The euro market returned to centre stage for Latin American borrowers last year, and no deal did more to achieve this than Brazil's €750 million, eight-year transaction in September.
The issue, which was co-lead managed by Dresdner Kleinwort Wasserstein (DrKW) and UBS, was Brazil's first in euros in more than two-and-a-half years. Such was the bond's success that Moody's raised the Republic's rating to B1 from B2 the following day, citing Brazil's "lower reliance on international borrowing and increase in exports".
Initially, Brazil planned to raise €500 million, but as total orders reached over $2 billion in just four hours, the deal's size was increased. Over 240 clients in 24 countries showed interest. The biggest buyers were UK investors, followed by Swiss, US and German accounts.
Mutual funds and banks received the most amount of paper, accounting for 70% between them. Hedge funds, retail investors, insurers, money managers and central banks also participated, although all received less than 10% of the final allocation.
The transformation of the European market from a retail-oriented one to a more sophisticated, liquid institutional source of funding has made it more compelling for borrowers. "Brazil recognized the strategic importance of tapping this base, as it offered them an incremental source of funding at attractive levels relative to their US dollar curve while applying pricing and supply relief to these instruments," says Enrique Bustamante, head of Latin American debt capital markets at DrKW.
Indeed, following the bond's placement, Brazil's euro and dollar yield curves tightened. In fact, Brazil's dollar curve tightened significantly during the roadshow period, as US investors realized that an alternative source of funding was materializing.
The deal's success was a result of three months' hard work, with the Brazilians initially reluctant. But in July Jamaica, Pemex and the Philippines issued euro transactions demonstrating that European investors were comfortable with emerging markets credits. "The success of these transactions convince Brazil to return to the euro market," says Marcelo Delmar, head of Latin American debt capital markets at UBS.
In September, the Brazilians sent all their top officials to the roadshows, including Alexandre Schwartsman, deputy governor of the central bank, and Joaquim Levy, secretary of the national treasury. In London, the team held an unprecedented 19 one-on-ones with investors; in Zurich 70 people attended their presentations; in Geneva, 50. Attendance was also high in Frankfurt and Munich.
The trade was launched at about 11am (London time) on September 8, and within hours it was clear that investors were very keen to get their hands on the bond. "I was pleasantly surprised by the level of demand and the speed with which it came together," says Delmar.
Sixteen days later, Brazil re-opened the bond and raised an additional €250 million. Bustamante says the transaction "demonstrates the appeal Brazil has to global investors due to the great strides they have taken regarding their economic performance."
Issuer: Federative Republic of Brazil
Launch date: September 8, 2004
Amount: †750 million (subsequently re-opened for an additional †250 million)
Maturity: Eight years
Coupon: 8.5%
Credit ratings (at pricing): B+ (Fitch); B2 (Moody's); B+ (S&P)
Lead managers: Dresdner Kleinwort Wasserstein; UBS