Brazil set out on a new course in 1999, both in the management of its economy and in its approach to the international capital markets. Concerns over the country’s deficits provoked huge capital Xight and a currency devaluation last January. But Brazil did not tip over into crisis. President Fernando Enrique Cardoso, Wnance minister Pedro Malan and central bank governor Arminio Fraga have pushed through tough measures: cutting spending and increasing taxes so as to produce a primary (before debt service costs) public-sector surplus of 3% of GDP. This is the target for the next three years.
Meanwhile a new approach has also been evident among officials at the central bank under Daniel Gleizer, director of international afairs, charged with managing the country’s foreign liabilities. Gleizer, an economist, took up the position in March. He recalls: “Brazil had to rebuild credibility across the board last year. The challenge for us was to build credibility over our liability management at a time when many international investors still had doubts about the economic fundamentals.”
Gleizer saw the challenge as being to “lower borrowing cost over the medium term through an active liability management strategy, while allowing easy and fluid access to international markets and also help the private sector to tap the markets in an eYcient way.” The new approach allowed for leaving a few basis points on the table now, to build well-supported liquid benchmark deals and goodwill among buyers, rather than pushing for the last basis point of cost saving on each transaction.
Very quickly bankers used to covering Brazil noticed a very diferent style. The country’s aggressive, bureaucratic and inflexible approach to new issues was abandoned. One banker recalls: “It used to be that when Brazil decided to come to the market, it would send out a request for proposals to the banks, then make a short-list of bidders and Wnally pick one bank and do the deal. That’s not a great approach. It telegraphs to the world what you intend to do and when, and that can hurt your spreads. Also the bidding process raises the risk of banks bidding too aggressively for mandates, deals not working, investors being hurt and being reluctant to support future deals.”
An important behind-the-scenes change last year at the Banco do Brasil was the consolidation into a single team of two distinct groups that had been separately responsible for new issues and for liability management. This made decision-making easier.
At the same time, the infamous requests for proposals stopped. These had been an understandable but irksome constraint, designedto show Brazilian politicians that there was price competition on the country’s international deals. From last spring, Gleizer and his team made clear that the new strategy was to be less opportunistic and instead to build yield curves of issues with broadly distributed bond deals in the three main currencies – dollar, euro and yen. The euro was easiest, as Brazil was not encumbered with the associations of forced restructuring that haunt its dollar bonds, particularly the Brady bonds. In the second half of last year, Brazil launched euro-denominated deals of three-, five- and seven-year maturities of between e500 million and e800 million. It launched a 10-year euro deal in January. In the dollar markets, it organized a buy-back of Brady debt last year and an accompanying new issue. And this January and February, Brazil launched $1 billion 20-year and 30-year deals, later increasing the 30-year issue by another $600 million. Most recently, it entered the yen market with a ¥60 billion ($560 million) three-year deal.
While the Brazilian team now strives for transparency, by informing all their banks of its over-arching strategy, it is far from naive when it came to executing transactions. One banker says: “Now Gleizer and his team sit back and listen to the banks. But they don’t show their hand on individual transactions. Instead they may team up two banks that have been pushing a particular idea. And they can pull the trigger quickly.”
That nimbleness is evident in delaying the timing of deals as well as in launching them quickly. A banker at a US Wrm says: “I remember the whole Brazilian team was up in New York early in the new year working on the 20-year dollar deal when markets were very uncertain. Everyone thought they would go ahead but they didn’t. They waited and launched later in the month. And they didn’t push too hard, they kept it at $1 billion.”
The 20-year dollar deal was being closely watched as a signal for how borrowers from the region might fare in 2000. While the Brazilian team monitored the dollar market carefully in early January, they also took the opportunity to quickly push out a e750 million 10-year issue in the midst of the uncertainty. A banker at one of the lead managers says: “I had spoken to them on the Tuesday in New York urging ‘go now’. They got back to me on the Thursday evening and asked could we still do a deal. I said yes they could get e500 million. They put us together with the other lead and told us to do it the very next day. They got e750 million. Two years ago the Brazilian central bank would never have been Xexible enough to do that.”
From time to time, Brazil still does opportunistic deals. When Dresdner Kleinwort Benson oVered very Wne terms on a two-year e600 million deal last November, it was too good to pass up. “The deal was not incompatible with our overall strategy. Not all goals can be achieved simultaneously in the same deal. The e600 million oVer was done at a time when the market was still a little sceptical about our external accounts and whether we had enough reserves,” says Gleizer. “And the demand for the paper was there and the deal could help pave the way for the private sector.”
But the central bank is now at pains to take care of investors. Bankers understand Gleizer’s unwritten rule is never to reopen a popular new issue after payment date, no matter how great the demand, so that original investors are not deprived of spread performance. “Essentially the rule is that whoever bought our paper in the first place should not be harmed. In uncertain markets, that translated to not reopening after payment date.”
One banker sums up how far Brazil’s reputation as a borrower has improved in the past year: “What they’re doing is not exactly rocket science. And they may not be as experienced or sophisticated as the Argentines, who have a much greater foreign borrowing requirement every year. But what’s impressive is that they’ve set out their goals and their modus operandi clearly and actually stuck to them. In the process, they’ve built an aura of success around Brazil deals and I now sense among investors that lines are opening up to them.” What’s more, while some bankers advised the Brazilians to wait out uncertain markets earlier this year and come at Wner terms as the country’s economic fundamentals improved, having ploughing ahead Brazil can now sit out a far darker period of credit aversion among investors. “We met our borrowing requirement for this year in the Wrst three months,” says Gleizer. “We have $3.9 billion maturing in 2000. We’ve already raised $3.4 billion and have drawn $600 million of an IADB loan and have a World Bank loan in the pipeline. I’ve said we’ll do $4 to $6 billion in 2000, so we’ll be prefinancing 2001.”
Big challenges remain for Brazil, especially in liability management. One is smoothing out the maturity proWle of international issues before a lumpy repayment calendar in 2004. The tension here is between the wish to issue longer maturities and the goal of creating yield curves useful for private-sector Brazilian borrowers, which would only be able to issue at short maturities.
Also Gleizer wants, over time, to replace the heavily structured Brady bonds that came out of debt restructuring with new simpler global dollar bonds. The intention is to bring the Brady yield curve closer to the global dollar bond yield curve. Assuming greater capital account deregulation, this may then inXuence lower the yield curve on Brazil’s huge domestic debt. “We don’t want to retire Bradys for the sake of it, but only if there’s a net present value saving between the price and spread of old Bradys and new bonds,” says Gleizer.
Of course if the market perceives a credible threat that the central bank might buy up cheap Bradys, international investors might snap them up and do the job for him. But it remains to be seen whether international investors are quite so enamoured of Brazil as all that.
