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Santander’s ‘Main Bet’ Is Brazil’s Local Corporate Bond Market

  • Market could expand as much as 20% this year, bank says
  • Drop in benchmark interest rate fuels search for yield

Brazil’s $1.2 trillion fund industry is flocking to local corporate bonds in search of higher yields as benchmark interest rates decline, according to Banco Santander Brasil SA, the country’s biggest foreign lender.

“My main bet for the next 18 to 24 months is Brazil’s local-bond market,” said Rafael Bello Noya, who runs corporate investment banking at Sao Paulo-based Santander Brasil. The bank is the nation’s second-biggest underwriter of corporate bonds this year, after ranking third in 2016, according to data compiled by Bloomberg.

The market has started heating up as the nation’s economy crawls back from a record two-year recession and companies speed up sales to avoid issuing debt during the 2018 election year. Local corporate-bond issuance has surged 21 percent to 26.3 billion reais ($8.4 billion) this year, the data show.

A renewed bout of political turmoil threatened to derail that growth in May when President Michel Temer was embroiled in an alleged cover-up scheme involving the jailed former speaker of the lower house of Congress. The allegations make it more difficult to implement a reform agenda designed to pull Latin America’s largest economy out of its deepest recession on record.

As a result, “we’ve seen the repricing of some transactions” of about 20 basis points in some cases, “which isn’t much,” said Guilherme Silveira, head of debt capital markets for Santander Brasil. Silveira estimated that local corporate issuance, including corporate bonds and receivables-backed funds, will increase 10 percent to 20 percent this year, from 35 billion reais in 2016.

Fund Investments

Brazil’s fund industry mainly invests in government bonds. Of its total 3.76 trillion reais in investments, 2.56 trillion reais are in assets tied to federal government bonds, according to May data from Anbima, the capital-markets association. About 288.2 billion reais are in banking bonds, known as “letras financeiras,” and just 93.6 billion reais are in non-financial corporate bonds, the data show.

Noya expects those figures to change in coming months. Brazil’s benchmark Selic rate will probably drop to 8.4 percent by year-end and remain largely unchanged in 2018, compared with 13.75 percent at the end of 2016, according to forecasts compiled by Bloomberg.

Funds will need to beat their benchmarks by shifting to corporate bonds, stocks or alternative investments, Noya said, adding that he’s “convinced the local credit market will remain very strong.”

Starting next year, Brazil’s pension funds will also need to look into new investments in order to beat their return targets, since simply yielding the benchmark rate, known as CDI, won’t be enough.

Worsening risk perceptions created by political scandals have brought instability and price volatility, “but the fact is that capital is still available to Brazil big time,” Noya said.

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