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Gol Bonds Show Real Strength as Yields Fall Below Tam

Gol Linhas Aereas Inteligentes is beating its biggest rival, Tam SA, in the bond market as Brazil’s economic growth accelerates amid a four-month rally in the real.

Gol’s 7.5 percent bonds due in 2017 yield 7.69 percent, or 81 basis points less than Tam’s similar-maturity notes, after yielding 476 basis points more a year ago, according to data compiled by Bloomberg.

The relationship between the nation’s two largest airlines reversed because Gol gets 89 percent of its paid passenger miles from domestic business while Tam receives 41 percent of its miles from international business, according to April figures. The real’s 6.7 percent gain since Feb. 1 has reduced fuel and debt-servicing costs for Gol while hampering Tam’s revenue growth. The rally, the biggest among all currencies tracked by Bloomberg, follows a 33 percent surge in 2009.

“Right now Gol is doing better because more of its revenues are in reais,” said Roger King, an analyst at CreditSights Inc. who has covered airlines for 20 years. “Many of their costs are in dollars. When the real gets stronger, those costs become lower in Brazilian terms.”

Tam, Brazil’s second-biggest airline by market value after Gol, had its rating cut yesterday to B+ by Standard & Poor’s, which said its “business profile is weak” and that the company faces “fierce competition” in the industry.

Domestic Traffic

The yield on Gol’s $221 million of 2017 bonds has tumbled 49 basis points since the end of January, according to Bloomberg data. The yield on Tam’s $298 million of 2017 notes dropped 33 basis points over that time to 8.50 percent. The gap between the two securities reached 99 basis points last week, the biggest since March 22. Tam bonds last yielded less than Gol debt on Oct. 21.

Domestic air traffic in Brazil jumped 35 percent in the first quarter, almost triple the 13 percent gain in international travel, as the economy recovered from last year’s recession, the civil aviation agency reported April 14.

“Airplane travel demand in Brazil has gone crazy,” King said. “It’s a big success story.”

The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries widened two basis points to 198 basis points at 5 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI+ index. The yield premium on developing-nation debt shrank one basis point to 279 basis points.

Rising Rates

The real fell 0.1 percent to 1.7756 per dollar. It jumped 0.9 percent yesterday after retail sales rose the most on record, the latest sign that growth is quickening in Latin America’s biggest economy. Central bank President Henrique Meirelles lifted the benchmark lending rate last month to 9.5 percent from a record low 8.75 percent in a bid to stem inflation as the expansion picks up.

The yield on Brazil’s overnight interest-rate futures contract due in January was unchanged at 11.12 percent. That level implies traders expect Meirelles to raise the benchmark rate to over 12 percent by year-end.

The yield spread between Tam and Gol bonds should be smaller because the companies’ market share is similar, said Natalia Corfield, a corporate debt analyst with ING Groep NV in New York.

“Numbers-wise and strategy-wise, they’re each time more similar companies,” Corfield said. “The market has a better perception of Gol than Tam. I don’t see the reason fundamentally.”

Real Advance

Gol and Tam together control 83 percent of Brazil’s domestic air travel, with Tam leading with a market-share advantage of less than 0.5 percentage point, according to the civilian aviation agency.

Gol bonds will likely keep outperforming Tam securities over the next year, King said. The real will advance 3.2 percent more to 1.72 per dollar by year-end as the expansion lures investment, according to the median estimate from 19 analysts surveyed by Bloomberg.

Economic growth will climb to 6.3 percent this year, the fastest pace in 24 years, according to a central bank survey of analysts published this week. Itau Unibanco Holdings SA, Brazil’s biggest bank by market value, raised its growth forecast yesterday to 7.5 percent from 6.5 percent, citing a stronger global economy and measures to stimulate domestic demand.

‘Overall Outperformance’

Gol has also held up better than Tam in the equity market. Its shares are down 14 percent this year, compared with a 25 percent slide for Tam.

Gol’s bond and share movements have more to do with the company’s “overall outperformance in the last eight quarters” than the real’s rally, said Rodrigo Alves, the company’s investor relations general manager.

“We have been posting higher operating margins in the Brazilian airline industry, have lower leverage ratios and higher cash flow generation,” Alves said in comments sent by e-mail to Bloomberg News.

Gol and Tam are equally affected by currency fluctuations, according to Alves. While Gol has less dollar revenue, Tam has more debt in the U.S. currency, he said. An official with an outside media agency representing Tam declined to comment.

Gol’s operations may be hurt should the real slump, Chief Executive Officer Constantino de Oliveira Jr. said May 7. The company reported a day earlier that first-quarter profit fell 61 percent after the real fell 2.1 percent, increasing the cost of financing its dollar debt, in the January-to-March period.

Tam is slated to announce first-quarter earnings tomorrow.

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