Brazil made an opportunistic hit on the US dollar bond market on Wednesday November 9th with a $500m reopening of its 2015 issue, after Standard & Poor's raised the outlook on its BB- credit rating.
Like Colombia and several Latin American companies, Brazil was keen to take advantage of a better tone in the international bond market this week, before investors start winding down for the US Thanksgiving holiday in late November. Investors snapped up Brazil's bond — which takes its 2015 line to a $2bn size — after lead managers Citigroup and HSBC offered it at an attractive 312bp over Treasuries.
About 200 investors put in more than $3.5bn of orders. Like many issuers in recent weeks, Brazil wisely offered a small pick-up to secondaries to entice investors back into what has been a volatile market for the past month. "It was a nice deal," said an emerging market debt syndicate manager. "This [Wednesday] morning, even with the tap out there, the bonds were bid at 304bp. Without the tap the spread would arguably have been around 300bp and they did this at 312bp."
News of the bond reopening and S&P's decision to change its outlook on Brazil from stable to positive helped send the Brazilian real to a four year high of R2.1767/$. Brazilian bonds performed well after weaker industrial production numbers raised hopes that the central bank would ease interest rates.
The sovereign was rumoured last week to have eyed the longer end of its yield curve for a reopening. But its choice of the 2015s was in line with what appears to have been a year-long strategy of picking points on the curve and turning them into $2bn benchmarks. So far this year it has reopened its 2034s and taken its size up to $2bn; it enlarged its 2025s to $2bn with a $1bn tap, and the 2015s have now been reopened twice to hit the $2bn size.
Brazil's decision to issue in dollars disappointed banks across the Atlantic, however. "We had hoped that at some point they would reopen the euro 2015s," said one banker in London. That bond is only Eu500m in size. "But the euro-denominated market, swapped back to dollars, is still 50bp to 60bp wider than where their dollar curve is," he said. "Even so, it would be nice to see them return to the euro market before the year's out, even if it is more expensive, just to diversify."
Hopes of upgrade
Although S&P's action was only an outlook revision, it has boosted market hopes of an upgrade. "We would expect an upgrade from BB- to BB before the end of the first quarter next year," said Goldman Sachs in a report this week. S&P cited Brazil's impressive export performance in the past year, the reduction in its public and private sector external debt and the present administration's laudable efforts to overhaul its local debt mix.
"Net of international reserves and other liquid assets, external debt (public and private) is projected at 90% of current account receipts in 2005-2006, versus 270% in 2000," the agency said.
Although that is a far cry from the median for BB rated countries of 48%, S&P said it was impressed that, for Brazil's public sector alone, external debt was projected at 45% of current account receipts for the 2005-06 year, much closer to the BB median of 33%. Brazil has all but cleared away its huge pile of dollar-linked local debt — these instruments now make up just 3.8% of its total debt. It has also begun converting its predominantly floating rate local debt to fixed rate and extending the tenor of its local currency fixed rate bonds. These now go out to 10 years after Brazil's $1.5bn equivalent real-denominated 10 year global bond in September.
Further improvement in creditworthiness will hinge on Brazil's ability to train local investors' to have an appetite for long-dated fixed rate reais bonds. Most of the 10 year global real deal was sold abroad. Local investors, having lived through Brazil's 30%-a-month inflation in the early 1990s, still find it difficult to be attracted to long-dated fixed rate government bonds.
"Evidence that local market participants are willing to hold longer term fixed rate paper would reflect improved confidence in the overall policy stance," said S&P's sovereign credit analyst, Lisa Schineller. Moody's (Ba3) and S&P (BB-) classify Brazil in the same rating bracket and both now have it on positive outlook.
Despite the pace of Brazil's fiscal improvement in recent years, investment grade status is still a distant goal. "Even if Brazil is upgraded to BB in 2006 and then reaches BB+ later next year or in 2007... the investment grade level would not be reached before the end of this decade," said Drausio Giacomelli, senior sovereign credit analyst at JP Morgan in New York.
Brazil has now prefunded $3bn of the $9bn of external funding it plans to raise in 2006 and 2007. There are presidential elections next year, which may complicate further fundraising.