Bloomberg News

New Normal Is Selling Old Debt as Issuance Surges: Brazil Credit

February 03, 2012

Feb. 3 (Bloomberg) -- Brazilian companies led by Itau Unibanco Holding SA and Petroleo Brasileiro SA are selling more of their existing bonds in a bid to access international credit markets faster amid a decline in borrowing costs.

Eight out of 16 overseas corporate bond offerings from Brazilian companies this year have been so-called re-openings, up from eight in all of 2011, according to data compiled by Bloomberg. The average yield on dollar debt sold by Brazilian companies has dropped 26 basis points, or 0.26 percentage point, this year to 5.9 percent, the lowest since August, according to JPMorgan Chase & Co. Borrowing costs for Mexican companies fell 24 basis points in the same period to 6.05 percent.

Brazil’s debt sales are part of a surge in emerging-market bond issuance overseas amid growing speculation Europe’s debt crisis is easing. Brazilian companies are trying to take advantage of rising demand for higher-yielding assets by issuing outstanding securities that already have prospectuses and credit ratings, which reduce the amount of time it takes to market the notes to investors, said Robert Stoll, a Fitch Ratings analyst.

“It’s faster and easier to work with existing documents,” Stoll said in a telephone interview in New York. “One of the reasons it’s easier is that a ratings company doesn’t have to take the additional time, the additional due diligence, to ensure that all of the terms and conditions are there since it refers to something we’ve seen before. Now there is a certain window of opportunity when markets are calm.”

Developing-nation borrowers issued $59.4 billion of dollar debt last month, according to data compiled by Bloomberg. Brazilian companies have sold $12.3 billion this year, compared with $10.5 billion in the same period last year.

‘More Liquidity’

Votorantim Cimentos SA, a unit of Votorantim Group, sold $500 million more of its dollar bonds due 2041 to yield 7.3 percent yesterday, the latest Brazilian company to re-open an existing security. Similar-maturity Brazilian government debt yields 4.64 percent.

Votorantim Cimentos declined to comment.

Brazilian companies are also selling more of existing bonds to boost the liquidity of their securities in the secondary market, said Douglas Chen, the head of international fixed- income distribution at Itau Unibanco Holding SA.

“A re-tap allows you to add a tad more liquidity to an existing bond,” Chen said in a telephone interview in New York. “When you do a new issue, you commit yourself to selling a benchmark-sized deal.”

Benchmark typically means a bond offering of at least $500 million.

Petrobras Offering

Itau, Latin America’s biggest bank by market value, sold an additional $500 million of its bonds due in 2021 to yield 6 percent on Jan. 17, increasing the amount of the securities to $1.5 billion. Yields on the notes have dropped 14 basis points to 5.86 percent, according to data compiled by Bloomberg.

Itau didn’t return a call and e-mail seeking comment.

Vinicius Pasquarelli, an emerging-market debt trader at Tradition Asiel Securities in New York, said companies that are seeking to ensure their bonds are benchmarked to the most-traded U.S. Treasuries have to sell new bonds. While Petrobras issued more of its 10- and 30-year bonds this week, it also sold notes due in 2015 and 2017 to better line up with Treasuries, he said.

“What Petrobras did was reshape its curve in the market,” Pasquarelli said in e-mailed comments.

Petrobras, as the Brazilian state-owned oil producer is known, sold $2.75 billion more of its bonds maturing in 2021 to yield 295 basis points above Treasuries and $1.25 billion more of its 2041 securities at a spread of 295 basis points on Feb. 1. It also issued a $1.25 billion, three-year bond to yield 275 basis points above U.S. Treasuries and a $1.75 billion, five- year security at a spread of 290 basis points.

Yield Spread

Petrobras declined to comment.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries widened one basis point yesterday to 219, according to JPMorgan.

The cost of protecting Brazilian bonds against default for five years rose one basis point to 142, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default 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.

The real rose 0.9 percent to 1.7189 per dollar.

The yield on the overnight interest-rate futures contract due in January 2013 fell five basis points to 9.45 percent.

Robert Abad, who helps oversee $37 billion of emerging- market assets at Western Asset Management, said companies are opting for re-openings because of concern a sudden reversal in investor demand may shutter international credit markets.

“This is the time to do it,” Abad said in a telephone interview from Pasadena. “You’re not going to wait two months. You don’t even know if you have two weeks.”

--With assistance from Boris Korby and Veronica Navarro Espinosa in New York and Rodrigo Orihuela in Rio de Janeiro and Felipe Frisch and Tais Fuoco in Sao Paulo. Editors: Lester Pimentel, David Papadopoulos

To contact the reporters on this story: Drew Benson in New York at abenson9@bloomberg.net; Christine Jenkins in New York at cjenkins28@bloomberg.net

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


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