Junk Chicken-and-Egg Bonds in Brazil Facing a Tough SellJulia Leite
Globoaves Sao Paulo Agroavicola Ltda., a family-owned poultry and egg producer, is seeking to persuade investors to buy its first overseas bond. The bid will probably fail, according to Oppenheimer & Co. and INTL FCStone.
Located 440 miles (708 kilometers) southwest of Sao Paulo in Cascavel, Globoaves is meeting with investors in the U.S., Europe and Latin America this week and next, said a person familiar with the matter. Fitch Ratings expects to rate the proposed $200 million, five-year unsecured notes B, five levels below investment grade.
While the company is trying to exploit demand for higher-yielding assets that’s tripled issuance of Brazilian junk debt to $5.1 billion this quarter, only one unsecured bond as lowly rated has been sold this year. Globoaves needs to pay at least 12 percent in interest to lure investors, said INTL FCStone’s Carlos Gribel. Paranapanema SA, a similarly-rated copper producer, pulled its debut sale of five-year bonds in April after offering a yield of 8 percent.
“I don’t know how much investors would be willing to go into a deal like this one,” Omar Zeolla, a corporate credit analyst at Oppenheimer & Co., said in a telephone interview from New York. “There is still a stretch for yield, but it probably doesn’t stretch that far.”
A Globoaves press official declined to comment on the bond sale.
The company hired BCP Securities LLC, Grupo BTG Pactual and Banco Santander SA as managers for the sale, according to the offering’s prospectus obtained by Bloomberg.
Globoaves, which raises hens, hatching eggs and one-day old chicks, plans to use the money to repay as much as 259.7 million reais ($116.6 million) of short-term debt, according to the prospectus. Its net debt has swelled 18 percent in the past year to 351.6 million reais in December 2013. At the end of the first quarter, about 76 percent of the company’s debt was short-term liabilities.
“They’ll have to be aggressive on the yield,” Gribel, vice president for emerging markets at INTL FCStone, said in a telephone interview from Miami. “With a five-year duration, they’d have to pay at least 12 percent to be successful. Below that, the chances of it going wrong are big.”
The Brazilian real fell 0.4 percent to 2.2370 per dollar at 1:17 p.m. in Sao Paulo today.
The last junk-rated company in Brazil to sell debut bonds abroad was sugar producer Aralco SA Acucar & Alcool, which issued $250 million of seven-year notes rated B in April 2013.
The company defaulted on the securities in March, after making just one interest payment.
Klaus Spielkamp, the head of fixed income at Bulltick Securities LLC, said recent junk-bond sales from companies and governments show demand for high-yield debt is still “very strong,” which will allow Globoaves to access the market. He expects the offering to yield about 9 percent.
The extra yield investors demand to own emerging-market high-yield corporate debt instead of similar-maturity U.S. Treasuries narrowed to 4.43 percentage points this month, the lowest since November 2007, JPMorgan Chase & Co. index data show.
Brazilian sugar and ethanol producer Grupo Virgolino de Oliveira SA sold $135 million of 2020 bonds June 9, less than two weeks after Fitch lowered its assessment to B-. Marfrig Global Foods SA, the Sao Paulo-based meatpacker rated B, issued $850 million of 2019 notes a day later. Similarly-rated Ecuador raised $2 billion with a debt offering June 17.
“The smaller and less known the company is, the harder it gets,” Spielkamp said in a telephone interview from Miami. “But they’ll manage it. It will take a bit more effort, but the appetite is there.”
While high yield, high-risk issuers have benefited as central banks around the world suppress borrowing costs, Globoaves will likely struggle to sell the bonds, according to Revisson Bonfim, the head of global emerging-markets analysis at Sterne, Agee & Leach.
“There’s still strong appetite for high-yield, but it’s not for any credit,” he said in a telephone interview from New York. “I’d be very surprised if a name like Globoaves managed to issue. If they did, it’s a sign the market is too hot.”