The credit crunch is rocking financial boats across the world, but so far Brazilian markets have missed the worst of it
The turn of the tide in international capital markets has barely clouded the picture for the Brazilian financial trade. While the credit crunch is showing up improbable vulnerability in markets around the world, it has yet to have any significant impact on Brazil.
IPOs slow
So far, the effects of global financial tensions have only impacted capital raising – and here most evidently for public equity offerings: the abrupt end to Brazil’s IPO fever, following a bull run in which nearly 100 companies went public over the past three years, including 64 in 2007 alone.
Although both the Sao Paulo stock exchange Bovespa and the futures market BM&F successfully launched their own IPOs and are now planning to merge, most of the 38 listings which prepared for the first quarter of this year have been shelved.
“It will take a while before public markets reopen,” says Jose Olympio Pereira, managing director of Credit Suisse investment banking in Brazil. “For large attractive stories, there will be a market. It’s going to be a much more challenging market for the $200 million type deal,” he adds.
Brazilian Finance & Real Estate (BFRE), which received a large cash injection at the end of 2006 from Texas Pacific Group-Axon Capital to operate in the flourishing real estate and mortgage sector, is among those that had to look for fresh alternatives. “We gave up due to market conditions,” says Fabio Nogueira, director of BFRE. “But the growth dynamics are still here,” he adds.
Luiz Fernando Resende, vice-president of the Brazilian Association of Investment Banks (Anbid), believes that equities will be hardest hit by the global turmoil. “Decoupling is a utopian fantasy,” he says.
But he predicts that there will be a strong migration from equity to local fixed income which, he says, has historically performed better in Brazil. “The impact of the crisis will not be felt so strongly in [local] fixed income.”
While the international bond market remains closed for non-investment grade issuers, local debt markets, meanwhile, are largely buoyant. Carlos Calabresi, BNP Paribas’ head of fixed income for Latin America, points out that – crucially – there have been no liquidity problems in the Brazilian market. Local investment in fixed-income instruments provides a ready source of funds.
“Local funding is available at lower costs,” he says. “It is only a question of price when spreads are in the range of 480–500 basis points [in the international market] and local alternatives are at 300–350 points.”
Private equity lifeline
Many see a window of opportunity for private equity investors. “The money has dried up in the public equity universe, but it is still there in the private sphere. A lot of money was raised with private equity to focus in Brazil,” says Credit Suisse’s Olympio. “There’s a lot of private equity money actively chasing opportunities. For entrepreneurs, this money will come at a higher cost than what was available in the public markets, but still at a cost which is acceptable to finance their projects.”
Advent International is among the quick movers that invested in Brazilian assets and managed to find the exit in time. The firm invested in the duty free shops network in Brazilian airports, and launched Dufry’s local IPO at Bovespa less than a year later. It also took advantage of abundant liquidity to raise $1.3 billion to invest in Latin America, half of it in Brazil.
“We have just raised the largest fund ever in the region,” says Patrice Etlin, Advent’s director in Brazil, which has recently invested in restaurant chains and software companies. “The latest bout of volatility will be good for us: equity valuations will fall; we will take advantage of this. Actually, 2008 will be very intense for funds that have cash in hand like us.”
Credit Suisse’s Olympio takes a similar view: “There are an abundance of high return projects here in Brazil. Even at the levels at which private equity is willing to deploy its funds, you still have an attractive source of funding for entrepreneurs.
“There are plenty of projects with price/earning ratios of two to three in the Brazilian market. Before the entrepreneurs could go to the public market and raise money at (shall we say) seven to nine times, which was great, because it was very cheap funding... but if the money that is available is only available at a multiple earnings of four to five, it’s still creative. You are raising funds at a higher PE, then you are able to invest them,” he says.
Moreover, the long list of IPOs executed before the end of last year may in turn boost merger and acquisition activity, especially in the construction sector. “There is going to be some consolidation as early as this year,” says Anbid’s Resende. “Today, we have 26 companies in the sector. It may not be as radical as in Mexico where there are only four or five companies left, but there are people who are willing to sell. There may be only 10 or 15 in three years’ time,” he says.
Indeed, the number of mergers and acquisitions may increase by up to 20% compared to last year, according to PricewaterhouseCoopers.
The result of all this is that Brazilian companies – for the time being at least – are bolstered in a climate of fear that has gripped their foreign competitors. —T.O.