Brazil IPO pipeline the latest victim of Petrobras scandal
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Emerging Markets

Brazil IPO pipeline the latest victim of Petrobras scandal

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Brazil’s IPO cupboard is empty thanks the worsening Petrobras scandal. Only when the Lava-Jato inquiry is complete and debt markets can reopen will equity deals flow again in Brazil.

Brazil’s troubled economy and the depressed investor sentiment have conspired to bring IPO activity in the country to a complete halt, and there may not be much action for the rest of the year, according to market players.

Economic activity was almost flat in 2014 — with GDP growth at 0.1% compared to the previous year — and an even worse performance is expected this year.

“The price-earning forward over 12 months in Brazil stands at around 11,” said Francis Repka, CEO of Société Générale in Brazil. “The US is at 17 and Europe at 15. These value-based elements are very important. There is almost a 50% gap. In the equity market, price-earning ratios are much lower than elsewhere.”

Since the beginning of the year there has not been any single IPO, and in 2014, there was only one. However, as many as six companies have shelved public offering plans due to the “worsening market outlook”. These include JBS Foods, the non-beef division of the Brazilian meat exporter JBS, the Azul airline and the Brazilian subsidiary of the retailer Carrefour, which is looking for local investors to expand its operations in what has become its largest market outside France.


Blurred perception

The fallout from the Petrobras corruption scandal is being felt across financial markets, with the Brazilian oil company failing to release audited financial statements since mid-2014. “The Petrobras effect has also blurred the perception of Brazil from abroad in the short term,” said Repka. “If things improve, business may resume quite quickly. But the current outlook is very negative, and several Brazilian policymakers are aware of that... It is not possible to have an equity market with rising volumes that may lead to IPOs if the debt market is not active. This is why the Petrobras case is so serious from the economic point of view.”

The outlook for the equity market at the São Paulo stock exchange is also negative, due to repercussion of the Petrobras scandal. “The impact of Lava Jato [the police’s name for the investigation into corruption at Petrobras], will severely impact the economy and ultimately Bovespa [the São Paulo stock exchange]. I am not optimistic about it,” said another banker who did not wish to be named.

The IPO slump is not just a Brazilian phenomenon, Repka said. “This is quite natural when there is a recession, and a strong volatility in the currency and the equity markets. This reflects an outlook for growth that is too weak, and the outlook for demand from foreign markets that is set by the price and volume of commodities,” he said.

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