Brazils Banco Bradesco capitalised on low global interest
rates to price a $1.1bn long 10 year bond on Monday, with the
lowest ever coupon for a lower tier two issue from the country.
As the only Latin American
corporate issuer in the cross-border dollar debt markets this
week, Bradesco had the limelight to itself, and demonstrated
the depth of demand for Brazilian financial paper. It was the
banks first issue of subordinated debt in dollars since
Rated BBB-/Baa2, the notes attracted almost $4bn of demand.
Lead managers Banco Bradesco, Bank of America Merrill Lynch,
HSBC and JPMorgan priced them at 99.622 with a 5.9% coupon to
yield 5.95%, or 311.9bp over US Treasuries.
Bradesco had called its $300m 8.875% perpetual non-call five
bond at its first call date in June this year. The bond had
been sold in May 2005 with the expectation that it would count
towards tier one capital, but regulations introduced later
meant it could only count as tier two. "Its a high cost
to maintain tier two at 8.875%," Marlene Millan, director of
Bradescos international department, told EuroWeek in
June. "We could have tier two at a much better price."
As a result, this weeks tier two issue with its 5.95%
yield was "cheap for the issuer" compared to its previous
subordinated debt issues, said a banker on the deal.
Brazils second largest bank by assets grabbed $1bn of
demand in less than an hour after the leads released official
price guidance for a benchmark transaction of 6% area on Monday
A banker on the deal said the notes offered a 12bp concession
over Bradescos October 2019s. "The strong demand we
received from 270 accounts shows just how much cash there is on
the sidelines and investor attention for all things Brazil,
even in a holiday week," the same banker said.
The deal was opened up overnight for Asian accounts with a
$100m greenshoe option that was four times oversubscribed. In
total, North American investors bought 40% of the deal,
Europeans 30%, and Latin Americans and Asians 15% each. Real
money investors and "high quality private bank portfolios"
snapped up most of the paper, said bankers on the deal. The
bonds traded up to par on the break.
"This weeks deal shows how other Latin American banks
with high coupon perpetual bonds should come to the market for
refinancing purposes, given the low cost of capital raising,"
said a Latin American syndicate banker in New York.
Buoyed by Bradescos success, bankers are busy pitching
Itaú Unibanco and Banco do Brasil, which have benchmark
perpetual bonds that are callable.
But in general, "Brazilian banks are not in a rush to come to
the subordinated debt market, given their high capital
cushions," said the head of Latin American debt capital markets
at a Wall Street investment bank. The countrys banks have
an average capital adequacy ratio of 18.2%, compared with 14.3%
in the US, according to Bank of America Merrill Lynch.
In its second quarter results, Bradesco reported a tier one
capital ratio of 13.9% and a tier two ratio of 2.1%. It expects
to be able to reduce its capital allocation for market risk if
the Brazilian central bank approves its application to use
internal market risk models for capital allocations under Basel
The results, published in July, showed net income had increased
by 14.3% from the first quarter, reaching R$2.45bn ($1.4bn).
Equity analysts at Barclays Capital said the results were
better than expected, due to lower loan loss provisions.
"Brazilian banks remain in the sweet spot of decent credit
growth, stable margins and especially better asset quality,"
the bank wrote.
Chill steals over
Despite Bradescos success, investors appetite for
emerging market risk weakened this week as developed equity
markets tumbled on Wednesday due to concerns about US growth.
Analysts predict Latin bonds will continue to outperform US
high yield paper in the coming months, but the primary markets
will not be insulated if global market distress kicks in.
"With the equities slowdown this week, I dont think any
other issuer will come to the market over the next three
weeks," said Bevan Rosenbloom, Latin American corporate debt
analyst at RBS.