As the only Latin American corporate issuer in the cross-border dollar debt markets this week, Bradesco had the limelight to itself, and demonstrated the depth of demand for Brazilian financial paper. It was the banks first issue of subordinated debt in dollars since May 2005.
Rated BBB-/Baa2, the notes attracted almost $4bn of demand. Lead managers Banco Bradesco, Bank of America Merrill Lynch, HSBC and JPMorgan priced them at 99.622 with a 5.9% coupon to yield 5.95%, or 311.9bp over US Treasuries.
Bradesco had called its $300m 8.875% perpetual non-call five bond at its first call date in June this year. The bond had been sold in May 2005 with the expectation that it would count towards tier one capital, but regulations introduced later meant it could only count as tier two. "Its a high cost to maintain tier two at 8.875%," Marlene Millan, director of Bradescos international department, told EuroWeek in June. "We could have tier two at a much better price."
As a result, this weeks tier two issue with its 5.95% yield was "cheap for the issuer" compared to its previous
subordinated debt issues, said a banker on the deal.
Brazils second largest bank by assets grabbed $1bn of demand in less than an hour after the leads released official price guidance for a benchmark transaction of 6% area on Monday morning.
Cash to spare
A banker on the deal said the notes offered a 12bp concession over Bradescos October 2019s. "The strong demand we received from 270 accounts shows just how much cash there is on the sidelines and investor attention for all things Brazil, even in a holiday week," the same banker said.
The deal was opened up overnight for Asian accounts with a $100m greenshoe option that was four times oversubscribed. In total, North American investors bought 40% of the deal, Europeans 30%, and Latin Americans and Asians 15% each. Real money investors and "high quality private bank portfolios" snapped up most of the paper, said bankers on the deal. The bonds traded up to par on the break.
"This weeks deal shows how other Latin American banks with high coupon perpetual bonds should come to the market for refinancing purposes, given the low cost of capital raising," said a Latin American syndicate banker in New York.
Buoyed by Bradescos success, bankers are busy pitching Itaú Unibanco and Banco do Brasil, which have benchmark perpetual bonds that are callable.
But in general, "Brazilian banks are not in a rush to come to the subordinated debt market, given their high capital cushions," said the head of Latin American debt capital markets at a Wall Street investment bank. The countrys banks have an average capital adequacy ratio of 18.2%, compared with 14.3% in the US, according to Bank of America Merrill Lynch.
In its second quarter results, Bradesco reported a tier one capital ratio of 13.9% and a tier two ratio of 2.1%. It expects to be able to reduce its capital allocation for market risk if the Brazilian central bank approves its application to use internal market risk models for capital allocations under Basel regulations.
The results, published in July, showed net income had increased by 14.3% from the first quarter, reaching R$2.45bn ($1.4bn). Equity analysts at Barclays Capital said the results were better than expected, due to lower loan loss provisions. "Brazilian banks remain in the sweet spot of decent credit growth, stable margins and especially better asset quality," the bank wrote.
Chill steals over market
Despite Bradescos success, investors appetite for emerging market risk weakened this week as developed equity markets tumbled on Wednesday due to concerns about US growth. Analysts predict Latin bonds will continue to outperform US high yield paper in the coming months, but the primary markets will not be insulated if global market distress kicks in.
"With the equities slowdown this week, I dont think any other issuer will come to the market over the next three weeks," said Bevan Rosenbloom, Latin American corporate debt analyst at RBS.