Oi Plans Bond Sale as Pimco Predicts $12 Billion of Deals: Brazil Credit

The biggest year for Brazilian corporate debt sales is about to get busier as record-low borrowing costs prompt Pacific Investment Management Co. to predict $12 billion in offerings by year-end.

Telemar Norte Leste SA, Brazil’s largest fixed-line phone company, and Suzano Papel e Celulose SA, the nation’s No. 2 pulp maker, plan to sell bonds in international markets this year, according to people familiar with the transactions. Construction company Odebrecht SA is returning to debt markets after abandoning a $200 million offering in May, a person with knowledge of the deal said.

Brazil corporate borrowing costs had their biggest two- month drop in a year, plunging 47 basis points, or 0.47 percentage point, through Aug. 31 to 6.16 percent, after hitting a record low of 5.91 percent on Aug. 19, according to JPMorgan Chase & Co.’s CEMBI index. International debt sales by companies in Brazil reached $20.9 billion in the first eight months of this year, almost surpassing the $21.8 billion sold in all of 2009 and putting debt offerings on course to reach a record for 2010, according to data compiled by Bloomberg.

“We expect a huge pipeline of companies that want to access the lowest financing costs in history,” said Sara Zervos, who helps manage $10.5 billion of emerging-market debt, including Brazilian bonds, at Oppenheimer Funds Inc. in New York.

Photographer: Paulo Fridman/Bloomberg

Oi controls almost 20 percent of Brazil’s mobile phone market, Bloomberg data show. Close

Oi controls almost 20 percent of Brazil’s mobile phone market, Bloomberg data show.

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Photographer: Paulo Fridman/Bloomberg

Oi controls almost 20 percent of Brazil’s mobile phone market, Bloomberg data show.

Only one Brazilian company sold international bonds in August, traditionally the slowest month of the year. Banco Bradesco SA, the nation’s second-biggest lender by market value, sold $1.1 billion of 10-year bonds last month in its largest dollar-denominated offering.

Oi’s Plans

Telemar Norte Leste of Rio de Janeiro hired Bank of America Corp., BNP Paribas SA, BTG Pactual SA and Itau Unibanco Holding SA to sell benchmark dollar bonds, said the person, who declined to be identified because the terms aren’t set.

The company, known as Oi, plans to start meeting with investors on Sept. 6, the person said yesterday. Oi controls almost 20 percent of Brazil’s mobile phone market, Bloomberg data show.

An Oi official, who asked not to be indentified to comply with company policy, declined to comment.

Suzano plans to sell 10-year bonds in international markets, a person familiar with the deal said on Aug. 26. The person asked not to be named because the terms aren’t set. The offering would be its second in international markets, according to data compiled by Bloomberg. Suzano, based in Salvador, sold $100 million of eight-year bonds in 1996, which the company bought back in 2001.

A Suzano official, who asked not to be named in accordance with company policy, declined to comment.

Bank Offerings

Banks may also sell bonds this year, said Brigitte Posch, who helps manage $35 billion in emerging-market fixed income assets at Pimco in Newport Beach, California. Brasilia-based Banco do Brasil, Latin America’s largest lender by assets, and the country’s state development bank, known as BNDES, raised $2.5 billion earlier this year.

“You might see Banco do Brasil and BNDES but less of the mid-sized banks because they already came,” said Posch in a phone interview.

Brazil’s national bank for economic and social development, or BNDES, hired BNP Paribas SA, Credit Suisse Group AG and Deutsche Bank AG to arrange meetings with bond investors starting Sept.6, said today a person familiar with the situation, who declined to be identified because the discussions are private.

Global Slowdown

Officials for Banco do Brasil and BNDES in Rio de Janeiro, who asked not to be named to comply with company policies, declined to comment.

Even with borrowing costs falling, companies may pull back on issuance if the global economy slows further, said Diego Torres, head of emerging markets credit research at Munita, Cruzat y Claro, a Chilean financial-services firm in Santiago.

Sales of existing U.S. homes plunged by a record 27 percent in July, while weekly jobless claims in August reached the highest level since November. China’s industrial production grew in July at the slowest pace in five months, while policy makers in Japan expanded a bank-loan program by 10 trillion yen ($118.8 billion) in an emergency meeting on Aug. 30 to support the economy.

“New bond sales will fall if fears about a double dip recession in the U.S. become stronger,” said Torres in an interview from Santiago. “If investors start to be more risk averse because they feel this could end up badly, there won’t be new bond deals.”

Credit Default Swaps

The yield gap on Brazilian corporate dollar bonds over U.S. Treasuries has climbed 123 basis points from a 2 1/2-year low of 227 basis points on April 5, according to JPMorgan’s CEMBI index.

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries fell 13 basis points to 220 today at 5:00 p.m. New York time, according to JPMorgan. The gap widened 19 basis points last month.

The yield on Brazil’s January interest-rate futures contract was unchanged at 10.69 percent. The contract dropped 7 basis points in August. The real gained 0.6 percent to 1.7460 per dollar. The currency was 0.1 percent down in August.

Refinancing

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps fell seven basis points to 124 and jumped 15 basis points in August, 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.

Companies including Odebrecht and Gerdau SA are taking advantage of record low rates to refinance debt issued at higher rates.

Odebrecht, based in Salvador, plans to use the proceeds of the bond sale to buy back in December perpetual bonds sold in 2005, according to Fitch Ratings. The company will have the option to buy the new perpetual bonds after five years.

Odebrecht’s perpetual bonds yield 9.6 percent compared with a yield of 4 percent for the 9.625 percent notes due in 2014, according to data compiled by Bloomberg. An Odebrecht press official in Sao Paulo declined to comment.

Gerdau SA, Latin America’s largest steelmaker, plans to purchase bonds this month, the company said in an Aug. 17 statement. Net Servicos de Comunicacao SA plans to refinance $150 million of 9.25 percent notes, former Chief Financial Officer Joao Adalberto Elek Jr. said on a July 20 conference call. Elek resigned on July 30 and was replaced by Roberto Catalao Cardoso.

Cia. Siderurgica Nacional SA is considering redeeming $750 million of 9.5 percent bonds callable in October, investor relations director Paulo Penido Pinto Marques said on an Aug. 11 conference call.

“Companies can borrow money at very attractive levels, which lets them do two things: finance future projects and refinance existing debt at better rates,” said Torres of Munita, Cruzat.

To contact the reporter on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

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