When is a ratings downgrade good news? When your negative outlook had dragged on for nine months and had investors fearing much worse, of course.
At least, that is one conclusion to draw from Brazil’s well subscribed euro denominated bond issue yesterday.
Brazil’s macroeconomic problems are well documented (see front page). When Standard & Poor’s placed Brazil’s BBB rating on negative outlook in June 2013 the sovereign curve sold off heavily – even worse than LatAm peers during last summer’s EM debt rout.
It painted a grim picture for Brazilian credit. Spreads widened and new issue volumes plummeted. Indeed there was more international bond issuance from Mexico than Brazil in 2013.
But Brazil demonstrated that it still has serious clout in the capital markets yesterday. The sovereign shrugged off negative noise and some weakness in European markets on the back of turmoil in Ukraine and the Crimean peninsular to attract €2.7bn of demand for a seven year bond having announced a benchmark size trade.
One EM debt investor said that the bond markets had long considered a downgrade an inevitability, meaning it was already priced in. Investors’ focus had therefore moved to whether S&P would maintain a negative outlook after the downgrade – which would have placed the investment grade status of Latin America’s former star economy in imminent danger.
But a stable outlook was awarded, meaning Monday’s downgrade triggered a rally in the sovereign’s bond.
The borrower responded on Thursday by announcing its first euro trade since 2006 – a month since it completed a roadshow in Europe to update investors.
FAIR PRICE
The sovereign paid 20bp more in interest than where it could have funded in dollars. But though this looked generous from the point of view of some bankers not working on the deal, one bookrunner said it was a fair price for a borrower upon its return to the currency.
“You simply need to look at the overall objective,” the syndicate banker on the bond said. “This is Brazil’s first deal since 2006, and they’ve been on a roadshow to convey to investors that they will be a more regular euro borrower. Other more regular issuers might trade tighter, but this is their return.”
Bookrunners BB Securities, JP Morgan and Santander started execution with initial price thoughts in the 175bp over mid-swaps area for an SEC registered 2021 benchmark deal yesterday morning. They revised this to final guidance in the 165bp-170bp range and closed books at 1pm GMT.
Brazil eventually priced €1bn of bonds at 5pm GMT to yield 165bp over mid-swaps. The coupon was 2.875% with the re-offer price 99.464 to give a yield of 2.961%.
Debt capital markets bankers say LatAm sovereign euro curves generally trade just inside or slightly wide of their dollar bonds.
Petrobras also tried to put a positive spin on its downgrade. The state-owned oil company was downgraded at the same time as the sovereign but the headline on its website read “S&P revises Petrobras, maintaining investment grade rating”.