 0.40 percentage point, in the past month, outpacing a decline of 17 for Brazilian corporate debt tracked by JPMorgan Chase & Co. The company’s planned $1.5 billion offering will be the single-biggest issue since a $2.5 billion sale by state-run oil producer Petroleo Brasileiro SA in October 2009, according to data compiled by Bloomberg.
Odebrecht, Latin America’s largest engineering and construction company by sales, is seeking to tap into Brazil’s plan to invest 955 billion reais ($570 billion) on urban transport, sewage, homebuilding and electricity and water distribution as it prepares to host the World Cup in 2014 and Olympic games in 2016. President-elect Dilma Rousseff has also pledged to rebuild roads, ports, railways, power plants and electricity distribution lines to bolster growth in Latin America’s biggest economy.
“Odebrecht is one of the largest construction companies in the country and is well positioned to take advantage of all that’s going to happen,” said Natalia Corfield, a corporate debt analyst at ING Groep INV in New York.
Odebrecht’s 7 percent bonds are also beating emerging- market corporate debt, which posted a yield decline of 9 basis points in the past month, according to JPMorgan. The yield on high-yield and investment-grade corporate bonds in the U.S. dropped 13 basis points during the same period, Bank of America Merrill Lynch indexes show.
Ratings Increase
The prospect of a ratings increase and debt yields that are higher than peers suggest Odebrecht’s bonds have more room to rally, Corfield, who recommends investors buy the securities, said. Standard & Poor’s may boost the Salvador-based company’s rating one level to BB+ before the end of the year, she said.
Reginaldo Takara, an analyst at S&P in Sao Paulo, didn’t respond to a request for comment.
At 5.54 percent, Odebrecht’s notes yield 37 basis points more than 10-year bonds issued by Cia Siderurgica Nacional SA, Brazil’s third-biggest steelmaker. The companies are both rated BBB-, the lowest investment grade, by Fitch Ratings.
“These guys will have a lot of business going forward,” said Edgardo Sternberg, an emerging-market debt strategist at Boston-based Loomis Sayles & Co., which manages about $140 billion in assets. “You buy all these construction companies, cement companies and steelmaking companies, and you’ve bought growth. It’s a growth story.”
Economic Growth
Brazil’s economy may expand 7.6 percent this year, the fastest pace since 1985, according to a central bank survey of about 100 economists published Nov. 1.
Odebrecht’s construction projects in Venezuela and Africa are also helping lure investors to its bonds, according to Jayme Fonseca, director of finance of the company’s engineering and construction unit. Odebrecht has contracts to build an electricity grid in Venezuela and service mining exploration by Vale SA, the world’s biggest iron ore producer, and steel producer ArcelorMittal in Africa, he said.
“Since we have an important position in infrastructure in Latin America and Africa, we are seen as an alternative investment that allows investors to capture this positive cycle in the sector in these countries,” Fonseca said in a telephone interview from Sao Paulo.
Odebrecht Oleo e Gas, the company’s oil and gas unit, will issue the new 10-year bonds and use proceeds of the sale to refinance debt related to the construction and operation of two deepwater drill ships that have been chartered by Petrobras, said Marco Rabello, the unit’s head of structured finance. Banco do Brasil SA, Banco Santander SA, Deutsche Bank AG and HSBC Holdings Plc are arranging the sale, he said.
Riskier
Investors will be paid with future revenue from the deepwater drilling project and will have claims on the ships as security, according to Fitch.
The bonds may be riskier than conventional notes because payments are contingent upon the completion of the ships and their value as assets, as well as Odebrecht remaining the operator of the drill ships, according to Barclays Plc.
“When you’re talking about a project that’s not even on the ground yet, everything is a projection,” said Juan Cruz, a corporate bond analyst with Barclays in New York. “The value is going to be in the asset itself but the asset is only valuable if you can monetize it.”
The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. securities declined two basis points last week to 174, according to JPMorgan.
Default Swaps
Yields on Brazil’s interest-rate futures contract due in January 2013 rose 17 basis points last week to 11.88 percent. The real rose 1.1 percent to 1.6799 per dollar.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps dropped six basis points to 94 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.
Odebrecht is considering forming partnerships and selling shares in initial public offerings, finance director Fonseca said Sept. 3. Potential public offerings also include stadiums for the World Cup and Olympics, in which the group will act as an investor with the right to operate projects after their construction, he said.
“The sector itself is going to go through a big expansion in the next years,” ING’s Corfield said. “Odebrecht is an excellent company.”