Bloomberg News

Bond Sales Trail Mexico After Record Issuance: Brazil Credit

October 31, 2011

Oct. 31 (Bloomberg) -- Brazilian overseas bond issuance is lagging behind Mexican offerings for a fourth straight month, the longest streak in three years, after record debt sales earlier this year reduced financing needs.

International bond issues from Brazil totaled $1.75 billion in October, compared with $3.6 billion from Mexico, according to data compiled by Bloomberg. The four-month streak is the longest since the period ended March 2008.

Brazilian companies are shunning the overseas market after selling a record $34.1 billion of bonds this year, as Europe’s debt crisis fuels a surge in borrowing costs. Yields on Brazilian corporate debt touched a two-year high of 6.91 percent on Oct. 4. Rio de Janeiro-based Petroleo Brasileiro SA, the state-controlled oil producer that sold $6 billion of bonds in January, said that while it has no need to tap markets at this time it may sell bonds in Europe if there’s an opportunity.

“Brazilian companies came to the market earlier in the year,” Natalia Corfield, a corporate debt analyst at ING Groep NV, said in a telephone interview from New York. “They didn’t need to come now. If they are seeing market turbulence, why come now? Why not just wait and see?”

Centrais Eletricas Brasileiras SA, Latin America’s largest publicly traded utility, was the only Brazilian company to sell debt overseas in October, according to data compiled by Bloomberg. Rio de Janeiro-based Eletrobras, as the state-owned company is known, issued $1.75 billion of 10-year bonds to yield 5.75 percent. Yields on the securities have fallen 54 basis points, or 0.54 percentage point, in secondary market trading, to 5.21 percent. Similar-maturity Brazilian government bonds yield 3.56 percent.

High-Grade Demand

Mexican companies led by America Movil SAB and Petroleos Mexicanos, both based in Mexico City, took advantage of demand for higher-rated debt to sell bonds to finance acquisitions and investment plans. America Movil, Latin America’s biggest wireless carrier, has sold $5.4 billion of debt denominated in euros, dollars, Swiss francs, British pounds and yen to help finance its $6.5 billion acquisition of Telefonos de Mexico SAB.

The company, whose A- rating is the seventh-lowest investment grade and two levels above that of the Mexican government, accounted for 55 percent of the country’s debt issuance since July, according to data compiled by Bloomberg.

Mexico’s overseas debt issuance relative to that of Brazil since July has been “a bit of an anomaly in the market,” Michael Schoen, head of Latin American debt capital markets at Credit Suisse Group AG, said in an Oct. 26 interview in New York. “Petrobras, the Republic of Brazil and a few others would likely have had similar execution success if they’d chosen to go the market.”

Petrobras Plan

Brazil may sell bonds denominated in dollars within weeks, Treasury Secretary Arno Augustin told reporters in Brasilia on Oct. 27.

Petrobras, as the state oil producer is known, hired banks including Banco Bradesco SA, Deutsche Bank AG and Banco Santander SA to manage a bond offering denominated in euros and pounds, said three people familiar with the matter who asked not to be identified because the plans haven’t been announced publicly. The sale will take place when market conditions improve, the people said.

Petrobras said in an e-mailed statement that it’s constantly evaluating new alternatives to finance its business plans, the company response to questions.

“There’s no urgency, but if we have an opportunity we’ll do it,” Chief Executive Officer Jose Sergio Gabrielli told reporters in Brasilia on Oct. 27. “We’re looking every day. It’s a fast operation. We have all the legal requirements. We have $26 billion in cash. We don’t have any problems with cash.”

‘Leave Room’

Brazilian overseas debt sales may surpass those from Mexico in the coming months, said Omar Zeolla, an analyst at RBS Securities Inc.

“This trend is not going to continue because the large companies in Mexico issued recently,” Zeolla said in a telephone interview from Stamford, Connecticut. “They should be done for the rest of the year. That’d leave room for Brazilian companies to issue more debt than Mexican ones.”

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries widened 4 basis points to 216 at 11:03 a.m. Sao Paulo time, according to JPMorgan.

The real fell 0.9 percent to 1.6867 per U.S. dollar. Yields on interest-rate futures contracts due in January 2013 fell fouir basis points to 10.30 percent

The cost of protecting Brazilian bonds against default for five years rose one basis point to 134 on Oct. 28, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Junk Offerings

International debt sales from Brazil have totaled $33 billion this year, compared with $19.8 billion from Mexico, according to data compiled by Bloomberg. Brazilian issuance has exceeded that of Mexico every year since 2005.

Thirty-seven percent of Brazilian debt sold in the last two years was issued by companies rated junk by at least one rating company, compared with 20 percent in Mexico, according to data compiled by Bloomberg.

The average yield on corporate debt sold by emerging-market companies rated below Baa3 by Moody’s Investors Service or BBB- by Standard & Poor’s touched a two-year-high of 11.88 percent on Oct. 4 before falling to 9.27 percent last week, when global markets rallied after European leaders agreed on a plan to stem the debt crisis.

‘Almost Impossible’

“If a high-yield company wanted to do a deal at this point it would be almost impossible,” Siddhart Dahiya, a credit analyst at Aberdeen Asset Management in London, said in a telephone interview.

RBS Securities’ Zeolla said Brazilian companies are likely to return to the international credit markets if demand for higher-yielding assets increases.

The average yield on Brazilian corporate debt sank 34 basis points last week after European leaders agreed to expand a bailout fund to stem the region’s debt crisis, according to JPMorgan.

“The Brazilians might be waiting for better terms to come to the market,” Zeolla said. “They’d come if they think that the market is going to improve.”

--With assistance from Boris Korby in New York. Editors: Lester Pimentel, Brendan Walsh

To contact the reporters on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net; Drew Benson in New York at abenson9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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