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
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
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