Corporate debt issuance from Brazil is set to boom. The funding
needs of the country's newly privatised companies will require
access to the broadest spectrum of international capital markets,
while many of Brazil's fast-growing corporates need longer term
financing than the domestic market can provide.
With debt costs in international markets now well below those on
offer at home, companies are keen to establish their names
Investors, particularly in the credit-conscious and yield-hungry US
market, are looking for new sources of diversification and return
on their debt portfolios.
And international investment and commercial banks are gearing up
their corporate debt capabilities, believing this to be the next
growth sector in a market that has so far been dominated by
sovereign, quasi-sovereign and bank bond issuance.
BRAZILIAN corporates are lining up to tap the international debt
markets on an unprecedented scale, hoping to capitalise on the
buoyant sentiment towards Brazil and the hunt by investors for
In the first six months of this year private sector Brazilian
corporates raised $1.525bn worth of debt in the international
capital markets, compared with $2.6bn for 1996 and just $875m in
But this is just the tip of the iceberg, say bankers.
Thanks to privatisation and moves by the country's biggest
companies to secure market share in high growth sectors such as
media and telecommunications, Brazil is on the brink of a corporate
debt issuance boom that looks set to dwarf the rest of the Latin
"The potential for funding needs is absolutely huge," says Jim
Pelgrift, managing director and head of emerging market fixed
income at Morgan Stanley.
"Privatisation in the electricity and cellular phone sectors are
the two biggest factors right now. Basically that creates two
potential needs: in the case of the cellular companies, the bidding
consortia will need acquisition funds (to buy the band 'B' licences
being auctioned) and that runs into billions of dollars - people
are expecting in aggregate about $4bn-$5bn. Then there are the
needs thereafter for capital expenditure."
The sheer volume of funds required, not only from newly privatised
entities and their buyers but also from well established corporates
looking to expand, is precipitating a major shift in the markets
that Brazilian issuers tap for funds - and how underwriters serve
The desire for longer term debt is growing, causing a shift away
from the Eurobond market and towards the US high-yield
That is in turn creating opportunities for new debt underwriting
players that can use their high-yield debt distribution
capabilities as a way of jumping onto the Latin debt issuance
"There is no question that issuers' interest in the US high-yield
market will get bigger," says Pelgrift. "The need for financing
coming out of Brazil over the next several years - whether it is
privatisations or just organic growth and need for capital
expenditure - is going to be too large to be absorbed by a
[European] retail bond market and there isn't any choice for a lot
of these issuers other than to go to the US high-yield
Increasing numbers of Brazilian companies making their debuts in
the international markets are now doing so in the US high-yield
rather than the Eurobond market, since the US investor base is more
institutionally based and far more advanced in corporate credit
analysis than European investors.
Although most deals are Euro-144A bond issues, an increasing
portion of them are being placed solely with US investors,
especially those which are in the telecom and media sector and
would be considered 'junk' bonds no matter where they were
Issuers include NetSat, a joint venture start-up satellite TV
company sponsored by News Corporation and Brazil's biggest media
Although the cost of coming to market was large for NetSat, the
fact that such an emerging market company with no corporate history
could come to the international markets at all was a feat in
In July last year the company raised $200m in 10 put five year 144A
high-yield bonds carrying a 12.75% coupon and launch spread of
Part of the proceeds were put in escrow to prefund the first few
years' interest payments, since the market at the time would not
accept a zero coupon bond structure from an emerging market
Other telecom and media companies out of Brazil have also been
successful in raising money in the high-yield market, including
Multicanal, TV Filme, Paging Network do Brasil, Tevecap and
Access to the high-yield investor is not exclusively the domain of
companies in the favoured sectors of media and telecom. Electric
utility Copel and food firm Arisco Produtos Alimentiçios have also
tapped the high-yield investor base in the US.
