Best Borrower Latin America 2006
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Best Borrower Latin America 2006

Fabio Barbosa, Companhia vale do rio doce's (CVRD) chief financial officer, explains the ins and outs of his funding strategy


The Brazilian mining company Companhia Vale do Rio Doce (CVRD) took the market by storm last year when it launched a spectacular all cash $18 billion bid to acquire Inco, a Canadian nickel producer. To the surprise of many of its competitors, which included Phelps Dodge and Teck Cominco, it quickly managed to raise a multi-billion dollar bridge loan with a pool of international banks. This was swiftly followed by a clever refinancing scheme, as part of its winning funding strategy. Indeed, CVRD lifted the Inco prize last October and became the world’s number two in the mining industry, behind BHP Billiton.

CVRD’s strength has traditionally relied on its large reserves of iron ore at home and its strategic transport logistics power, which have turned it into the world’s largest iron exporter. But it is its strong financial muscle that has allowed it to successfully diversify both in geographic terms (Inco’s assets are based in Canada, Asia and Oceania) and in terms of asset portfolio (reducing its dependence on iron ore).

Key moment

Four European banks backed the initial offer. Fabio Barbosa, CVRD’s chief financial officer, was the main brain behind the golden deal. He is thought to have first approached Credit Suisse, although neither he nor the Swiss bank would officially confirm this. UBS, Santander and ABN Amro also took part in the operation (unlike US banks, none of them was involved in rival bids), which was backed by a pool of 37 international banks soon after, as part of a two-year bridge loan (CVRD eventually needed to borrow only $14.6 billion to close the deal). “We managed to do this in less than two weeks,” says Barbosa. “This was a decisive step”.

His main challenge was then to refinance the bridge loan in the capital markets, which he now intends to conclude before next July. “We did not try to focus on a single market; we tried to diversify the funding to refinance the bridge loan in various ones.” Most of the work has been completed partly because of the abundant liquidity in the international market, he adds, although this has not been a picnic. “There was a lot of paper work, a great quantity of lawyers and advisers involved in such a large-scale operation. We quickly had to lead with the syndication of the bridge loan, two bond launches, prepay operations, a launch of debentures in the Brazilian market... the whole thing was very complex, and it has not been easy to do this in such a record time,” says Barbosa.

By Christmas, CVRD said it had completed 84% of the refinancing deal, and the company now hopes to clear the remaining $2 billion during the first part of this year. Barbosa had to face a battle with the bond market, too. “Originally, there was a rapid deterioration in the market perception, and a negative outlook was given by some credit rating agencies, which was reflected in the credit default swaps (CDS). But gradually, as the refinancing structure and the potential results of the acquisition clearly emerged, CDS quickly converged to their pre-acquisition levels.

As a matter of fact, the markets reacted pretty well, and Standard & Poor’s withdrew its negative credit watch.” CVRD was the first and remains one of the few Brazilian companies that has received investment grade from the main international credit rating agencies. “We don’t go to the market very often, and CVRD has a strong cash generation capacity. We keep on having a modest presence in the market, but it is well appreciated by the bond holders,” he says.

Comfort zone

The company’s debt profile was affected by the bridge loan, Barbosa admits. According to CVRD’s 2006 financial results, the company’s $22.5 billion debt had an average maturity of 8.3 years (net debt was $18.1 billion). “This is already extremely comfortable, but we are still penalized by the leftover from the bridge loan. When we clear this, the maturity will increase to more than 10 years, which will be more than reasonable.”

CVRD’s appetite has not been satiated as it announced a smaller, yet significant transaction, when it acquired the Australian coal producer AMCI Holdings for some $660 million earlier this year. Barbosa says he is not too concerned with market jitters, as this may not go beyond some portfolio realignments, but he argues that it is always better to work with a conservative estimate to have a margin of manoeuvre in order to deal with volatility.

The serious-looking Barbosa smiles when he is asked whether it’s easier to deal with CVRD’s finances than with the Brazilian Treasury, of which he was in charge during an especially volatile period, between 1999 and 2002. However, he remains cautious in his statement: “These are different job descriptions,” he simply says.

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