The latest ratings upgrade came from Standard & Poor’s, which on 17 November raised Brazil’s rating to BBB from BBB-. S&P analyst Sebastian Briozzo said that Brazil’s resilience within the global economy was the driving factor behind the ratings upgrade: "The Rousseff administration of Brazil has demonstrated its commitment to meeting fiscal targets, thereby enlarging the scope for using monetary tools to influence the domestic economy. We expect the government to pursue cautious monetary policies that, combined with the country’s growing economic resilience, should moderate the impact of potential external shocks and sustain long-term growth prospects."
The government’s tightening of fiscal policy through budget cuts – the biggest challenge President Dilma Rousseff faced at the beginning of the year, according to most Brazilian economic analysts – is expected to result in a consolidated public sector primary surplus for 2011 of 3.15%. S&P expects per capita real GDP to increase by 2.1% in 2011 and 2.4% in 2012 "barring an unexpectedly severe deterioration in external conditions". The agency also predicts that net general government debt will decline only gradually over the next three years from the 41% of GDP estimated for the end of 2011. "We expect that the current account of the balance of payments will reflect only moderate deficits of less than 2.5% of GDP in the coming three years with net foreign direct investment inflows financing a large share of these. That, along with the accumulation of international reserves that we currently estimate as covering 10 months of current account payments, is likely to sustain Brazil’s external liquidity."
| Top Brazil Domestic DCM Bookrunners - By Deal Volume |
|
2011 YTD |
Q1-4 2010 |
| Bookrunner Parents |
Rank |
Deal Value $ (Proceeds) (m) |
No. |
%share |
Rank |
Deal Value $ (Proceeds) (m) |
No. |
%share |
| Banco Bradesco BBI SA |
1 |
1,957 |
23 |
21.7 |
4 |
1,297 |
11 |
12.9 |
| Itau BBA |
2 |
1,804 |
15 |
20.0 |
6 |
871 |
7 |
8.6 |
| Banco do Brasil SA |
3 |
1,413 |
9 |
15.7 |
3 |
1,306 |
7 |
13.0 |
| BTG Pactual |
4 |
1,039 |
15 |
11.5 |
2 |
1,604 |
10 |
15.9 |
| HSBC |
5 |
968 |
17 |
10.7 |
5 |
1,099 |
12 |
10.9 |
| Santander |
6 |
844 |
8 |
9.4 |
1 |
1,719 |
10 |
17.1 |
| Banco Votorantim SA |
7 |
300 |
4 |
3.3 |
8 |
420 |
2 |
4.2 |
| Citi |
8 |
230 |
3 |
2.6 |
7 |
646 |
4 |
6.4 |
| Deutsche Bank |
9 |
129 |
2 |
1.4 |
12 |
97 |
1 |
1.0 |
| Banco do Nordeste do Brasil SA |
10 |
120 |
1 |
1.3 |
|
|
|
|
| Total |
|
9,031 |
50 |
100.0 |
|
10,077 |
33 |
100.0 |
| Source: Dealogic | |
The agency notes that monetary policy and macro-prudential measures are beginning to be relaxed but says that such counter-cyclical policies – when combined with continuing fiscal discipline – are not a threat to the country’s upgrade. A bigger long-term threat to further future upgrades is the low level of investment. According to the ratings action report: "Investment to GDP, estimated at 19.4% for 2011, and microeconomic rigidities in many sectors hamper its ability to increase per capita real economic growth much above 3% without running the risk of creating macroeconomic imbalances. Given the public sector’s limited, though improving, fiscal flexibility, we believe that the effort to increase private sector investment will be a key challenge for Brazil."
S&P’s upgrade came less than a week after the sovereign conducted a re-tap of its 30-year bonds, in a continuation of the strategy of deepening the liquidity and narrowing the pricing of its benchmark bonds to facilitate access to the international markets for the country’s leading corporates. However, it is unlikely that the pricing would have benefited from the upgrade prior to the re-tap with the market already pricing the sovereign higher than its BBB- rating would imply. Brazil actually upsized the re-tap of its 5.625% 2041s to $1 billion from a proposed $500 million after the transaction attracted a book of more than $6 billion. With little else in the market, Brazil enjoyed pricing benefits of this oversubscription, closing at 114.700 to yield 4.694% or US Treasuries plus 160 basis points, equivalent to a concession of about 10 basis points on the outstanding notes. Brazil now has $2.8 billion of 2041s and $2.1 billion of 2021s. Bank of America Merrill Lynch and Barclays managed the transaction.
Corporate deals
The sovereign’s November re-tap will only help Brazil’s corporates access the markets, although as the end of November nears the volume of Brazilian corporate paper on the international markets has been low. At the beginning of September bankers reported a pipeline of between $5 billion and $7 billion, with many corporates readying to issue. This hasn’t happened, aside from some notable transactions, as corporates with track records are, despite low treasuries, reluctant to pay the higher new issue premiums being demanded by investors. Meanwhile the market doesn’t appear to be open for issuers of high-yield credits or first-time issuers.
| Top Brazil International DCM Bookrunners - By Deal Volume |
|
2011 YTD |
Q1-4 2010 |
| Bookrunner Parents |
Rank |
Deal Value $ (Proceeds) (m) |
No. |
%share |
Rank |
Deal Value $ (Proceeds) (m) |
No. |
%share |
| Santander |
1 |
4,675 |
12 |
13.4 |
3 |
3,928 |
20 |
10.3 |
| HSBC |
2 |
3,451 |
15 |
9.9 |
1 |
4,344 |
22 |
11.3 |
| JPMorgan |
3 |
3,290 |
12 |
9.4 |
2 |
4,336 |
16 |
11.3 |
| Itau BBA |
4 |
3,042 |
13 |
8.7 |
5 |
3,706 |
23 |
9.7 |
| Bank of America Merrill Lynch |
5 |
2,641 |
14 |
7.6 |
6 |
3,448 |
18 |
9.0 |
| Citi |
6 |
2,528 |
8 |
7.2 |
13 |
835 |
4 |
2.2 |
| Credit Suisse |
7 |
1,838 |
6 |
5.3 |
8 |
2,069 |
8 |
5.4 |
| Deutsche Bank |
8 |
1,637 |
10 |
4.7 |
4 |
3,737 |
14 |
9.8 |
| BTG Pactual |
9 |
1,602 |
7 |
4.6 |
17 |
474 |
3 |
1.2 |
| Banco Bradesco BBI SA |
10 |
1,563 |
11 |
4.5 |
9 |
1,723 |
13 |
4.5 |
| Total |
|
34,972 |
55 |
100.0 |
|
38,320 |
68 |
100.0 |
| Source: Dealogic | |
Electrobras’s transaction on 20 October showed that market volatility is stifling demand from Brazilian credits. The quasi-sovereign is rated Baa2/BBB/BBB- and had set out to raise $2.5 billion but had to lower that to $1.75 billion in a trade-off for pricing over size. Despite offering a new issue premium of between 40 and 50 basis points, pricing at par with a 5.75% coupon, the company had to downsize the deal. That a quasi-sovereign is having to cut deal sizes shows the difficulty in raising the amount of capital that creates the liquidity investors are looking for in deals out of Latin America.
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