Thin liquidity in the Brazilian local debt market is forcing borrowers to shelve deals – but a senior executive of the country’s financial regulator believes that macroeconomic stability and corporates’ low indebtedness will soon bring lenders back to the market.
Parandanpema, a unit of Duke Energy, last week cancelled a R$750 million local bond issue. In March, construction firm Inpar shelved a R$460 million deal and utility company Neoenergia cancelled a R$315 million sale, meaning that the Securities and Exchange Commission (CVM) oversaw no transactions that month. Poor liquidity along with global volatility has made pricing and execution of deals difficult.
Sergio Weguelin, a CVM board member, told Emerging Markets that while the equity market is “booming”, liquidity in the debt market is poor. Chronic risk aversion from local institutional investors, who demand firm pricing guarantees and often hold debt until it matures, has strangled liquidity in the asset class, Weguelin said.
But he argues this is only a short-term rut, and that structural factors will ensure the upward momentum of the debenture market. “We are having a moment of pause owing to the global market volatility,” he said. In order to jumpstart the sector, he predicted that investment-grade companies would eventually issue large benchmark deals that would unleash liquidity and provide pricing reference for subsequent sales.
“Brazilian companies are relatively under-leveraged and the country’s macroeconomic stability now allows them to have stable long-term capital raising plans.”
Fundamentals are sound: external debt is at historic lows and macroeconomic confidence is high. But international volatility, which has sparked higher new issue premiums for bond deals globally, has aggravated the structural weakness of Brazil’s domestic market and derailed new deals, participants said.
Matheus Kuhn, debentures analyst at Santander in Sao Paulo and advisor to Parandanpema’s postponed debt sale, said: “We are telling issuers not to access the market now, because we cannot determine what secondary market prices are going to be from one day to the next, and what new issue premiums investors are going to demand.” Corporate spreads have widened around 150 basis points since June 2007, with pricing increasing by 50 basis points alone since January, Kuhn said. Borrowers coming to the market are expected to opt for short tenor deals between two and five years.
Weguelin of the CVM said that domestic institutional investors would diversify their portfolio investments into fixed income assets, boosting liquidity. “Asset managers are now getting lower rates of return for government Treasury bills as interest rates come down, so they now have an incentive to seek higher returns.”
He argued that the CVM’s overhaul of local accounting standards would encourage foreign investors to come into to the local market. The commission last year introduced a law that follows international best practice. “Once we fully implement this law and companies comply by the end of next year, international investors will have more confidence and it reduce their analysis costs. So everything is in place to carry the debenture market forward,” he concluded.