Slim Leads Record M&A Fueling Most Bond Sales in Six Months: Brazil Credit
Embratel Participacoes Headquarters in Rio de Janeiro
Andre Vieira/Bloomberg
Embratel, based in Rio de Janeiro, sold three-year bonds linked to the country’s overnight interbank rate on Oct. 8.
Embratel, based in Rio de Janeiro, sold three-year bonds linked to the country’s overnight interbank rate on Oct. 8. Photographer: Andre Vieira/Bloomberg
Brazilian companies are selling the most local bonds since April as they finance record acquisitions and investment to tap into the fastest expansion in two decades.
Bond offerings climbed to 5.25 billion reais ($3.1 billion) in the first two weeks of October from 1.58 billion reais in all of September, according to the capital markets association known as Anbima. Embratel Participacoes SA, a unit of billionaire Carlos Slim’s America Movil SAB, accounted for 60 percent of the sales by issuing 3.15 billion reais, the most by a non-financial company since 2006, to pay for a stake increase in cable-TV operator Net Servicos de Comunicacao SA.
Companies are turning to the local debt market to finance growth as analysts predict Latin America’s biggest economy will expand 7.1 percent this year, the most since 1986. The value of deals where Brazilian firms were targets has climbed to $84 billion this year, more than for any full year since at least 1998, from $61 billion for all of 2009, data compiled by Bloomberg show. That compares with $32 billion in takeovers of Russian companies, $34 billion in India and $87 billion in China this year, according to the data.
“The local market is gaining depth,” Ricardo Kovacs, a senior analyst at Moody’s Investors Service in Sao Paulo, said in a phone interview. “These issues show the evolution of Brazilian capital markets. Even with shorter terms than international bonds, they are a good alternative for companies with revenue exclusively in local currency.”
Overnight Rate
Embratel, based in Rio de Janeiro, sold three-year bonds linked to the country’s overnight interbank rate on Oct. 8. With that rate trading at 10.64 percent yesterday, the bonds yield about 11 percent. By comparison, government floating-rate bonds due in 2013 pay yields in line with the overnight rate while its fixed-rate securities yield 11.82 percent, according to data compiled by Bloomberg.
Central bankers left their overnight rate target at 10.75 percent at a policy meeting yesterday after raising it 200 basis points, or 2 percentage points, from a record low earlier in the year to prevent the expansion from sparking a surge in inflation. Brazil’s benchmark target compares with rates of no more than 1 percent in the U.S., Europe and Japan.
Brazil will likely sell more bonds denominated in reais overseas this year as part of its efforts to stem gains in the currency, Treasury Secretary Arno Augustin said.
Augustin, in an interview in Brasilia, said the foreign bond sales in local currency could help slow capital inflows from foreigners who currently enter the domestic market to buy assets in reais.
Yields Rise
Yields on Brazil’s interbank rate futures contract due in January 2012 rose seven basis points to 11.34 percent today.
The real weakened 1.1 percent today to 1.6968 per dollar. It’s gained 2.8 percent this year and 36 percent since the end of 2008, prompting the government to raise a tax on foreigners’ fixed-income purchases this week to 6 percent to stem the rally.
The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries fell two basis points to 184 basis points today, according to JPMorgan Chase & Co.’s EMBI+ index.
Local Brazilian bond sales have totaled 35.7 billion reais this year, an 86 percent increase from the amount issued through the first 10 months of last year, according to Anbima. Companies are awaiting approval for another 3.1 billion reais in offerings.
‘Fast Rule’
Companies are also boosting international issues, having sold a record $30.9 billion in the first nine months of the year, according to data compiled by Bloomberg.
All the local offerings this month were done through a regulation requiring the debt be sold exclusively to institutional investors in a process similar to private placement in the U.S. The rule, implemented by Brazilian securities regulators in January 2009, allows companies to sell bonds faster than through a traditional debt offering. The deals can only include 20 buyers.
“We are seeing a credit boom using debentures under the fast rule,” Gustavo Dezouzart, partner at Oliveira Trust, trustee for 6.5 billion reais of issues this year, said in a phone interview from Rio de Janeiro.
The average maturity on debt issued in Brazil has climbed to 5 years from 3.8 years in 2009. The last issue this month, by Votorantim Cimentos, the cement unit of Brazil’s Grupo Votorantim, was 1 billion reais of 10-year bonds. The lengthening of maturities is allowing infrastructure companies, utilities and homebuilders to finance their longer-term investments, Rubens Cardoso, capital markets director at state- controlled Banco do Brasil SA, said in a phone interview from Sao Paulo.
Amil Offering
“We are seeing record levels of issuance to support growing investment,” Cardoso said.
Amil Participacoes SA, a health insurance provider, has set price ranges for 900 million reais in floating-rate bonds with three-, four- and five-year maturities that will be used to repay one-year bridge loans taken to acquire Medial Saude SA last year. On the three-year bonds, the company will pay up to the overnight rate plus 140 basis points, according to a person familiar with the transaction.
“Acquisition and project financing have become more usual in the local market,” said Marcio Pepino, head of capital markets at Banco Espirito Santo SA.
Smaller, private companies that before only had access to bank credit lines can now raise capital through private debt offerings, according to Dezouzart. The securities can be issued in the time it takes to secure a loan, Alberto Kiraly, vice- president of Anbima in Sao Paulo, said in an Oct. 1 interview. They are attractive to banks because they can sell the notes more easily than loans should they want to unload them, he said.
“Today banks are the main buyers,” Kiraly said. “But as we see higher volumes being financed, the trend is to broaden the investor base.”
To contact the reporters on this story: Tatiana Bautzer in Sao Paulo at tbautzer@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
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