`End of Cycle' Means Sabesp Sale May Be Last Until January: Brazil Credit

Bond offerings by Cia de Saneamento Basico do Estado de Sao Paulo and Telemar Norte Leste SA may mark the end of a record year in Brazilian issues as overseas borrowing costs rise.

Sabesp, as the country’s biggest water utility is known, sold $350 million of 10-year bonds yesterday while Telemar, the biggest land-line company, issued 750 million euros ($993.3 million) of seven-year notes, snapping a three-week drought and pushing issuance this year to $40.7 billion, according to data compiled by Bloomberg. Overseas debt sales from Brazil rose 62 percent from last year and exceeded the $26 billion from Mexico.

Brazilian companies may be reluctant to sell more bonds this month as Europe’s sovereign debt crisis and rising U.S. Treasury yields drive up borrowing costs for emerging-market issuers, said Andre Silva, co-head of Latin America debt capital markets at Deutsche Bank AG in New York. Yields on Brazilian corporate dollar debt have jumped 47 basis points from a record low on Nov. 4 to 6.11 percent, according to JPMorgan Chase & Co.

“It’s the end of the cycle for the year,” said Vinicius Pasquarelli, an emerging-market debt trader in New York at Tradition Asiel Securities Inc., a unit of Lausanne, Switzerland-based inter-dealer broker Compagnie Financiere Tradition SA. Borrowers “will probably come back only next year,” he said in a telephone interview.

The yield on the 10-year U.S. note climbed 20 basis points this week to 3.2, the highest since June, on speculation President Barack Obama’s decision to extend tax cuts enacted under his predecessor may bolster U.S. growth while worsening the nation’s budget deficit.

Ireland Bailout

The $1.3 billion raised by Brazilian companies this week was the most since the week ended Nov. 10, according to Bloomberg data. Issuance dropped last month after rising borrowing costs forced Ireland to seek an 85 billion-euro bailout from European governments and the International Monetary Fund and sparked concern the region’s debt crisis may spread to Spain and Portugal.

“Concerns on the U.S. economy, and on the Treasury side, and European peripheral concerns -- those are the two major macro drivers for diminishing risk appetite,” Silva said in a telephone interview. “The macro backdrop could deteriorate even further. That’s the dilemma people have. ‘Should we test the waters now in a less than ideal environment and beat the crowd, or wait for January and hope that the markets are going to be better?’”

‘Natural Hedge’

Telemar, based in Rio de Janeiro, paid 274.5 basis points, or 2.745 percentage points, more than German bunds on its first euro-denominated offering. The company borrowed in euros because it’s looking for a “natural hedge” to match its operations with Portugal Telecom SGPS SA, which agreed in July to invest as much as 8.4 billion reais ($4.9 billion) in Telemar to tap into Brazil’s wireless market, Chief Financial Officer Alex Zornig said.

“We didn’t want to risk waiting until next year,” Zornig said in a telephone interview in Rio de Janeiro. “We’re always looking to extend maturities and reduce cost. We took advantage of this end-of-year window to do this.”

Sabesp, based in Sao Paulo, paid 315.8 basis points more than similar-maturity Treasuries on its first international bond since 2006. Sabesp officials were traveling and unavailable for comment, the company’s press department said.

The yield premium on Brazilian dollar government bonds over U.S. Treasuries was unchanged at 168, according to JPMorgan’s EMBI+ index.

Default Swap

The cost of protecting Brazilian debt against default for five years rose one basis point to 110, 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 0.3 percent to 1.7055 per dollar at 6:30 a.m. New York time.

The yield on Brazil’s overnight interest-rate futures contract due in January 2012 dropped 5 basis points to 11.93 percent.

The average Brazilian corporate bond yield fell one basis point yesterday to 6.11 percent, according to JPMorgan’s CEMBI index.

Sabesp and Telemar were the first Brazilian issuers to sell debt abroad since Itau Unibanco Holding SA, Brazil’s biggest bank by market value, sold 500 million reais ($293.4 million) overseas on Nov. 16. Banco Bradesco SA, Banco Industrial e Comcercial SA and Banco BVA SA pulled offerings the same week after a slump in global markets and an investigation into alleged fraud at Banco Panamericano SA drove up borrowing costs.

‘Premium’

Sabesp and Telemar “had to access the market with some premium,” Leonardo Kestelman, who helps oversee $860 million of assets at Dinosaur Securities Inc. in Sao Paulo, said in a telephone interview.

Deutsche Bank expects Brazilian bonds sales to increase next month as investor demand picks up. The Frankfurt-based bank arranged $4 billion of overseas Brazilian debt sales this year, making it the fourth-biggest underwriter, according to Bloomberg data.

“There’s a question in the markets of whether you’ll be better off by waiting until early next year,” Silva said. “Investors have more clean balance sheets and more appetite to invest” in January, he said.

To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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