Brazilian Bonds Shunned by Structured-Note Buyers as Real Slumps

Sales of notes tied to Brazil’s sovereign bonds are off to their worst start in 13 years as investors turn their backs on deteriorating conditions in Latin America’s biggest economy.

Banks sold $11.8 million of the securities through Thursday, the least since 2002 and less than a third of the total for the same period last year, according to data compiled by Bloomberg. In all of 2014, banks issued $493 million of notes tied to Brazil and state-owned oil company Petroleo Brasileiro SA. This year, they’re on pace to sell less than $50 million.

Protesters swarmed the capital last weekend to rail against President Dilma Rousseff’s economic policies, which have been blamed for stalling growth and stoking inflation. Brazil’s economy will contract the most since 1990 this year, according to a central bank survey of economists and the International Monetary Fund. As a result, the cost of insuring against a Brazilian default has risen to an almost six-year high, while the real has sunk to its lowest level against the dollar since 2003.

“Brazil’s fiscal and macro situation has deteriorated considerably over the past year, and we do not yet see it bottoming in many aspects,” said Dev Ashish, Latin American strategist at Societe Generale SA in Bangalore, India.

Credit Agricole SA announced plans to sell $1.2 million of notes tied to Brazilian bonds on March 10, which would be just the third offering this year. The five-year securities, which settle March 24, pay a coupon tied to dollar swap rates, Bloomberg data show. Brazil’s Banco Itau BBA, last year’s biggest issuer of the notes with 23 percent of total sales, hasn’t done a single deal in 2015, Bloomberg data show.

Marcelo Serrano, a spokesman for Itau, and Karen Wilkens, a spokeswoman for Credit Agricole in London, didn’t return requests for comment.

Higher Yields

Investors previously flocked to the securities because of the high yields on Brazil’s investment-grade bonds and central bank support for the real. Last year, banks sold more notes tied to Brazil and Petrobras than to all other Latin American countries combined. Brazil was the second-most linked-to sovereign, after Russia.

Both Russia and Brazil have seen the price of their default swaps rise on the back of crashing oil prices and political turmoil. Swaps on Brazil traded at 306 basis points on March 19, while Russia’s was at 490 basis points. A basis point is one hundredth of a percent.

Petrobras Scandal

Russia and its state-owned entities made up $1.02 billion of the credit-linked note sales last year. This year, banks have sold just $28.6 million of securities tied to state-owned Russian companies and none tied to its government debt.

Total sales of credit-linked notes have fallen by almost half from the same period last year, to $4.63 billion, Bloomberg data show. Coupons on the notes come from selling default protection on the linked entity. Buyers of the notes are betting it won’t go bankrupt before the security matures.

Securities linked to Petrobras made up $180.2 million of notes sold tied to Brazil or its state-owned entities last year. The Rio de Janeiro-based oil producer has been all but shut out of bond markets and forced to sell units as it grapples with Brazil’s largest-ever corruption scandal. President Rousseff’s party has been accused of benefiting from the kickbacks, an allegation it denies.

Banks haven’t sold any of the notes denominated in reais this year as the currency has fallen 24 percent to 3.2919 per dollar. An official at Fitch Ratings said on March 17 that it’s reviewing Brazil’s investment-grade rating, with an announcement possibly coming in a few weeks.

Unrest in the country could “further complicate government efforts to restore investor confidence,” Mauro Leos, an analyst at Moody’s Investors Service, wrote in a March 18 research note.

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