Brazil marched boldly into new territory last September when the sovereign issued a new global bond denominated in reals. The deal was a landmark: the biggest global ever issued by an emerging market sovereign in its own currency.
Although not the first global bond in a Latin American local currency (Colombia’s peso global was the first), it’s the first to offer international investors the prospect of substantial liquidity. It also fulfils Brazil’s long-held ambition of extending its fixed rate yield curve in reals.
The R$3.4 billion ($1.5 billion), 10-year deal, led by Goldman Sachs and JP Morgan with co-manager Banco Itau, attracted more than 200 investors and $7 billion of orders, allowing the country to achieve aggressive pricing of 12.75%.
“We led [our] first ever sovereign issue denominated in local currency, and it was quite a success,” says Jose Antonio Gragnani, head of debt management at the finance ministry.
“This deal was Brazil’s way of saying ‘look: we have a local market’,” says a banker close to the deal.
Despite its significance, the bond initially traded down in the secondary market and came under attack from rival bond houses that missed out on the highly sought-after mandate.
“That bond was underrated and misunderstood,” says a banker familiar with the deal. “It was extremely significant for the market. Its poor initial performance had to do with the timing. Brazil was able to price it at the very tight end of what it could have achieved.” The important point, he stresses, is that the bond never underperformed the local market itself. Its subsequent performance in secondary markets speaks for itself.
Since President Lula moved to scrap withholding tax restrictions in February, money has been pouring into real debt. With overnight interest rates above 17% and a currency going from strength to strength, Brazilian risk has taken on new appeal. The bonds are now trading over par with a yield of less than 12.5%. “Such a success has helped us in creating an extension of the interest curve in local currency ... The market has developed an appetite for real-denominated risk,” says Gragnani.
Even considering the effects of the tax exemption, some analysts think real rates will drop another 100bp in the next six to 12 months, simply because of improving economic fundamentals.
The issue is a landmark for a new asset class among Latin American bonds. Bankers have been predicting a rash of sovereign and corporate Eurobond offerings denominated in Latin American currencies for some time. Brazil’s deal may have helped give momentum to the nascent market.
Issuer: Brazil
Date of launch: 12 September 2005
Amount: R$3.4 billion
Maturity: 10 years
Coupon: 12.5%
Lead managers: Goldman Sachs, JP Morgan