Bond Buybacks Hit Record in Brazil as Yields Tumble for CSN: Brazil Credit
Record Bond Buybacks Spurred By Sinking Yields
Paulo Fridman/Bloomberg
Rebar is stacked and awaits shipment at a Gerdau SA steel plant.
Rebar is stacked and awaits shipment at a Gerdau SA steel plant. Photographer: Paulo Fridman/Bloomberg
Brazilian companies from Gerdau SA to Globo Comunicacoes e Participacoes SA are refinancing a record amount of perpetual bonds after borrowing costs sank to an all-time low.
Gerdau, Latin America’s largest steelmaker, said last week it plans to purchase its 8.875 percent bonds next month, the fourth Brazilian company this year to call a total $1.7 billion of the securities, the most in any year since borrowers began issuing the debt in 2005, according to data compiled by Bloomberg. Cia. Siderurgica Nacional SA and Net Servicos de Comunicacao SA may push the total to $2.6 billion.
Brazilian corporate yields fell to a record low 5.91 percent last week, according to JPMorgan Chase & Co. Companies can cut costs by 125 basis points, or 1.25 percentage points, by redeeming perpetual notes and issuing similar debt, Sao Paulo- based Itau Unibanco Holding SA said. Globo reduced interest more than 300 basis points, or about $10 million a year, last month.
“If you can knock 300 basis points off your coupon, that can add up pretty quickly,” said Christopher Buck, a corporate debt analyst with Barclays Plc in New York. “Prices have improved, they can get the deal done and they can structure it in a way that investors are comfortable with.”
Brazilian companies have options that allow them to retire, or call, as much as $6 billion of perpetual bonds this year, data compiled by Bloomberg show. Perpetual bonds, which allow companies to repay the principal at their discretion, total $7.4 billion in Brazil, the data show.
‘Clearly Considering’
Globo bought $325 million of 9.375 percent perpetual bonds last month that were issued in 2006 and sold new debt with a 6.25 interest rate. Banco Bradesco SA redeemed $298 million of its $300 million perpetual bonds in April. Banco Santander Brasil SA and Gerdau plan to call notes for as much as $1.1 billion next month.
CSN, based in Rio de Janeiro, is “clearly considering” redeeming $750 million of 9.5 percent bonds that are callable in October, Paulo Penido Pinto Marques, the company’s investor relations director, said on an Aug. 11 conference call. Brazil’s third-largest steelmaker sold $1 billion of 10-year bonds with a rate of 6.5 percent in July.
Cable-TV producer Net plans to refinance $150 million of 9.25 percent notes, former Chief Financial Officer Joao Adalberto Elek Jr. said during a July 20 conference call. In October, the Sao Paulo-based company issued $350 million of 2020 bonds at an interest rate of 7.5 percent.
“A window of opportunity opened up in the market, where for the same type of bonds we can get a better pricing,” he said.
Yield Gap
A Sao Paulo-based spokeswoman for Net, CSN’s Sao Paulo- based spokeswoman and a spokeswoman for Gerdau in Porto Alegre didn’t respond to requests for comment.
Braskem SA, the biggest producer of petrochemicals in Latin America, is considering refinancing its 9.75 percent perpetual bonds callable in December to reduce debt costs, the company said in an e-mailed statement.
“The opinion of some banks is that it would be possible to get a lower yield these days,” the e-mail said. The Sao Paulo- based company also wants to “maintain relations with investors in this type of bond,” according to the e-mail.
The average yield gap on Brazilian corporate dollar bonds over U.S. Treasuries fell five basis points last week to 316, according to JPMorgan Chase & Co.’s CEMBI index.
The extra yield investors demand to own Brazilian government dollar bonds instead of Treasuries shrank five basis points to 199 at 5:23 p.m. New York time, according to JPMorgan’s EMBI+ index.
Credit-Default Swaps
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps fell two basis points to 119, 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 real fell 0.8 percent to 1.77 per dollar. The yield on Brazil’s overnight interest-rate futures contract due in January was unchanged at 10.68 percent.
While near-zero interest rates in the U.S. are spurring demand for perpetual bonds among individual investors who look to hold the debt for a longer term, some buyers prefer that companies call the notes because the securities usually do worse than debt with a defined maturity during market routs, according to Vinicius Pasquarelli, an emerging-market debt trader with Tradition Asiel Securities Inc. in New York.
“Perpetual bonds are only a good option if you believe that they will be called,” Pasquarelli wrote in an e-mail. “When the market goes down, these bonds fall like equity, where the downside is way higher than the return itself.”
Rating Increases
Brazilian companies are also able to obtain cheaper financing because they have won credit-rating upgrades since they issued the perpetual bonds, said Joao de Biase, head of debt capital markets at Itau, the country’s biggest bank by market value.
Globo, based in Rio de Janeiro, had its rating raised to BBB-, the lowest investment-grade ranking, by Standard & Poor’s in 2008, two years after it sold perpetual bonds. Ten Brazilian companies have been upgraded by S&P this year and two have been cut, the most increases relative to downgrades since 2006, according to data compiled by Bloomberg.
Globo, the country’s biggest television network, lowered the coupon on $325 million of perpetual bonds July 15 to 6.25 percent from 9.375 percent, saving about $51 million over the next five years, according to data compiled by Bloomberg. The company agreed to resume paying the original, higher rate should it fail to call the securities after five years, the data show.
“What has returned is appetite from investors to invest in this type of instrument,” said de Biase, who helped arrange the Globo transaction. “That’s an opportunity for them to refinance the old perpetuals.”
To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net
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