Intense appetite for Latin Americas largest economy led to the Federative Republic of Brazil achieving a new pricing landmark on Tuesday. Around $6bn of orders gave the BRIC country its lowest ever yield 4.547% on a $825m 10 year retap.
Buoyed by the recent rally in the countrys debt, the Brazilian treasury again tapped the 2021 bond it originally issued in April. Its yield had dropped to a record 4.365% by Mondays close, compared to 5.63% on May 7. The $787.5m benchmark offered a 5% yield at launch.
Before this week, the lowest yield for a Brazilian bond came in December 2009 for a 10 year deal that offered a 4.75% yield at launch.
The initially generous pricing whispers of 160bp over and stable market conditions on Monday generated $5.9bn of demand via Bank of America Merrill Lynch and Deutsche Bank. This order book allowed the bookrunners to lower the rate to 150bp over, at the tight end of the official pricing guidance.
The deal, rated Baa3/BBB-/BBB-, was increased from $500m. The syndicate sold $75m of the offering to Asian investors on Wednesday morning via a greenshoe option, bringing the deal to $820m in total.
Highlighting the relentless demand for Brazilian securities, the new issue tightened by 8bp in the initial aftermarket, trading at 103.75, or 142bp over US Treasuries.
"We are seeing issuers like Brazil achieve record low coupons on their debt issuance and I expect we will see more opportunistic funding out of the region in coming weeks," said Max Volkov, managing director in Latin America debt capital markets origination at Bank of America Merrill Lynch.
Rival bankers were unusually positive in their compliments. "This was a blowout deal that benefited from perfect timing, perfect execution and perfect amount of liquidity," said one emerging market syndicate banker in New York.
PREMIUM HITS THE SPOT
A key driver for the deals success came with the high new issue premium offer of up to 25bp, when the leads dropped pricing whispers of 160bp over US Treasuries. This set off a flood of orders from global accounts, said bankers. Over the past two years, Brazil has developed a reputation as a price sensitive issuer that provides paltry premiums, like triple-A sovereigns even at the price whisper stage. In the end, the retap provided a concession of around 10bp-15bp versus secondaries, trading around 4.35% and 4.40% at launch. Some 72.9% of investors were in the US, 13.5% Europe, 3.7% Latin America, 9.8% Asia and 0.1% elsewhere. Asset managers snapped up 67.9%, hedge funds 16.4%, pension funds 4.9%, retail/private banks 4.8%, insurance firms 4.1%, and bank portfolios 1.9%. Lately Brazil has demanded increasingly aggressive pricing terms from an ever compliant investor base, buoyed by the countrys economic outperformance in the global crisis and its growing creditworthiness. "Investors are cash-rich, Brazil is a very strong credit and the deal offers a relatively competitive concession to its secondaries," said Helene Williamson, head of emerging markets debt for F&C Investments, who bought the paper.
NOT FOR EVERYONE
Nevertheless, some emerging market investors are increasingly shunning Brazilian sovereign debt due to the low absolute all-in yields on offer. "A large amount of cross-over money primarily US high grade buyers attracted to investment grade paper that offers a pick-up over US Treasuries drove this deal and traditional emerging market investors are less attracted to Brazilian yields these days," said Blaise Antin, head of research for the TCW Emerging Market Fixed Income Fund. As is typical of Brazil sovereign issues in recent years, the Treasury paid 25bp in fees. The sovereign does not set yearly external bond volume targets and uses proceeds to repay outstanding debt, rather than for balance-of-payment support. The Brazilian treasury "will assess further dollar denominated market access this year on the basis of market conditions and investor demand for liquidity in the Brazilian yield curve," said a source close to the issuer.n Banco Panamericano and Banco BMG highlighted the relentless demand for Brazilian bank debt this week, issuing $550m in total to capitalise on the US rally and primary market receptiveness to emerging market issuers. Banco Panamericano launched a $300m five year bond to yield 5.625% on Wednesday. The notes are rated two notches below investment grade via bookrunners Bradesco BBI, Itau and UBS. Panamericano last came to the overseas debt market in April for a $500m deal that yielded 8.625% initially but rallied below 7% just before this weeks launch. On Thursday Banco BMG attracted $1.5bn for 10 year notes that yield 8.875%. Morgan Stanley, Bradesco BBI, Santander and BCP Securities were bookrunners for the B-rated issue.