Spreads have come down considerably for corporate issuers since
1996 as sentiment towards Brazil has improved and as credit spreads
have become compressed. In May this year, for instance, Arisco
launched a $150m eight put five year 144A deal with Goldman Sachs
Maturities have also lengthened. In June JP Morgan broke new ground
with the launch of a $600m 10 year deal for steelmaker CSN - the
first straight 10 year corporate deal yet from Brazil and the
biggest single-tranche Latin American corporate bond.
The offering was priced at 275bp over Treasuries, representing a
25bp pick-up over the 10 year Brazilian sovereign curve.
The deal was originally targeted to raise $300m but was increased
to $600m because of a significantly oversubscribed book totalling
$1.5bn. About 85% of the CSN deal was placed with US investors and
the rest with European and Asian investors.
Other large corporate deals in recent weeks have included a $400m
10 put five year deal for top private sector conglomerate
Votorantim, led by ING Barings; a similarly structured $300m issue
for electricity distributor CESP, led by JP Morgan; and a $350m 10
year bond for fellow electricity distributor Escelsa, led by Morgan
Several other Brazilian corporates are also lining up international
bond financings, believing that the opportunities to lock in
low-cost term funding have rarely been better.
Brazilian corporate debt issuance has up until now lagged behind
Argentina and Mexico for a number of reasons - not the least of
which is, that having lived with decades of high inflation up until
the 1994 introduction of the Real plan, Brazilian corporates have
understandably preferred to keep debt off their books.
"A high inflationary economy brings by definition a very short term
mentality, so financial managers have always thought short term,"
says one banker. "It was always very hard to get debt of any kind
extended in Brazil, so most Brazilian corporates have largely been
Besides, even if they did want to take on debt the costs were and
still are huge domestically - in the 20% to 30% per annum range in
recent years depending on the corporate. Even at these rates banks
and bondholders usually have the right to renegotiate terms every
three or six months.
Although all-in costs of issuing international bonds are lower,
many Brazilian executives are put off by the fact that they still
usually have to pay more than comparable Argentine and Mexican
corporates because Brazil has a less developed sovereign dollar
But that is changing as the Republic of Brazil seeks to create a
complete yield curve through its dollar bond issuance. And bankers
are confident that the Brazilian overseas bond market - which has
long been dominated by banks raising funds to on-lend to their
corporate customers at huge spreads - will increasingly start to
take on a corporate flavour.
Brazilian corporate plain vanilla Eurobond issuance really only
began in earnest in 1993, when Iochpe-Maxion, an industrial
conglomerate, launched a $45m two year and six month
Despite having guarantees from local banks, the borrower was still
required to pay a spread of 778bp over US Treasuries.
By September 1994 things had improved and Iochpe-Maxion was able to
issue eight put five year Eurobonds at 500bp.
But just as corporate issuance started to get going, Mexico
devalued its peso and the markets shut down until April 1995.
By then investor confidence had been so decimated that even CVRD,
the then state-owned Brazilian blue chip mining conglomerate, had
to pay an effective spread of 287.5bp for $150m of 10 month
floating rate notes.
Also, Brazilian companies have had to go to painstaking lengths to
get their names known in the international markets - as its biggest
media group, Globo, has shown. Globopar, the group's TV cable
holding company which is looking for significant capital
expenditure funds over the next several years, had to prime the
market for more than a year with small, short dated issues before
it could make its proper international bond debut with an eight put
two year deal in October 1995.
The company began its fundraising exercise in June 1994 with a $50m
private placement of 175 day paper at Libor plus 398bp, followed by
a $85.5m issue off its ECP programme of 175 and 180 day paper at
Libor plus 500bp in March 1995.
In May 1995 it issued $10m of 180 day paper at Libor plus 400bp and
$30m of 10 month paper at Libor plus 400bp. The eight year deal was
structured with two, three and five year puts and three and five
year calls to appease investors wanting only a short exposure, and
to provide Globopar with the ability to call and refinance the debt
when markets improved.
