Brazil had to reduce a Eu500m reopening of its 2015 Eurobond
to Eu300m this week, when a sudden weakening of the market
erased all the concession it was offering to secondary market
The deal, led by Barclays Capital and Dresdner Kleinwort
Wasserstein, was initially launched as a Eu500m tap at 185bp
over mid-swaps, or 5bp wider than where the existing Eu500m
issue was trading.
However, no sooner had the leads opened the book than the
market sold off. By the time the tap was priced the 185bp
spread was tighter than secondaries.
"That was because the outstandings had widened
7bp," said a banker in London. "This bond has always been
cursed. If anyone asked me to tap this thing I'd run the other
The 2015s have been a thorn in Brazil's side ever since the
initial Eu500m deal was priced in January last year by BNP
Paribas and Deutsche Bank.
The sovereign had considered reopening the bond several
times last year, but decided against it because it was either
trading too wide to its dollar curve, or prospective
underwriters were reluctant to reopen an aggressively priced
deal that was also thought to have had suffered from poor
"This bond attracted a lot of negative attention when it was
first done last year," said one syndicate manager. "There were
rumours that one of the leads backstopped half the deal and was
left holding a large portion of the transaction on its books.
They also changed the marketing effort halfway through the
process and started targeting it as a retail transaction."
In Brazil's defence, however, it succeeded in its objective
of increasing the Eu500m deal to Eu800m so it cleared the
Eu750m minimum size needed for inclusion in the global MTS
electronic trading programme.
Brazil was also keen to diversify the investor base holding
the bonds away from a disparate group of unknown retail buyers
and toward institutional customers. Around 50 institutional
investors participated in the tap.
"There was no pressing need by Brazil to raise cash because
they are well ahead of their funding plans," said one of the
leads. "This was more of a strategic objective, to give the
bond greater liquidity and a more institutional investor base.
In that regard Brazil achieved its objectives and the deal
Some critics said the 2015 issue was a bad choice to tap,
because it was the most expensive point on Brazil's euro curve
and was trading at its tightest level to the dollar curve,
about 25bp back.
"Investors just didn't see a lot of upside buying a tight
euro bond," said one trader.
One of the leads argued, however, that accounts interested
in the deal did not raise the subject of pricing as an issue.
"The discussion was always about how much room they had in
their portfolio or how overweight they were in Brazil and so
forth. We did not have people tell us that they would be in it
if it was 'x' spread. It was not a pricing issue."
Some critics also argued Brazil would have been better
served to have initially launched a Eu300m tap, rather than a
"If the reason Brazil tapped the 2015s was because they
wanted to increase its size to make it MTS eligible, why go out
with Eu500m in the first place on a day before Greenspan's last
FOMC meeting?" asked one syndicate manager in London.
The leads said the reopening was eventually priced on top of
the secondaries, after the outstanding bonds widened from 180bp
to 185bp to meet the new 185bp offer level.
Other market participants, however, said the outstandings
had widened out to 187bp by the time the tap was priced at
185bp. The bonds underperformed after the tap but then began to
trade in line with the rest of the Brazilian curve and a weaker
market in general. Some saw it close on Monday at around 190bp
bid, 195bp offered.
There is a possibility, however, that the lack of a large
book for the deal might have deterred the Republic of Turkey
from tapping the euro market.
"The market has bounced a bit today (Thursday) but generally
it's been weak for the last few trading sessions and ever since
the Brazil tap we haven't heard of anything else coming out,"
said a banker in London. "We knew Turkey was considering a euro
deal, but having watched Brazil's experience they may be
seriously considering dollars now, and who can blame them?"