The Brazilian corporate debt pipeline appears to have grown slightly this month as a number of entities have begun marketing dollar bonds.
Ouro Verde Locacao e Servicio has begun roadshows led by Bradesco, Santander and Scotiabank to market a RegS/144A US dollar-denominated bond according to Reuters.
JSL has completed roadshows ahead of a possible RegS/144A senior unsecured dollar bond led by BB Securities, Bradesco BBI, Morgan Stanley and Santander, and BRF GmbH, the wholly owned subsidiary of BRF SA also finished roadshows led by BB Securities, Bradesco, Itau, JP Morgan and Santander for a senior unsecured Reg/144A bond with a medium to long-term maturity.
According to Jack Deino, head of EM corporate debt at BlackRock, Brazil is currently in a favourable position.
“The uncertainty around Rousseff’s impeachment has passed and most economists are beginning to see a bottoming out of economic growth in Brazil.”
In addition, Temer now has the potential to implement structural reforms that could reduce the fiscal deficit as well as improve the business environment for many companies. As a result, many companies are likely to want to tap the markets now whilst conditions remain relatively favourable, particularly because the situation could easily change in the near future.
“Longer term, there are some factors that could negatively impact Brazil. There is a significant amount of uncertainty over US rates and, although expectations remain positive, lot of uncertainty over the long-term ability to pass and implement much needed reforms on a timely basis,” Deino noted.
He added that although the government is currently enjoying somewhat of a ‘honeymoon’ period, it is facing elections in 2018.
“While there is a positive reception to President Michel Temer’s proposals to streamline government apparatus to meet budget targets needed to stabilise the country fiscally and protect Brazil from further downgrades, there is no single candidate who is looking like Brazil’s saviour.”
“There is the potential for volatility to flare-up again in Brazilian financial markets,” Deino said.
However not all the deals in the pipeline have progressed to market.
“For some transactions, roadshows have taken place but deals are yet to come. Some transactions were likely too complex, or there were disputes over pricing, so those deals got scratched. This explains why there have been roadshows, but there has not been a lot being printed.”
A lot of hesitation over deals actually hitting the markets and pricing hinges on the US Fed and whether it will raise rates or not. The Fed is set to meet on September 21, with concerns growing that it could hike.
However, even if there is a rise in US rates, there could still be a significant amount of Brazilian corporate debt hitting the markets following the initial hike shock.
“If the global risk situation stabilises after the Fed meeting, the pipeline in Brazil could be pretty sizeable. Brazilian corporates have, to a large extent, greatly reduced activity in international DCMs for quite a while meaning they may want to take advantage of any perceived window of opportunity to tap the markets” Deino said.
Any large numbers of debt issuances are also likely to be met by large levels of demand from the international community despite ongoing challenges at some of the country’s largest companies. Oi is struggling with an impending default, Gol is looking to renegotiate its debts, and Eldorado Brasil has become embroiled in the corruption scandal.
“At the end of the day there has been a slump in headlines and a quietening of activity, but the corruption investigations and their ability to impact financial markets are still prevalent,” noted Deino.
“At this point in the game, we are more prone to be long public sector and SOEs as opposed to private credit in Brazil. This is because despite corruption probes, the company usually remains intact. With non SOEs, there is far greater “key-man” risk and other sources of vulnerability.”