Corporate debt issuers line up

  • 01 Jul 1997
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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 overseas.
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 high-yielding assets.
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 1995.
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 American region.
"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 them.
The desire for longer term debt is growing, causing a shift away from the Eurobond market and towards the US high-yield market.
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 bandwagon.
"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 market."
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 domiciled.
Issuers include NetSat, a joint venture start-up satellite TV company sponsored by News Corporation and Brazil's biggest media company.
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 itself.
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 629bp.
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 company.
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 RBS.
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 at 425bp.
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 Stanley.
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 unleveraged."
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 yield curve.
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 Eurobond.
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 proceeds.
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 10.75%.
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 US investors.
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," says Pelgrift.
"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 markets.
"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 the sovereign."
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 around 170bp.
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 maturity.
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 maturity.
Realising the shift towards the US investor base, Wall Street and non-US commer-
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 high-yield investor.
"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 US."
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 Camargo Correa.
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)

RankManagerAmt $NoShare %
1Chase Manhattan1,575.001320.05
3JP Morgan1,155.00814.70
4ING Barings685.3758.72
5Credit Suisse First Boston455.0055.79
6Merrill Lynch357.8754.55
7Lehman Brothers350.0024.45
9ABN AMRO Hoare Govett290.0043.69
10Crédit Agricole Indosuez153.0021.95
11Banco Santander150.0011.91
11Goldman Sachs150.0011.91
13Deutsche Morgan Grenfell130.0021.65
15=Bank of Boston100.0011.27
15=Salomon Brothers100.0011.27
18=Bear Stearns75.0010.95
18=Sanyo Securities75.0010.95
20Banco Bilbao Vizcaya50.0010.64
21Banco Finantia49.0320.62
22Crédit Lyonnais45.0010.57
23Prudential Securities20.0010.25
24=Banco Comercial Portugues15.9810.20
24=Banco Espirito Santo15.9810.20

Source: Capital Data Bondware

Top Brazilian private corporate bond issuers
(January 1 1992 to July 15 1997)

RankIssuerAmt $NoShare %
2Globo Comunicacoes e Participacoes658.0568.38
3Companhia Siderurgica Nacional600.0017.64
4Aracruz Celulose500.0056.36
6Ceval Alimentos380.0044.84
7Industrias Klabin de Papel e Celulose250.0043.18
9Metalurgica Gerdau230.0022.93
10OPP Petroquimica225.0022.86
11Companhia Petroquimica do Nordeste215.0032.74
12Cia Hering200.0032.55
13Occidente y Caribe Celular190.7412.43
14Multicanal Participacoes185.0012.35
15=Arisco Produtos Alimenticios150.0011.91
15=Camargo Correa150.0011.91
15=Lojas Americanas150.0011.91
21RBS Participacoes125.0011.59
22=Sociedade Algodoeira do Nordeste120.0021.53
23Petroquimica Uniao105.0021.34
24=Bahia Sul Celulose100.0011.27
24=Globex Utilidades100.0011.27
24=Gradiente Electronica100.0011.27

Source: Capital Data Bondware

  • 01 Jul 1997

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 417,651.57 1605 9.04%
2 JPMorgan 380,255.75 1735 8.23%
3 Bank of America Merrill Lynch 360,270.83 1308 7.80%
4 Goldman Sachs 268,034.61 924 5.80%
5 Barclays 267,242.43 1081 5.79%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 45,449.36 196 6.57%
2 BNP Paribas 38,734.80 217 5.60%
3 Deutsche Bank 37,615.10 139 5.44%
4 JPMorgan 34,724.19 118 5.02%
5 Bank of America Merrill Lynch 33,835.53 112 4.89%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 22,475.00 105 8.66%
2 Morgan Stanley 19,057.00 101 7.34%
3 Citi 17,812.08 111 6.86%
4 UBS 17,693.89 71 6.82%
5 Goldman Sachs 17,332.64 99 6.68%