Debt capital markets bankers covering Latin America’s largest economy say that the “Brazil premium” is putting off even those Brazilian borrowers that are unaffected by the corruption scandal at Petrobras from issuing in international markets.
No Brazilian issuer has accessed international bond markets since Rio de Janeiro state pension fund RioPrevidencia sold $1.1bn of debt backed by oil royalty payments on November 14 last year — the day after the Brazilian police arrested several Petrobras executives linked to a bribery investigation.
Brazil’s absence from the markets has battered LatAm new issue volumes, which are below $25bn year-to-date versus $45.1bn in Q1 2014, according to Dealogic. In particular, borrowers are waiting for the state oil giant to issue audited financials, which it has not done since July.
“It is definitely a case of waiting for the full year results,” said one LatAm DCM banker. “There has been a bit of a rally in Petrobras and Brazilian sovereign bonds in the last couple of weeks but I don’t see the point in anyone re-opening the market until the results come through.”
Standard & Poor’s said on Tuesday that it would delay any rating action on the oil company until the end of April, and that should audited financial results not be forthcoming a downgrade of its BBB- rating would be likely. Petrobras has not yet given an exact date for the release of its results, though it has agreed to retain auditor PwC for the next two years.
There has been a spate of downgrades and a heavy sell-off in the bonds of companies with working relationships to Petrobras, including construction giant Odebrecht. But the volatility has also affected the bond prices of unrelated companies.
Proceed with caution
High yield meatpacker Marfrig, for example, attempted to issue a new bond shortly after the arrests in November, but found the market to be unattractive.
And those investment grade companies that do have access have little need to come market in such volatile times.
“There are some very good investment grade companies in Brazil that could still get decent levels,” said another LatAm DCM banker in New York, highlighting the Votorantim group, Embraer and BR Foods.
“I don’t think all Brazilian borrowers are locked out of the markets but there has been contagion in the trading of their bonds so while there would definitely be a price that would allow them to issue, I don’t think it anyone wants to be the first.”
When 10 year US Treasury yields were below 2% earlier in the year, some bankers said that the Brazilian sovereign should have taken the lead and re-opened the market. At that point, the likely hefty new issue premium would have been compensated for by low base rates, but Treasuries have since widened out, making new issues more expensive.
“There’s just so much headline risk and absolutely no guarantee that a sovereign deal would re-open the market anyway,” said a São Paulo-based banker.