Brazil IPO Curse Tests Insurer Debut as Economic Growth Fizzles

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Chances are investors who bought into Brazilian new equity sales and held onto their shares over the past decade are feeling some buyer’s remorse.

Those stocks have performed poorly even as the Ibovespa doubled, Latin America’s largest economy posted the fastest growth in 25 years and the country won an investment-grade credit rating. Of the 103 initial public offerings on the Sao Paulo exchange since 2005, 73 now trade below their IPO prices, according to data compiled by Bloomberg. This 60 percent fail rate is higher than in China, Russia and Mexico, where more than half of the stock sales have brought gains to investors.

That isn’t a very encouraging scenario for insurance seller Par Corretora de Seguros SA, which will try to break an eight-month drought in Brazilian IPOs Tuesday. With the economy now heading to the biggest recession since 1990, the outlook for stock sales may be a lot more challenging than in the previous decade, according to money manager Fausto Gouveia at AZ Legan.

“If you want to lure people to stocks, you need economic growth, and the outlook for Brazil is not very exciting,” Gouveia, whose firm oversees 850 million reais ($275 million) of assets, said from Sao Paulo, adding that he wasn’t planning to buy Par shares in the IPO. “It’s a really tough time to be raising money through the equity market.”

Par Corretora’s press office didn’t return calls and an e-mail seeking comment on the IPO.

The economic slowdown is pushing both companies and investors from the IPO market as the outlook for stocks turns negative, according to Wagner Salaverry, a money manager at Quantitas Gestao de Recursos SA.

Economy, Valuation

Brazilian stocks have slumped 8.6 percent from this year’s high on May 5 amid concern the economy will slow further. Analysts forecast a contraction of 1.27 percent for Brazil’s gross domestic product this year and predict policy makers will boost borrowing costs to a nine-year high, according to a central bank survey released Monday.

While the benchmark stock gauge is trading above its five-year valuation average, the Ibovespa is still 27 percent below its November 2010 peak, according to data compiled by Bloomberg. The Ibovespa rose 2.3 percent Tuesday in Sao Paulo.

“For an IPO to happen, you have to convince both the seller and the buyer that they’re getting a good deal,” Salaverry, who helps oversee 15 billion reais at Quantitas, said by phone from Porto Alegre, Brazil. The firm isn’t planning to buy Par’s IPO, he said.

Petrobras Probe

Par’s shareholders are seeking to raise about 500 million reais in the first Brazilian IPO since October. That was a month before a bribery scandal at Petroleo Brasileiro SA shut companies out of capital markets. Caixa Seguros Holding, a unit of state-run lender Caixa Economica Federal, is one of Par’s owners and isn’t selling shares in the deal.

Par said in the offer prospectus that Gavea Investimentos Ltda agreed to buy 140 million reais in the sale, as long as the shares are priced between 11.25 reais and 11.60 reais each.

Par needs to convince investors that selling insurance through the branches of its owners would allow it to cut costs and boost profits, according to Rodolfo Amstalden, an analyst at investment-consulting firm Empiricus Research. That’s how Banco do Brasil SA’s insurance unit was able to raise 10.2 billion reais in the world’s biggest IPO for 2013. BB Seguridade Participacoes SA has doubled since going public.

Good Sign

“The experience with BB Seguridade was a good one,” Amstalden said in an interview from Sao Paulo. “It makes sense for Par to try to sell shares using the same strategy. It shouldn’t be seen as a sign that IPOs in general are picking up, but for the company itself, the results might be good.”

A successful sale for Par could be a good sign for Caixa Economica, which plans to take its Caixa Seguros unit public in October, according to people with knowledge of the subject who asked not to be identified. The lender seeks to raise as much as 10 billion reais by selling a stake in the insurance company, the people said.

Still, demand for IPOs in Brazil is so weak that only companies with links to the government are considering selling shares, said Salaverry. Par’s deal today and Caixa’s offering later in the year are a consequence of Brazil’s need to bolster its coffers, he said. Brazil announced spending cuts last month as it tries to manage the widest budget gap in 16 years.

“Those deals may happen because there’s an urgent need for the government to raise cash, not because it’s a good time to be doing it,” he said.

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