Since the Rio de Janeiro state pension fund RioPrevidencia sold $1.1bn of debt backed by oil royalty payments on November 14 — the day after the Lava Jato corruption scandal exploded into the public conscience — Brazilian private sector companies Marfrig, Cosan and JBS have tried and failed to issue dollar debt. None have been successful. Brazilians are clearly taking this dry January thing rather too seriously.
While frequent borrowers such as Odebrecht have been implicated in the police investigation and are clearly unable to issue, other candidates for issuance find themselves caught up in almost impossible conditions, with volatility meaning pricing any EM bond is a tough job — let alone a Brazilian one.
This is where the sovereign needs to step in. Bankers have been saying that the Republic had its eyes on a January issue since before Christmas.
Mexico and Colombia have both sold dollar deals at record low yields to show markets are well open; Brazil’s only possible fear can be that the volatility means it would have to pay too much of a new issue premium.
But this is a misguided way of thinking. For a start, US Treasury yields are dropping by the day, with the 10 year closing at 1.68% on Monday — its tightest level since May 2013.
Brazil will likely have to pay at least 30bp wide of its existing curve to sell new debt , and bankers not on the deal will no doubt raise faux outrage that Latin America’s largest borrower had to pay up so much. But a few basis points on one deal will not have a material effect on government finances, and in any case would be cancelled out by the low Treasury yields, which will not last forever.
Fortunately, larger private companies such as Vale are not in great need of funds. But bankers report a string of companies, particularly in the double-B rating category, who are eagerly looking to finance themselves when the chance is there.
Amid his attempts to woo markets once again, new finance minister Joaquim Levy has spoken of the need for private sector companies to fund more in the capital markets rather than via the public sector lender BNDES. This is a worthy aim, but it is unrealistic to expect some unfortunate high yield company to take a further hit by paying extortionate rates to be the brave soul who reopens the market.
Brazilian companies need the government to issue a new benchmark bond priced to trade well in order to give issuers an idea of what they’d have to pay in terms of premium, and to start a sense of decoupling the rest of the country from the Petrobras crisis.
Investors have money to put to work, Brazil is too large a part of portfolios to be ignored for too long, and low base rates mean that even an apparently embarrassing new issue concession would not be too onerous. Now is time to reopen the markets.
By waiting — and forcing unrelated companies to suffer the apparently unending uncertainty surrounding Petrobras — Brazil is doing more harm than good.