Worst Brazilian Bond Drought Since August Shows ‘Market Closed’

Brazilian companies are avoiding the dollar bond market for a third week, the longest drought since August, as Europe’s debt crisis pushes borrowing costs higher.

“This market is closed,” said Guillermo Mondino, head of Latin American research at Barclays Plc in New York.

The extra yield investors demand to own Brazilian corporate dollar bonds rather than U.S. Treasuries swelled 21 basis points, or 0.21 percentage point, yesterday to 335, the most since November, according to JPMorgan Chase & Co indexes. Yields on the last two benchmark notes sold before markets seized up — 10-year securities from Marfrig Alimentos SA and Fibria Celulose SA — rose more than 70 basis points since May 3, double the average increase on Brazilian company bonds.

Growth in Latin America’s largest economy that analysts forecast at the fastest in two decades will slow should capital markets stay shut for a “much longer” period of time, Mondino said. Brazilian companies are staying out of the market after $15.1 billion of sales from January through April, the best start on record, as Europe struggles to contain its debt crisis.

The yield premium on Brazilian dollar government bonds over U.S. Treasuries soared 13 basis points yesterday to 243, within five basis points of a three-month high, as an unexpected increase in U.S. jobless claims added to concern that the global recovery will falter.

Stocks, Currency

Brazil’s benchmark Bovespa stock index sank 2.5 percent to an eight-month low and the real plunged 3 percent against the dollar, its sixth straight drop and the longest losing streak since October 2008. The currency has weakened 7.7 percent in May to 1.8836 per dollar, reversing a 6.3 percent rally in the previous three months.

The cost of protecting Brazilian debt against default for five years climbed nine basis points to 151 yesterday, the highest in two weeks, 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 government sold 28.3 million reais of fixed-rate bonds due in 2021 yesterday, or just 19 percent of the 150 million reais on offer as part of a weekly debt auction. Yields on the notes climbed 23 basis points to 12.83 percent.

‘Waiting’

“It makes no sense to offer large amounts when market conditions are not ideal,” Jose Franco de Morais, debt operations coordinator at Brazil’s Treasury, told reporters in Brasilia. Our strategy is “to not be too aggressive when the market is volatile,” he said.

The average yield on Brazil corporate dollar bonds rose 11 basis points yesterday to 6.64 percent, the highest since May 7.

“The problem is much more related with price,” said Fabio Mentone, director of investment banking at Sao Paulo-based Banco Bradesco SA, the eighth-biggest underwriter of Brazilian international bond sales. Companies are “waiting for a reading of the market, waiting to return to the rates and the yields before the Greek crisis,” he said.

Brazilian borrowers, excluding financial companies, had $41 billion of dollar debt maturing in 2010 as of Dec. 31, 2009. They have $30 billion of debt due in 2011 and $25 billion in 2012, according to Moody’s Investors Service.

Companies will likely be able to weather the bond market drought because most will meet their financing needs through bank loans or by tapping local capital markets, said Daniel Kastholm, a managing director at Fitch Ratings in Chicago. Companies have sold 14.7 billion reais of local bonds through April and 14.4 billion reais of shares, according to data from Brazil’s capital markets association and securities regulator.

‘Sidelines’

“Absent these financing sources, companies will simply sit on the sidelines until some calm returns,’” Kastholm said in an e-mailed response to questions.

Brazil’s economy will grow 6.3 percent this year, the fastest pace since 1986, according to a central bank survey published this week.

Brazilian corporate dollar bond sales dropped to zero in May from a $3.8 billion monthly average in the January-to-April period, according to data compiled by Bloomberg. Total sales in the U.S. corporate market dropped to $20.6 billion this month from a $103 billion average in the first four months.

Rising Costs

The last two Brazilian companies with plans to sell dollar debt — Odebrecht SA, a Salvador-based engineering and construction company, and Sao Paulo-based Banco Cruzeiro do Sul SA — shelved the offerings on May 7 as borrowing costs surged on concern Greece’s debt crisis was spreading across Europe.

Prices have plunged on the final two benchmark bonds that sold. Sao Paulo-based Marfrig’s $500 million of 10-year bonds fell to 92 cents on the dollar from 98.16 cents on May 3, the first day of data provided by Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Sao Paulo-based Fibria’s $750 million bonds slumped 5.9 cents since May 3 to 95.85 cents, according to Trace. Brazilian corporate bonds on average lost 2.2 percent over that period, according to JPMorgan.

The yield on Marfrig’s bonds jumped 79 basis points since May 3 to 10.57 percent, according to Trace. The yield on Fibria’s notes rose 86 basis points to 8.12 percent.

“The markets just need some reassurance that the sky is not falling,” Kastholm said. “That might just take some time.”