Brazil debt issuance on ice
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Emerging Markets

Brazil debt issuance on ice

Sovereign will “wait and see”, says funding official

Brazil has cooled hopes for new debt issuance this year, arguing that global market volatility is imposing unjustifiably high premiums for new issues.

“Our public finances are strong, so we can wait and see when we should issue debt – because the international markets right now are not good,” Paulo Valle, head of public debt operations at Brazil’s national treasury told Emerging Markets.

Brazil has issued on average $6 billion annually over the last four years. But plans to issue new debt in either dollar-denominated bonds, local currency paper overseas or domestic bonds were now on hold, Valle explained.

The sovereign’s next foray into the international markets would be a $500 million retap – i.e. the opening of an existing issue for additional investment – on its dollar 2017 or 2037 bonds.

But bankers suggest that the price-sensitive sovereign would only be willing to pay an 0.1% extra interest. “The sovereign has been thinking of this retap for several months now. [It has] waited, thinking global conditions will eventually improve, but they have actually deteriorated,” said a debt capital markets banker in New York. “It does not help that the sovereign is the most price-sensitive issuer in Latin America.”

A retap for Brazil’s key local currency-denominated onshore 2016 and 2028 bonds is also unlikely, given current conditions. They are trading above the 10.80% level, making a further issue unjustifiably expensive, Valle added. He also suggested plans to issue an onshore 30-year real-denominated bond – which would boost long-term access to capital for companies by providing a pricing benchmark – are on hold, again because premiums are too high.

Valle said that in order to ensure sufficient liquidity and competitive pricing, the sovereign had to court Asian investors to offset demand from the US.

For Asian accounts the debt management office would consider a so-called greenshoe, a provision that provides underwriters of a deal the right to sell investors more paper than originally planned by the issuer, Valle explained. Valle argued that his key medium-term challenge was to increase investment in Brazil’s real-denominated global issues, “because foreign investors are migrating to bonds locally now they have gained more confidence in domestic markets”. Onshore issues also on average offer an extra 1% interest.

Investors are less enthused by local debt since the government’s imposition in February of a 1.5% financial transactions tax on public bonds, aimed at reducing the appreciation of the real. Valle said: “This move was necessary to reduce the short term investment flow, change the composition of investors in favour of those long-term and reduce the flow of capital investment to improve our export competitiveness.”

But the market disagrees. “This tax has clearly dampened foreign investor interest and reduced liquidity,” said Matheus Kuhn, debentures analyst at Santander in Sao Paulo.

Valle also rejected issuing local debt via Euroclear, the clearing and securities settlement agency, which would unleash a tide of liquidity by effectively opening up Brazilian sovereign bonds to the global investor base for the first time.

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