BNDES, Brazils state development bank, launched a competitively priced $1bn global bond this week, capitalising on the scarcity value of the credit and demand for Brazilian risk.
BNDES had kicked off the week with what was described as a non-deal roadshow, taking in London, New York, Los Angeles and Boston. But after strong feedback from 46 accounts, including investors without previous exposure to the credit, BNDES decided to issue the new benchmark.
On Wednesday morning, bookrunners Goldman Sachs and HSBC, and co-managers Banco do Brasil and Itaú Unibanco, issued official price guidance of 300bp-310bp over Treasuries on a 10 year deal for the Baa3/BBB- issuer. The books were closed around lunchtime on the back of strong investor demand, and the deal was priced at the tight end of guidance, 300bp over, later in the afternoon. The 6.5% issue was priced to yield 6.546%.
The deal benefited from scarcity value. The state development bank last came to the market in May 2008 with a $1bn 10 year deal with a 6.4% coupon, which was its first international issue in seven years. These 2018s were trading at around 250bp-275bp on Wednesday morning before the 2019 deal was announced, according to a banker on the deal. The new issue therefore paid around 25bp more, but, with the curve between 2018 and 2019 worth some 10bp, the new issue premium could have been as little as 15bp, said the banker.
Other market participants said that given the illiquidity in BNDESs curve compared with Brazilian government paper, the sovereign benchmark provides a better pricing guidance. The deal came at 75bp-80bp over the sovereigns curve.
Bankers away from the leads were complimentary. "This was well priced, well timed and a good quality benchmark that benefited from scarcity value and the fact that Brazil is where everyone wants to be right now," said one Latin America debt syndicate banker in New York.Around 200 accounts, mainly real money investors, bought the paper, with strong demand from the US and Europe. Bankers estimated that the book totalled $3.5bn-$4bn.
Promising LatAm prospects
In the resurgence of appetite for emerging risk, Brazil has emerged as the Latin American favourite, with its stronger growth prospects this year thanks to domestic demand, rising commodity prices, and an under-levered financial system. Investors have been tactically allocating capital to the country this year and seeking exposure to high rated and liquid credits such as BNDES. "A lot of investors are now looking to become more active in Brazil as an investment grade credit with promising long term growth prospects," said Antonio Pereria, co-head of Brazilian investment banking at Goldman Sachs.
BNDES is the single largest lender to private companies and government-backed institutions in Brazil. This year the bank is acting as a counter-cyclical lender to fund infrastructure projects and finance the countrys largest oil company, Petrobras. The new global bond is designed to generate liquidity in its yield curve and cement relations with its international investor base in dollar benchmarks. BNDES is not expected to issue in offshore markets again this year.
Despite a spate of profit-taking in emerging markets this week, market participants foresee a generally supportive environment for emerging credit in the next few months, with plenty of cash on the sidelines and growing evidence of a global economic recovery. "After the natural course of adjustment in global markets, there is appetite for credit out there and we expect a lot of more activity in primary markets," said Pereria.
Despite the traditional lull in new issuance during the summer, a growing number of Latin corporate borrowers are looking to tap overseas markets with benchmark dollar bonds. Ecopetrol, Colombias state oil company, is expected to sell bonds "in weeks" as part of a $3.7bn borrowing programme this year, said its CEO, Javier Gutierrez, on Monday. And Colombias Empresas Públicas de Medellín (EPM), a state-owned utility, is expected to issue a $500m bond in August through bookrunners Merrill Lynch and JPMorgan, said bankers.