Latest Symptom of Brazil's Misery: Once-Great IPO Market Is Dead

  • Brazil's lone IPO this year raised just $229 million
  • Three other would-be issuers postponed plans to go public

Brazil’s IPO market is dead.

Once the hottest emerging market for initial public offerings after China, Latin America’s biggest economy isn’t even in the top 15 anymore. The nation’s lone IPO this year -- FPC Par Corretora de Seguros SA -- brought in just $229 million. That’s less than the amount raised in markets like Poland or Trinidad & Tobago and it’s not even 1 percent of the total from 2007, the very peak of Brazil’s go-go days. Three other would-be issuers -- all of them state-backed -- have scrapped their plans to go public in 2015.

It’s a dramatic turnaround for a country that was once the place to be for foreign investors seeking to take advantage of massive oil discoveries, surging agricultural exports and an up-and-coming consumer base that’s the second largest in the Americas. These days, Brazilian companies are more likely to de-list than go public as a sweeping corruption scandal, a crippling recession and political turmoil wipe out $290 billion in market value this year alone. Fitch Ratings on Thursday cut the nation to the cusp of junk, the fourth downgrade under President Dilma Rousseff’s watch.

"We’ve gone through bad scenarios before, like the 2009 global crisis, but this problem is all Brazilian -- we created it," said Fausto Gouveia, a money manager at AZ Legan, which oversees about 1 billion reais ($260 million). "The window for IPOs is closed, and I don’t see that changing in the next year."

Recession, Unemployment

Across emerging markets, the value of priced IPOs has dropped 27 percent to $48 billion this year as the commodities bust and specter of rising U.S. interest rates prompt investors to flee riskier assets.

Brazil’s collapse has been especially striking. The economy is forecast to shrink almost 3 percent this year, followed by a 1.2 percent contraction in 2016, which would be the longest recession since the Great Depression. Add to that unemployment that has crept up to 7.6 percent and inflation that’s running close to 10 percent. All of that has sent the Ibovespa tumbling 36 percent this year in dollar terms, the most among major indexes worldwide.

Until this month, bankers and issuers had held out hope that a few more transactions could still get done before the end of the year. But in the past month, insurance companies Caixa Seguridade Participacoes SA and IRB Brasil Resseguros SA postponed their plans, the latter according to a person familiar with the matter who had asked not to be identified discussing private matters.

Investment Banks

BR Distribuidora, the gas-distribution unit of embattled state oil giant Petroleo Brasileiro SA, also put off a deal, another person said. Petrobras said in a statement that it’s seeking a strategic partner for the business.

Par Corretora, the sole IPO of the year, has declined 18 percent since its debut in June, or 33 percent in dollar terms, data compiled by Bloomberg show.

The downturn has hit Sao Paulo’s investment bankers hard. Foreign banks including UBS AG and Barclays Plc trimmed their Brazilian teams starting in 2013. Another one of banks’ core businesses in Brazil -- mergers and acquisitions -- is set for the worst year in a decade. Perhaps the only growth segment in the nation’s investment banking industry is restructuring. Rothschild & Co. and G5 Evercore are among firms adding bankers as companies struggle under foreign debt taken on during the boom years of the past decade, according to two people familiar with the matter.

‘Corporate Governance’

At the heart of Brazil’s troubles is a graft scandal that spread from Petrobras to builders, service providers and politicians and leftRousseff fighting for her political survival. That’s fueling investor concern that corporate misconduct is widespread, said Josef Schuster, who invests in IPOs through his company Ipox Schuster LLC.

"The corporate governance situation has been a problem in terms of enticing foreign investors to look at deals," he said from Chicago. "Given that Brazil has done miserably in terms of the overall market, obviously the IPO market is going to do poorly as well."

Brazil’s IPO market is unlikely to rebound anytime soon as cautious investors will continue to shun new deals in favor of better, less speculative opportunities in stocks that already trade, said Marcio Guedes, a Sao Paulo-based investment banker with Pangea Partners.

Brazil’s Ibovespa now trades at 10.9 times projected earnings over the next 12 months, below the average for the last three years. The benchmark index rose 1 percent to 47,159.80 at the close of trading in Sao Paulo.

"Anybody who is interested in Brazil is going to look at the stock exchange, not at IPOs," Guedes said. "How can I justify buying at a price that’s actually higher than what I can get on the exchange?"

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