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Commodity-linked corporates find window in Brazil

Brazilian corporates like mining giant Vale are looking to tap international markets in a brief window provided by higher commodity prices and an improving economic outlook in the country. The majority of funding would be used to refinance existing debt.

Jun 8, 2016 // 5:20PM

Mining company Rio Tinto is looking to repurchase up to US$3bn of its outstanding debt, with a priority on US$2.9bn worth of bonds maturing in 2018, before considering offers from holders of US$5.2bn worth of bonds maturing between 2020 and 2022.

Vale is planning to issue fresh dollar-denominated notes worth US$1.25bn at 5.875% maturing in 2021, the first time it has accessed such funding in almost 4 years. Banco Bradesco BBI, BB Securities, HSBC, Merrill Lynch, Pierce, Fenner & Smith and Santander Investment Securities are arranging the deal.

“Brazilian commodity-related corporates are currently looking to refinance due to a window in the markets appearing,” said Raymond Zucaro, CIO of RVX Asset Management.  

“There had not been a large amount of EM issuance earlier in the year, especially in the first three months of 2016, leading to strong interest on the demand side as many investors are sitting on funds that have not been used.”

Pent up demand led to the relatively tight pricing on Vale’s imminent bond, which at 5.875% is only slightly higher than the company’s existing 2022 notes, which currently yield 5.61%.

This has been bolstered by the improved perception of Brazilian risk alongside an improved commodity backdrop. Iron ore prices alongside many other commodity prices are up significantly, and although there is more volatility than 3 years ago, prices have reached an equilibrium. Bloomberg’s commodity index closed 21% above its low of around 72.5000 in January at 88.2886 earlier in the week.

The supply side’s ability to access the markets has also been eased an improvement in Brazil’s political situation, with the impeachment of President Rousseff and interim president Temer’s appointment, moves the markets have viewed favourably.

The recent drive by Brazilian corporates to refinance their debt is an opportunity for them to catch up on funding and optimise their maturity profiles, rather than fund investments in greenfield projects.

“When these corporates previously tapped the markets the overall economic environment was poor and there is now an opportunity to catch up to the normal cycle of refinancing.”

The window also provides a chance for commodity-reliant corporates to access foreign capital, Zucaro added.

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