By Gabrielle Coppola - Aug 16, 2010 11:00 AM GMT+0800
The lowest borrowing costs in euros relative to dollars in four months led Brazilian petrochemicals maker Braskem SA to plan a bond offering that Banco Santander SA says may signal a pickup in sales from the country.
Braskem aims to sell its first-ever euro-denominated bond because there’s “more appetite” for emerging-market debt in Europe than the U.S., Chief Financial Officer Marcela Drehmer told reporters last week in Sao Paulo. Santander and Deutsche Bank AG, two of the top six managers of Brazilian debt sales overseas this year, are urging companies to sell euro bonds because investors are seeking alternative assets after European debt posted losses in April and June.
“Some investors really started to look into diversifying their portfolio into other regions” after the European debt crisis deepened, Ricardo Leoni, Santander’s head of Brazil debt capital markets in Sao Paulo, said in a telephone interview. “In the past, it was more expensive to issue in euros and swap it back to dollars than it is today.”
The extra yield investors demand companies pay to borrow in euros versus dollars on five-year debt shrank last week to as low as 25 basis points, or 0.25 percentage point, the smallest premium since April 28, from a high this year of 39 on May 6, according to data compiled by Bloomberg.
Votorantim Participacoes SA, a Sao Paulo-based industrial conglomerate, was the last Brazilian company to tap the European market, selling 750 million euros ($956 million) of bonds due in 2017 in April to yield 276 basis points more than benchmark debt. In March, Rio de Janeiro-based Vale SA, the world’s biggest iron-ore producer, sold $750 million euros of eight-year debt to yield 4.44 percent.
‘More and More’
Yields on Votorantim’s euro-denominated bonds due in 2017 have declined 21 basis points this month to 4.99 percent, compared with a 49 basis-point drop to 5.81 percent on the company’s dollar notes due in 2019, according to data compiled by Bloomberg. Yields on Vale’s euro-denominated debt due in 2018 slid 25 basis points to 3.59 percent while its dollar notes maturing in 2019 also dropped 25 basis points to 4.22 percent.
The Vale and Votorantim offerings make this year the busiest for Brazilian corporate sales in Europe since 2000, according to data compiled by Bloomberg. Latin American companies and governments have sold $5.3 billion of euro debt this year, the most since 2001, the data show.
“The trend of investor diversification into Latin America is real and it’s pretty obvious to us given the interest we have seen,” said Andre Silva, co-head of Latin American debt capital markets at Deutsche Bank in New York. “The euro market is going to be tapped more and more.”
‘Good Opportunity’
Santander has managed more Brazilian bond sales overseas than any other bank except London-based HSBC Holdings Plc, according to data compiled by Bloomberg. Frankfurt-based Deutsche Bank, which is ranked second in all Latin American deals, is sixth for Brazilian sales. Deutsche Bank helped manage the Votorantim offering. Santander helped arrange the Vale issue.
While growing, Brazilian offerings in euros remain less than 10 percent of this year’s $20.4 billion of sales in the U.S. market. With borrowing costs declining in euros relative to dollars, there’s a “good opportunity” for companies to broaden their financing sources, said Dorian Garay, an investment analyst at ING Investment Management in the Hague, Netherlands, which oversees about 414 billion euros.
Latin American companies want to “diversify their currency funding and investor base,” Garay said. “It’s a good opportunity for them to come to the market as their fundamentals are good and they represent good value.”
Extra Time
Drehmer at Braskem, Latin America’s largest petrochemicals maker, said at an Aug. 10 news conference that the company is waiting for a “window of opportunity” to sell euro bonds.
The extra time and cost associated with cultivating new creditors may discourage some companies in Brazil and across emerging markets from selling euro debt, said Alan Roch, head of Royal Bank of Scotland Plc’s bond syndicate desk in London for Central and Eastern Europe, the Middle East and Africa.
The average yield gap on Brazilian corporate dollar bonds over U.S. Treasuries was unchanged last week at 321 basis points, according to the JPMorgan Chase & Co. CEMBI index.
The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. securities narrowed eight basis points last week to 200, according to JPMorgan’s EMBI+ index.
Default Swaps
Yields on the country’s interest-rate futures contract due in January were unchanged at 10.78 percent. The real fell 0.6 percent to 1.7720 per dollar, extending its loss this year to 1.6 percent.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose four basis points last week to 118, according to data compiled by CMA DataVision. 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.
Insurance on Brazilian debt against default became cheaper this year than that on Spain and Portugal as concern grew about the European nations’ ability to rein in budget deficits and repay debt. It cost 156 basis points more to insure Portuguese debt than Brazilian debt and 100 basis points more to protect Spanish bonds from default on Aug. 13.
The Brazilian government’s improving credit status relative to Europe is helping the country’s companies access the euro market, ING’s Garay said.
“The sovereign risk underlying some Latin American corporates is lower than those in some developed countries facing fiscal constraints to handle debt crises,” Garay said.
To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net;
From Bloomberg published on Aug 16, 2010 11:00 AM GMT+0800