Decade’s Riskiest Debt at 12% Yields Enticing Junk Buyers
The hunger for returns from yield- starved investors is emboldening the riskiest Brazilian companies to try selling bonds at the highest rates in more than a decade.
Auto-parts maker Sifco SA is seeking to sell $200 million of 5.5-year bonds to yield about 12.75 percent, according to people familiar with the transaction. The interest rate would be the highest paid by a Brazilian corporate borrower since 2000, and comes after meatpacker Rodopa Exportacao de Alimentos & Logistica Ltda.’s sale of 12.5 percent notes in October. Chinese companies are also tapping into the demand, with six dollar-bond sales at coupons of 11 percent or higher since Sept. 1, compared with two in the first eight months of 2012.
Emerging-market issuers rejected by debt investors earlier this year are attempting to lure money managers as bond buying by central banks worldwide pushed down yields of corporate bonds to a record 3.38 percent last week. With growth in Latin America’s largest economy forecast to more than double next year, creditors who shunned Brazil’s speculative-grade sellers after at least $1.9 billion in overseas defaults in 2012 are boosting sales from junk-rated borrowers to $1.75 billion since October.
“As investors have sought higher yields in emerging markets this year, many of these types of credits have benefited by going to the market and refinancing,” Joe Bormann, a managing director at Fitch Ratings in Chicago, said in a telephone interview. Companies such as Rodopa and Sifco “need a stronger macroeconomic backdrop such as is being predicted for Brazil in 2013 so that their credit profile can strengthen.”
Overseas borrowing costs for emerging-market issuers rated below investment grade by Standard & Poor’s and Fitch have plunged 2.63 percentage points this year to 7.43 percent, according to data compiled by JPMorgan Chase & Co.
Globally, average corporate bond yields across all industries and rating categories fell to a record 3.38 percent on Nov. 8, data compiled by Bank of America Corp. show.
Sifco plans to sell the bonds, half of which mature after 4.5 years, to pay off shorter-term secured obligations and finance the tender of its $75 million of 11.5 percent notes due in 2016, according to three investors familiar with the transaction who asked not to be identified because they’re not authorized to speak publicly on the offer.
The securities would yield more than any other Brazilian overseas issue since 2000, excluding a post-default offering by Independencia SA in March 2010.
Sifco, based in Jundiai, Brazil, and Rodopa are rated B- by Fitch, just four levels above default. Issuers that share the rating had an average five-year default rate of 7.8 percent between 1990 and 2011, according to the rating company, more than double the 3.9 percent rate for companies rated BBB-, the lowest investment-grade ranking.
Rodopa scrapped debt offerings in April and September 2011 before selling its first overseas bond last month, while Sifco failed in efforts to market notes to investors in July during a six-month drought for Brazilian junk-rated issuers.
Speculative-grade companies are getting second and third chances to tap international markets as central banks from the U.S. to Japan expand bond-buying programs, pushing down corporate debt yields.
The Federal Reserve said Oct. 24 it will maintain $40 billion in monthly purchases of mortgage debt and probably hold benchmark interest rates near zero until mid-2015, while the Bank of Japan (8301) increased its asset-buying fund, its main policy tool, by 20 percent on Oct. 30 to 66 trillion yen ($830 billion).
“There’s less risk even over a two- to four-year time horizon that rates in developed markets will go up sharply,” Richard Segal, the director of the emerging-markets team at Jefferies Group Inc. in London, said in a telephone interview. “The thinking is, if you’re buying a relatively short tenor Eurobond, you should go for the highest coupon you can.”
Chinese property developers have sold $4.4 billion of dollar debt since the end of August with an average coupon of 7.85 percent. Half of the 12 issuers paid rates higher than 11 percent, data compiled by Bloomberg show.
Rodopa plans to use proceeds from its debut offer to lengthen its debt profile and finance expansion.
“Fund managers have the money and, as the crisis has lessened, they are more willing to pay attention to what a newcomer has to say,” Sergio Longo, the chief executive officer of Rodopa, said in a Nov. 9 telephone interview from Barueri, Brazil. “It doesn’t have to do solely with market conditions, but also because over time we delivered the results that we had forecast in our first attempt to sell debt.”
A Sifco spokeswoman didn’t respond to e-mail and telephone requests seeking comment.
Only seven other Latin American companies have sold dollar debt abroad with coupons paying 12 percent or more in the past five years, according to data compiled by Bloomberg.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell one basis point, or 0.01 percentage point, to 151 basis points at 10:40 a.m. in Sao Paulo, according to JPMorgan.
The cost of protecting Brazilian bonds against default for five years fell one basis point to 103 basis points, data compiled by Bloomberg show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
The real was little changed at 2.0455 per dollar. Yields on interest-rate futures contracts due in January 2014 increased one basis point to 7.36 percent.
While money managers will continue to snap up debt from the highest-quality junk issuers from Latin America, companies that share Rodopa and Sifco’s B- rating will struggle to find investors in the coming months, according to Jansen Moura, an analyst at BCP Securities LLC in Rio de Janeiro.
“The market is open for high-yield issuers, but not so receptive to the third- and fourth-tier companies,” Moura said in a telephone interview. “These two specifically are companies that no longer have credit availability in the domestic market. They are tapping foreign investors as a last option to sort out their liquidity issues.”
The outlook for faster economic growth in Brazil is making investors more willing to look at lower-grade issuers, according to Omar Zeolla, a fixed-income analyst at Oppenheimer & Co. in New York. Gross domestic product will expand 4 percent next year after rising 1.5 percent this year, according to the median estimates of economists surveyed by Bloomberg.
“There’s a sense the Brazilian economy is doing better,” Zeolla said in a telephone interview. “Investors will look at anything that has yield these days.”
To contact the reporter on this story: Boris Korby in New York at firstname.lastname@example.org