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 trading levels.
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 way."
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 distribution.
"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 worked."
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 Eu500m one.
"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?"