Brazilian Crapshoot?

In Brazil, they call it jeito. Roughly, it means "cleverness." On Jan. 21, Banque Indosuez and J.P. Morgan Securities Inc. launched a $200 million Eurobond offering for Brazil's state of Minas Gerais that was in the best tradition of Brazilian financial jeito. Even though Brazil and Minas Gerais, an industrialized southeastern province, are still technically in default on billions owed to Western banks, investment bankers seized on emerging-market mania to sell the unrated paper to institutional and individual investors as a public offering in Europe and a private placement in the U.S.

While the issue may not be the diciest emerging-market Eurobond deal ever to cross the Rio Grande, some experts say investors may be overlooking its risks.

Brazil still suffers from political chaos and a 2,600% annual inflation rate. A leftist victory in the Nov. 15 presidential election, which is a distinct possibility, could derail free-market reforms. An agreement on rescheduling Western bank loans has still not been implemented. And the central bank could conceivably seize foreign-exchange reserves, blocking other government entities from meeting their foreign obligations.

Peter L. Clark, vice-president of J.P. Morgan Securities, acknowledges that investing in developing-country debt, including the Minas issue, "is a risky business....People need to do their homework." But he contends that Brazil "is still relatively cheap," and that "they're getting an economic plan together."

Significantly, Minas Gerais beat Brazil itself back into the public-debt markets, doing so even before Brazil could complete the rescheduling of its $34 billion in bank debt, which is expected by Apr. 15, as called for in the Bush Administration's Brady Plan.

Moreover, the transaction represents the first time that a province of a Latin American country has raised long-term money in the Euromarkets since the debt crisis of the 1980s, although several state-owned companies have already tapped the market. With this deal, says Alfredo M. Viegas, vice-president at Salomon Brothers Inc., Brazil is "a little sneakily coming back" into the markets.

LAND OF ADVENTURE. The offering consists of two equal portions, one bearing a rate of 7 7/8% for five years and the other 8 1/4% for six years. As a sweetener, Minas Gerais tacked on three-year warrants giving investors the right to buy preferred shares in CEMIG, an 84% state-owned utility. Based on trading in the warrants, the five- and six-year bonds are yielding about 9.5% and 9.7%,


Asserting that Minas Gerais is one of Brazil's best-managed states, and CEMIG one of its best utilities, says Claude Marion ef Banque Indosuez,: "They can go to market with better credit than the state of S o Paulo or even the republic."

That said, investors could still be in for a roller-coaster ride.

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