Although Eurobond deals usually had an eight year maturity, that
was only to avoid onerous Brazilian taxes on Eurobond
Most have three and/or five year put and call options since, until
only very recently, Eurobond investors would not buy anything
longer and Brazilian corporates were reluctant to lock in large
debt servicing costs.
Globopar's first Eurobond issue was priced to the first two year
put at a spread of 500bp over Treasuries at a yield of
Thereafter the yield rose with the tenor, providing a yield to the
three year put of 10.987% (a spread of 515bp); a yield to the five
year put of 11.486% (558bp); and a yield to the eight year maturity
of 12.027% (600bp).
Since then Globopar has taken advantage of a rising US investor
appetite for Brazilian corporate debt to issue longer term debt at
steadily better spreads.
In December 1995 Globopar issued a $151.3m eight put and call three
year floating rate note in Portuguese escudos at an effective
spread of 435bp.
It followed that up in June 1996 with a $100m 10.625% eight put and
call three year Eurobond, and then a $50m two year Eurobond in
September last year at 297bp.
In December 1996 it issued its first bond predominantly targeted at
the US high yield market: a $250m 10.5% 10 year non call five 144a
deal at 438bp.
The offering was essentially sold as an institutional deal and was
taken up by emerging market specialists and cross over high-yield
Like a lot of Brazilian corporates, Globopar has tended to embed
short dated puts and calls into its bonds, not so much because it
has been concerned about investor appetite as because of the
company's own belief that it will be able to get better spreads as
time goes on.
That mentality, however, is changing, says Morgan Stanley's
Pelgrift, especially after Brazilian borrowers witnessed the many
liquidity problems that Argentine and Mexican corporates suffered
after the Tequila crisis.
"The Tequila crisis focused people's attention on the fact that
market conditions are not always there to roll over your debt,"
"Companies in emerging markets, where the possibility exists of a
major shutdown of markets, have been extending their maturities and
putting in layers of long term debt to ensure they have the
liquidity when they need it."
The central bank has been keen to build a sovereign debt yield
curve to improve the pricing of Brazilian corporate issues ahead of
a wave of newly privatised companies coming to the international
"If you don't have a benchmark it is
difficult to make a fair value assumption in terms of which is the
real spread for the company," says Andres Rojo, head of JP Morgan's
New York emerging markets debt syndicate desk.
"If you have a clear curve like Mexico and Argentina then you have
to assess whether the company is worth more, the same or less than
Last year Brazil made its debut in the dollar market with a five
year global bond launched at 265bp which was trading in mid June at
At the peak of the market last year Chase underwrote a landmark
$375m five and 10 year Euro-144A deal for Petrobras, providing the
market with the first quasi-sovereign benchmark at the 10 year
Petrobras' $125m five year tranche was placed at 250bp over
Treasuries and the 10 year at 350bp over.
But so far the sovereign has not tapped the 10 year sector itself,
with the result that only government-guaranteed issuers like
Petrobras and Eletrobras - and the quasi-government Banco do Brasil
- can provide any pricing reference for corporates at that
Realising the shift towards the US investor base, Wall Street and
cial banks involved in Latin debt underwriting are all jumping onto
the high-yield bandwagon.
Relative newcomers and smaller players
in the Latin corporate debt underwriting
game are now making inroads by arguing
that they have a better ability to structure deals that most appeal
to US high-yield investors.
These include Smith Barney, Donaldson, Lufkin & Jenrette, Bear
Stearns, Lehman Brothers and Bankers Trust.
All of them are chasing the Latin corporate debt mandates and many
are arguing that while they might not have the sort of Latin
American underwriting experience of their largest Wall Street
peers, they know how to structure deals that will appeal to the US
"One big advantage we have is the strength of the high-yield
business," says Jeff Irwin, senior managing director and head of
the emerging market group at Bear Stearns.
