(Corrects budget deficit figure in eighth paragraph of story published Sept. 27.)
Brazilian companies are selling a record $8.7 billion of international bonds this month in a sign investors are confident President Luiz Inacio Lula da Silva’s successor will continue his economic policies.
Sales by Vale SA, the world’s largest iron-ore producer, and Gerdau SA, Latin America’s biggest steelmaker, helped make September the busiest month since Bloomberg started collecting the data in 1999 and the most active before an October election. September offerings were 29.4 percent of issuance in 2010, compared with 15 percent in September 2006 and zero in 2002, data compiled by Bloomberg shows. Dilma Rousseff is the leading candidate in polls ahead of the Oct. 3 vote and Lula’s chosen heir.
“Dilma means the continuation of Lula’s government, which in the eyes of investors outside Brazil is fine,” said Natalia Corfield, a corporate debt analyst at ING Groep NV in New York. “Investors have cash that they have to put to work and the companies are taking advantage of that.”
Investors are snapping up Brazilian corporate bonds on growing speculation Rousseff will preserve fiscal policies that are helping fuel the fastest economic expansion in two decades. Brazilian debt sales are part of a global push by issuers to take advantage of record-low interest rates in Europe, Japan and the U.S., the benchmark for emerging-market debt. Companies have sold $124.3 billion in the U.S. market this month, on pace to beat the $125.1 billion issued last September, the most on record.
“Investors don’t even ask questions about the new government,” said Ricardo Leoni, Santander’s head of Brazil debt capital markets in Sao Paulo in a phone interview. “They assume nothing will change the trend of rising investment in infrastructure and strong economic growth.”
The extra yield investors demand to buy Brazilian corporate debt rather than U.S. Treasuries shrank 23 basis points, or 0.23 percentage point, this month to 329, according to JPMorgan Chase & Co.’s CEMBI Broad index.
The yield difference swelled nine basis points in the month before the last election in 2006 and 299 before Lula’s victory in 2002, when concern he would default upon taking office drove borrowing costs to a record 26 percent. The yield tumbled by mid-2003 after Lula shored up investor confidence by cutting government spending.
Latin America’s biggest economy will grow more than 7 percent this year for the first time since 1986. The annual inflation rate has declined to 4.6 percent from 17 percent in 2003 as Lula pared the budget deficit as a percentage of gross domestic product to 3.4 percent from as high as 6 percent and the currency rallied 102 percent against the dollar.
“Regardless of the new government’s policies, Brazil will continue to benefit from high commodity prices and the favorable external environment,” said Alexander Severino, managing director at BTG Pactual in New York. The bank advised Telemar Norte Leste SA on the $ 1 billion 10-year bond sale on Sept. 8. The yield was the lowest the company ever paid, 5.5 percent, 400 basis points lower than the 9.5 percent the company paid last year on a similar issue.
Rousseff, Lula’s former cabinet chief, maintained her 27 percentage point lead over opposition candidate Jose Serra, according to a Vox Populi poll, reported Sept. 23 by TV Bandeirantes. The nationwide poll of 3,000 people was taken between Sept. 18 and 21 and has a margin of error of 1.8 percentage point, according Bandeirantes.
“Brazil has evolved,” said Sara Zervos, who oversees $10.5 billion in emerging-market assets, including Brazilian dollar- and real-denominated debt, at Oppenheimer Funds Inc. in New York. “The market believes that the institutional framework is strong enough that it won’t be changed by political change. Throw in the fact that the Federal Reserve, Japan, and Europe all have near-zero interest rates, and Brazilian companies can issue at record-low levels.”
The yield gap on Brazilian government bonds over Treasuries was unchanged at 205 basis points at 10:01 a.m. in New York, according to JPMorgan.
The cost of protecting the nation’s debt against non- payment for five years with credit-default swaps was unchanged at 116 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.
The real rose 0.1 percent to 1.70097 per dollar at 10:02 a.m., from 1.7109 on Sept. 24.
The yield on Brazilian interest-rate futures contracts due in January fell one basis point to 11.53 percent after touching a six-week high of 11.56 last week.
Brazilian companies have issued a record $29.6 billion this year, compared with $22 billion in all of 2009, according to data compiled by Bloomberg.
Vale, based in Rio de Janeiro, was the biggest corporate borrower this month, issuing $1.75 billion of 10- and 30-year bonds in its largest offering since 2006, according to data compiled by Bloomberg. Gerdau, in Porto Alegre, sold $1.25 billion of bonds that mature in 2021 last week.
Issuance is set to rise further as Braskem SA, Latin America’s largest petrochemicals producer, plans to sell perpetual bonds overseas as soon as this week, said a person familiar with the transaction who declined to be identified because the terms aren’t set.
No Election Blip
BR Properties SA, the Brazilian property developer that sold shares to the public for the first time in March, and Votorantim Participacoes SA, a Sao Paulo-based industrial conglomerate are planning sales of perpetual bonds, according to two people familiar with the discussions.
“Unlike all previous times in history, the election is not causing a blip,” Zervos said. “The fundamentals that are driving the flows will not change for a long time -- U.S. rates are low and the fundamentals are great in emerging markets.”
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