Brazil plans to expand its government borrowing into Japanese yen and has found strong interest from investors in Japan, said Paulo Valle, Brazil’s deputy treasury secretary, in the wake of the sovereign’s first euro denominated bond since 2006 on Thursday.
Valle visited Japan in December and told Emerging Markets that “100%” of investors he spoke to asked the country to issue bonds.
Brazil is now studying the possibility in more detail and going through documentation, and could potentially issue as early as this year.
The bond would be part of a diversification of funding strategy that manifested itself in this week’s €1bn seven year issue in the euro market. Brazil attracted €2.7bn of demand from 155 investors for the deal, managed by Banco do Brasil’s BB Securities, JP Morgan and Santander.
Bookrunners tightened pricing from initial thoughts of 175bp over mid-swaps to a final spread of 165bp over. In the secondary market the note had tightened by 10bp on Friday afternoon, according to a bond trader in London.
“We don’t need to raise money, our funding is strategic,” said Valle. “Last year we perceived strong demand in euros so prepared an issue.
“We started at seven years but could certainly go into longer maturities later.”
After Standard & Poor’s decision to downgrade Brazil on Monday, the sovereign waited to see the market reaction ahead of issuing.
Brazilian assets rallied on the announcement, and Valle said this showed the market’s confidence that the country’s new primary surplus target of 1.9% of GDP was feasible. Just before its investor roadshow began in February, Brazil announced R$44bn ($19.5bn) of spending cuts.
“It’s very clear that there’s no discussion over the investment grade rating,” said Valle. “In my view the uncertainty for investors lies in fiscal matters and the election.”
Brazil’s treasury reported a central government deficit of R$3.1bn ($1.4bn) for February on March 27, the day of the bond, down from a surplus of R$13bn in January. But Valle said this was a “seasonal” number at the investors were interested in the year as a whole.
MORE EURO SUPPLY
With a basis swap at inviting levels, private sector Brazilian issuers could now follow Petrobras, BNDES, Banco do Brasil and now the sovereign into the euro market, said one syndicate banker at one of Brazil’s bookrunners.
“European corporate issuance has just hit its highest volumes for one week since 2009,” said the banker. “With the huge levels of liquidity and appetite in the European market, and now there is clarity over Brazil’s rating, there will definitely be interest from not only Brazil but also Latin American issuers in euros as they look to diversify their funding.”
Mexico is on a roadshow visiting bond investors ahead of a potential euro-denominated issue.
Though Standard & Poor’s downgraded Brazil on Monday, the picture is more attractive for bond investors than in fellow BRIC, Russia, said the syndicate banker.
Valle added that he hoped Brazil’s movements in capital market eased access for Brazilian corporates especially in infrastructure, with a “big challenge” ahead for investment in the sector.
Two thirds of the demand for Brazil’s euro issue came from European investors, with the Americas taking 32% and Asia 1%.