Brazil, Colombia launch $1bn 10 year deal
Latin American primary markets re-open but a wave of corporate issuance is unlikely
However, aggressive pricing terms and difficult execution took the shine off Brazil’s deal, highlighting the challenges bookrunners and issuers face in negotiating choppy market waters and reeling in fear-ravaged investors. Nevertheless, these Latin sovereign deals, along with Turkey and Filipino bonds launched this week, demonstrate that high-grade emerging borrowers can still attract new money in the global downturn.
After the mid-September collapse of Lehman Brothers, deleveraging has savaged emerging market credits but in recent weeks investors have demonstrated a modest appetite for risk. This trend continued in the first two days of the week with cash bonds rallying by 27bp. JP Morgan’s EMBI now yields around 6.70% above US Treasuries compared with the 6-year high of 8.91% in October. This improved market tone and the historically low absolute US Treasury yields triggered Colombia and Brazil to launch deals this week.
Brazil (Ba1/BBB-/BBB-) priced its $1bn 2019 bonds at 98.135 with a 5.875% coupon to yield 6.127%, 370bp over US Treasuries. Bankers say this represents around a 50bp concession. But the deal has been marred by accusations of poor execution and expensive pricing demands, say rival bankers and investors that participated in the sale. The paper subsequently traded below the fixed re-offer price. Joint bookrunners Goldman Sachs and Merrill Lynch were unavailable for comment.
On Monday morning, the leads sent out pricing ‘whispers’ of around 330bp to 350bp for a deal up to $1bn. But investors were aghast at this aggressive concession compared with Mexico’s $2bn transaction last month that yielded 390bp over US Treasuries. Brazil’s existing 2017 bond was trading at 300bp over US Treasuries and investors demanded a reasonable concession above current yield curves for a new benchmark. This forced the leads to widen their official guidance to 375bp later in the day. Bankers typically whisper pricing guidance wider than is expected when official pricing terms are announced. This strategy helps to gauge investor appetite and boost perceptions of a deal’s success when final terms are tighter. "Providing such precise and aggressive price whispers so early on in the day without knowing the demand put off investors," said one rival banker in New York.
Brazil has a reputation as one of the most price-sensitive sovereign issuers in Latin America. In May 2007, buoyed by its promotion to investment-grade status a week earlier, Brazil launched a $525m 6% 2017 bond, representing a 4bp concession. This remains the lowest-ever concession for a Latin sovereign but Treasury departments can no longer dictate such aggressive terms to investors. The debt management office demanded a coupon inside Mexico’s $2bn 5.95% 2018 bond, said people familiar with the matter. The 5.875% coupon is the tightest in Brazil’s curve, beating its 2017 6.00% trophy deal.
After opening order books in the morning, the deal was only completed by around 6pm, according to people close to the sale. A battle between leads and investors over the scale of the concession substantially lengthened the allocation process, they said.
"I can’t believe it took so long," said one Latin American debt capital markets banker in New York. "I have led five Brazil deals in recent years and a transaction has never taken more than two hours."
He added: "To have powered the transaction on terms that the leads originally intended when spreading pricing whispers, you need real money anchor orders."
Investors say their confidence was undermined by the botched pricing talk as well as Colombia’s cheaper and transparent new issue premium.
The Colombian (Ba1/BBB) deal also executed on Tuesday aggravated the negative perceptions of the Brazilian deal, said investors.
On Tuesday at 9am, joint bookrunners Morgan Stanley and Barclays Capital announced Colombia would be out with a 10-year $1bn deal later that day. With around $2bn of interest before official pricing guidance was released, the leads decided to price the transaction at 10.45am and it was completed in just 2 hours.
"When we looked at the quality of books that came after the deal was announced, we had confidence to launch the transaction there and then rather than send out any official price guidance. This helped to reduce the execution risk," said a banker involved in the debt sale.
The bond was priced at 99.136 with a 7.375% coupon to yield 7.500%, or 502.9bp over US Treasuries. This represents around a 40bp concession, referencing its 2017s that were yielding 6.95%. The $1bn deal completes the sovereign’s international financing plans for this year and the paper climbed to around par in the initial aftermarket.
This is one of the largest deals in Colombia’s dollar yield curve. Last January, the sovereign priced $650m in 7.375% 2017 notes to yield 5.997%, 222bp over US Treasuries. Additionally, a $350m tap in 7.375% 2037 notes was priced to yield 6.601%, 229bp over US Treasuries. Around 70% of buyers were in the US, 20% in Europe and 10% in Latin America. By investor type, 50% were asset managers, 25% hedge funds, 10% insurance companies, 5% banks and 5% were miscellaneous. Around $3bn of orders were received.
No problems for Colombia
"The Colombia deal had no problems but there were notable allocation problems with the Brazilian paper," said one investor who bought both credits. Rival bankers said BB Securities (the investment banking subsidiary of Banco do Brasil) was co-opted as co-manager of the transaction after the deal was launched — suggesting leads needed to widen their investor base by involving a regional partner.
In the end, the deal received around $1.8bn orders , with around two-thirds of the buyers based in the US and real money accounts representing the same proportion. On Wednesday morning, Brazil also opened the 2019 bond for an extra $25m for Asian investors to yield 6.127%.
For the last two years, Brazil has issued modestly sized $500m bonds in an effort to secure tight pricing and due to its low external funding needs. A $1bn 10-year standalone is now needed for a deal to be considered a benchmark and provide tradeable liquidity, analysts said, with some adding that given Brazil’s credit quality a $1.5bn size would have been preferable. Brazil is expected to issue a further $500m in new money later this year.
The difficulty of executing this deal also highlights the perils in determining a market clearing level for new benchmarks after the primary market shutdown in the second half of last year as well as the reduced emerging market investor base.
The leads for both deals are rumoured to have secured around 30bp in fees, which now seems to be the average for Latin sovereigns, said bankers. This is the second coup for Goldman Sachs after lead managing the Mexican deal in December. The bank has a small Latin American capital markets franchise and limited emerging market fixed-income trading operations. In addition, along with JP Morgan, it has also been accompanying the Republic of Peru for a non-deal roadshow on the US West Coast this week. Chile is also expected to come to the international markets this quarter.
Bankers and investors said this week’s flurry of emerging market sovereign deals highlights how investors have the appetite and free cash to put to work.
"These large deals show there is an impressive amount of cash on the sidelines for high-quality credits," said one US investor who snapped up all new emerging market sovereign paper this week.
But Nick Chamie, head of emerging markets research for RBC Capital Markets in Toronto, cautioned: "The pricing for the Brazil and Colombia deals suggests that demand has gone from non-existent to relatively modest."
He said emerging sovereigns may seek to raise more international cash this year to fund fiscal stimulus programs as an alternative to burning accumulated foreign exchange reserves. Governments will then hope to provide dollar liquidity to banks and corporates that need to rollover external debt while cross-border markets remain effectively closed for non-sovereigns, he said.
The overall external funding needs for emerging markets stand at around $450bn in 2009, according to Dealogic. However, there are growing concerns that the huge financing requirements for G7 nations this year will crowd out these borrowers.
While bankers welcomed Brazil’s newly created 10-year reference point, the dysfunction in core markets means that high-grade corporates are unlikely to access external markets anytime soon despite’s the explosion of liquidity this week, they concluded.