IPO Surge Dries Up on World’s Worst Stock Drop: Corporate Brazil

Brazil’s initial public offerings are drying up after the best start of a year since 2007 as investors flee volatility in the world’s worst-performing major stock market.

No Brazilian company has completed a sale since renewable energy producer CPFL Energias Renovaveis SA raised 900 million reais ($387 million) in July. The Brazilian airline run by the founder of JetBlue Airways Corp. scrapped a plan to sell as much as 1 billion reais of shares last month after cement maker Votorantim Cimentos SA suspended a $3.7 billion sale in June.

The IPO market is reversing course after a spurt of seven sales this year valued at $7.8 billion as the Ibovespa slumped 18 percent from its Jan. 3 peak, the most among the world’s 20 biggest benchmarks. Globally, 13 offerings have been postponed in 2013 while 91 were withdrawn, according to data compiled by Bloomberg. Brazilian deals are unlikely to come back until price swings lessen, according to Joel Roberto, the head of investment banking at Deutsche Bank AG in Brazil.

“Foreign investors, who continue to provide a majority of the funding for most IPOs here, will remain cautious until this volatility subsides,” Roberto said in an interview at the bank’s main office in Sao Paulo. “Companies that don’t need to go to the public equity market now will wait until next year rather than accept discounted valuations.”

Ibovespa Volatility

The Ibovespa’s 90-day volatility reached a 10-month high in August. Foreign investors accounted for 42 percent of trading in Latin America’s largest equity market last month, the lowest level since February, according to data from the exchange. Foreign investors have injected 6.35 billion reais into Brazilian stocks this year through Sept. 2, the data show.

Azul Linhas Aereas Brasileiras SA, Brazil’s third-biggest air carrier by market share, said in an e-mailed response to questions after it canceled its offering on Aug. 19 that the decision was made because of “unfavorable macroeconomic conditions.”

Votorantim Cimentos said in an Aug. 12 statement that market conditions “reinforce the low probability of a window of opportunity for the offering in the short term.” The company’s IPO would have been the world’s second biggest this year after the Brazilian insurer BB Seguridade SA’s $4.2 billion offering in April.

Bear Market

The Ibovespa sank into a bear market on June 11 as inflation soared in Latin America’s biggest economy even as growth stalled. The central bank increased the country’s benchmark interest rate and U.S. bond yields lured money away from emerging markets.

The Brazilian benchmark stock gauge gained 1 percent to 52,221.76 at 3:32 p.m. in Sao Paulo today.

Consumer prices rose 6.3 percent in the 12 months through July, and policy makers in August raised the target lending rate to 9 percent. Gross domestic product increased 1.5 percent in the second quarter, or an annualized 6 percent. While expansion exceeded estimates for the first time since 2011, analysts have been lowering projections as confidence among businesses and consumers drops below last year’s levels. Economists in a central bank survey this week forecast 2014 growth of 2.3 percent, down from 2.6 percent a month earlier.

Standard & Poor’s reduced the outlook on Brazil’s BBB credit rating to negative on June 6, citing sluggish growth, weakening fiscal accounts and the government’s loss of credibility with investors. Marcio Holland, economic policy secretary at the Finance Ministry, said after the move that there is “no change in economic policy and the environment is conducive to investment.”

Missing Opportunity

Companies that canceled or postponed IPOs had set price estimates too high as they looked for an opportunity “that’s just not there right now,” said Will Landers, the Princeton, New Jersey-based senior portfolio manager at BlackRock Advisors LLC. “Brazil is a big question mark in a lot of investors’ minds,” he said in interview on Bloomberg Television’s “Market Makers” on Aug. 20. “The IPO market in Brazil is not the most attractive place to be.”

Azul and Votorantim declined to comment when contacted by Bloomberg News.

Even as deals get canceled, Brazil will probably still see more offerings this year, according to Jose Olympio Pereira, chief executive officer for Credit Suisse Group AG in Brazil.

“The second half of the year will be weaker than the first because we probably won’t see a huge deal like the one from BB Seguridade,” Pereira said in an interview at the bank’s office in Sao Paulo. “The market will be very selective, but a bunch of good stories will be well accepted.”

New Filings

Ser Educacional SA, the Recife, Brazil-based education company, announced plans on Aug. 27 to sell shares, according to a regulatory filing. The company’s net income jumped 83 percent in the first half of 2013 compared to the same period last year, according to the filing.

Sao Paulo-based GAEC Educacao SA, known as Anima Educacao, also filed to sell shares. Net income at the education company jumped 67 percent in the first six months of 2013 from the same period last year, while revenues advanced 36 percent, according to the Sept. 3 filing.

Sascar Participacoes SA, a provider of services such as vehicle monitoring for the transportation industry, filed a request with regulators on Aug. 20. Revenue grew an average 23.8 percent between 2010 and 2012, while the country expanded 1.8 percent, the Santana do Parnaiba, Brazil-based company said in the filing.

Press officials for Ser and Sascar declined to comment further on the offerings. GAEC did not reply to a phone call and an e-mail seeking comment.

‘Pretty Depressed’

Even as smaller companies file for IPOs and Brazil’s main stock gauge rebounds, climbing 16 percent from this year’s low on July 3, most potential sellers probably won’t have enough confidence to test the market, said Sean Lynch, the Omaha, Nebraska-based global investment strategist for Wells Fargo Private Bank.

“Given that the markets are still pretty depressed, companies may take a pause,” he said in a phone interview on Aug. 29. “They’ll wait until they do get some certainty.”

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