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Hypermarcas Bonds a Buy to BTG as Yields Rise to Record High

Banco BTG Pactual SA is recommending investors buy bonds of Hypermarcas SA, Brazil’s third-worst performing stock this year, after the consumer company’s borrowing costs surged to a record high.

The 28-basis point jump in yields on Hypermarcas’ 2021 bonds to 6.78 percent yesterday was unjustified given it was driven in part by baseless speculation that the company used inappropriate financial adjustments, according to a report from BTG, the Brazilian bank led by billionaire Andre Esteves. The yields gapped to 120 basis points, or 1.20 percentage point, above comparable debt issued by Brasil Foods SA. BTG analysts said the yield spread should be between 50 and 70 basis points.

While concern that second-quarter earnings may miss estimates and sales growth will keep slowing contributed to the drop, BTG said Hypermarcas bondholders are “getting spooked by rumors with no real fundamental.” Shares of Brazil’s fifth-largest consumer goods company fell as much as 9 percent yesterday before erasing losses and climbing 1.4 percent.

“The bond market reacted immediately in the same direction” as the stock, said Leonardo Kestelman, who oversees $880 million of assets at Dinosaur Securities in Sao Paulo. “It’s a matter of credit, so if there’s no profit or if there’s a balance sheet issue, ‘Let’s sell the bond, let’s sell whatever asset is related to the company.’”

Stock Declines

Hypermarcas shares fell 1.5 percent to 10.93 reais in Sao Paulo trading at 9:46 a.m. New York time, bringing the decline this year to 51 percent. The yield on the 2021 bond rose 3 basis points to 6.81 percent, extending yesterday’s slump.

The stock’s retreat this year is the third-worst performance on the benchmark Bovespa index after airline Gol Linhas Aereas Inteligentes SA and B2W Companhia Global do Varejo, a unit of Brazil’s biggest discount retailer Lojas Americanas SA. In the month through yesterday, shares have fallen 27.2 percent, almost double the 14.5 percent decline in the Bovespa.

Before yesterday’s tumble, the bonds due in 2021 were yielding 6.5 percent, down from 6.75 percent when they were issued in April.

Yesterday’s declines followed worse-than-anticipated second-quarter earnings from Natura Cosmeticos SA, Latin America’s largest cosmetics company, on slower sales growth. Sao Paulo-based Hypermarcas, whose first-quarter net income fell 40 percent from a year earlier to 32.9 million reais ($21 million), is scheduled to report second-quarter results on Aug. 15.

Stock Valuation

Company officials declined to comment yesterday, citing a quiet period before earnings.

Hypermarcas, which sells foods, cosmetics and pharmaceuticals, trades at 15.8 times 12-month forward earnings compared with 8.9 times for the Bovespa stock index, according to data compiled by Bloomberg. Executive Director Gabriela Garcia said last month that after making 25 acquisitions in two years, Hypermarcas plans to focus on consolidation.

In a July 27 report on Hypermarcas, BTG analysts said they “think its equity underperformance is understandable (but maybe too exaggerated).” The company’s lower sales are the result of a change in commercial strategy and “should pick up again,” according to the report.

Bank of America Corp. lowered its forecast yesterday for Brazilian growth this year to 3.6 percent from 4.1 percent previously, and for 2012 to 4.2 percent from 4.6 percent.

U.S. Data

Concern about weakening U.S. economic data and the prospect of a recession is making high-yield corporate bonds more vulnerable to a sell-off, Kestelman said. “Liquidity is very thin on high-yield bonds, the market is not comfortable holding illiquid stuff under this scenario.”

Hypermarcas is rated BB- by Standard & Poor’s, three steps below investment grade.

Prices on Hypermarcas bonds due in 2021 plunged to as low as 97.2 cents on the dollar yesterday, according to data compiled by Bloomberg. At that level, “we are buyers,” the BTG analysts wrote.

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