"One of the things we have been able to do with that is bring more
of the cross-over investors who invest in technology and other
typically high-yield sectors and who can be attracted to a
technology story in Brazil as well as a technology story in the
Arguably the most successful of the relative newcomers is Morgan
Stanley. The firm has historically been a very small player in
Latin American sovereign debt underwriting, at least compared to
heavyweights like Credit Suisse First Boston, Merrill Lynch,
Deutsche Morgan Grenfell, JP Morgan, Goldman Sachs, Chase, SBC
Warburg, ING Barings and Citibank.
But in Latin corporate debt issuance it is now among the main
underwriters, largely due to its pioneering efforts in taking
Latin issuers to the US high-yield market.
Since its landmark deal for Mexican issuer Televisa, Morgan Stanley
has led the way in innovative new corporate bond structures for
Brazilian issuers. It was the first, for instance, to structure a
bond that provided interest rate payment relief for NetSat.
Providing high-yield capabilities is only one part of a new push by
investment and commercial banks to deliver the much-vaunted
one-stop shopping package of debt and equity financings for
Brazilian and other Latin American corporates.
The current rash of privatisations and creation of new start up
companies in need of huge funds makes Brazil a perfect target for
this kind of financing package - from syndicated loans, through
high-yield debt issuance to equity financing.
"One-stop shopping may sound like a cliche but it is very powerful
for corporate clients and especially emerging market corporate
clients," says one banker in New York. "The amount of due diligence
and documentation that major projects require are extremely time
and effort intensive and they are also expensive. To be able to do
it in one place with one team is a godsend."
Those investment banks that do not have lending capabilities argue
that chief financial officers will still look to get the best price
for each piece of the capital structure.
But already, with the sale of the 10 Band B cellular licences in
Brazil, the lending ability of the commercial banks is providing
them with a competitive advantage in meeting the billion dollar
capital requirements needed by the successful bidders.
In June BankAmerica Corp won the first deal of its type, when the
bank was mandated to arrange a $1bn eight year financing facility
for one of the Band B bidding consortia, Avantel Comunicacoes
Pessoais SA. The facility will be used to bid for the cellular
telephone network licence.
The eight year facility is guaranteed by the operating members of
the group that owns Avantel - including AirTouch Communications
Inc, Unibanco, and two large Brazilian conglomerates, Odebrecht and
The winning companies will have capital requirements for years to
come and it is likely that future financings will be conducted
through syndicate members.
Already the Wall Street investment banks are starting to muscling
in on the loan syndication business, hoping to provide stiffer
competition to the commercial banks.
And it is clear that, with corporate funding needs in Brazil set to
soar for the foreseeable future, the time to start establishing
banking relationships is now. EW
Top lead managers of Brazilian private
corporate bond issues
(January 1 1992 to July 15 1997)
|Rank||Manager||Amt $||No||Share %|
|5||Credit Suisse First Boston||455.00||5||5.79|
|9||ABN AMRO Hoare Govett||290.00||4||3.69|
|10||Crédit Agricole Indosuez||153.00||2||1.95|
|13||Deutsche Morgan Grenfell||130.00||2||1.65|
|15=||Bank of Boston||100.00||1||1.27|
|20||Banco Bilbao Vizcaya||50.00||1||0.64|
|24=||Banco Comercial Portugues||15.98||1||0.20|
|24=||Banco Espirito Santo||15.98||1||0.20|
Source: Capital Data Bondware
Top Brazilian private corporate bond
(January 1 1992 to July 15 1997)
|Rank||Issuer||Amt $||No||Share %|
|2||Globo Comunicacoes e
|3||Companhia Siderurgica Nacional||600.00||1||7.64|
|7||Industrias Klabin de Papel e
|11||Companhia Petroquimica do
|13||Occidente y Caribe Celular||190.74||1||2.43|
|15=||Arisco Produtos Alimenticios||150.00||1||1.91|
|22=||Sociedade Algodoeira do Nordeste||120.00||2||1.53|
|24=||Bahia Sul Celulose||100.00||1||1.27|
Source: Capital Data Bondware