Brazil’s bankers hope Azul is green light for more IPOs
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Brazil’s bankers hope Azul is green light for more IPOs

Airline IPO finally takes off on fourth attempt; optimism immediately tempered by renewed political risk.

Azul management and staff celebrate the IPO at BM&F Bovespa Stock Exchange
in São Paulo on Tuesday

Brazil’s beleaguered ECM bankers will be hoping the successful IPO of airline Azul is a sign that international investors have renewed appetite for fresh equity transactions from the largest Latin American country.

Azul’s IPO came after three previous attempts – in 2013, 2014 and 2015 – had been pulled due to poor market conditions.

This time the lead arrangers – Citi, Deutsche Bank and Itaú BBA – found strong demand and generated 5-times oversubscription before pricing in the middle of the range. The other banks in the transaction include Banco do Brasil, Raymond James and Banco Safra.

Brazilian bankers have been targeting up to 15 IPOs this year and were heartened by the Azul deal pricing in the middle of its range.

Good and bad

The transaction seemed to offer a positive sign for the waiting pipeline of deals, but that optimism was almost immediately thrown into doubt by more bad news for the government from the Lava Jato corruption investigation.

On Tuesday, a Supreme Court judge approved investigations into nine government ministers, 29 senators and 42 congressman – including the speaker of both houses.

Local newspaper Folha de São Paulo reported finance minister Henrique Meirelles’ immediate response that the development had thrown the government’s economic programme – and particularly the vital reform of state pensions – into “disarray”.

None of the banks involved in the Azul deal would comment publicly about the likely impact of the latest Lava Jato development on the appetite of investors and the prospects for deal flow.

However, bankers are clearly hoping that the pensions reform isn’t blown off course. After a dearth of transactions over the past three years, there is plenty of supply to come.

In May, XP Investimentos aims to market a $1.3 billion IPO – led by BTG Pactual, Itaú BBA and Morgan Stanley – and healthcare insurer Grupo NotreDame Intermédica has hired Credit Suisse, Bradesco BBI, Itaú BBA, JPMorgan and UBS to take it public later this year.

Netshoes – an online retailer – is also trying again after having pulled an IPO last year. The deal is being led by Goldman Sachs, Bradesco BBI, Allen & Company and Jefferies.

ECM bankers are desperate for the equity market to reopen in a substantive way and will take heart from the fact that Azul attracted 70% of its book from international investors for its dual listing in São Paulo and New York.

Source: Dealogic              *incorporates Brazil  

Data from Dealogic show just how poor ECM revenues have been in Brazil in recent years. From the heady days of 2007 – when a gold rush of 66 IPOs were priced and banks generated a total of $1.1 billion in fees – ECM revenues have slowed. Investment banks earned just $75 million of ECM fees in 2016. 

The proportion of ECM revenue within all investment banking fees was 69% in 2007, falling to just 5% in 2015 – when the combined ECM fees of all investment banks was a paltry $23 million) – and that was in a year when Brazilian issuers were also virtually frozen out of the DCM markets.

Last year, ECM fees comprised just 15% of total investment banking revenues of $506 million. However, already this year ECM is increasing in relative importance – with ECM generating 41% of all revenues: $74 million of $182 million.

A revival in Brazilian equity deals will primarily be good news for the local banks, which now dominate the fee earning league tables. Itaú BBA and Bradesco are the leading banks. Santander – a listed Brazilian bank – is third and Banco do Brasil is fifth – with JPMorgan the only truly international player, at fourth.

However, the data show just how important the revival of Brazil’s equity markets will be for the entire region.

In 2007, Brazilian equity transactions generated 81% of all ECM fees in Latin America – and an extraordinary 42% of all of the region’s investment banking fees. In 2015, the importance of the sector had shrunk: Brazilian ECM fees were just 16% of all the region’s ECM revenues and 2% of all investment banking business.


Bankers express hopes that Brazilian ECM fees will recover, but they are not expecting the level of transactions seen in 2007. It is now widely accepted that the frenzy in that year led to a lack of discipline on the part of both investors and underwriters.

Senior ECM bankers also do not think that Brazil will dominate the region to the same extent.

The open question is whether international banks would respond to a significant increase in deal activity with renewed investment in the sector in Brazil. Many of them invested heavily in their local platforms to try to win market share, only to find that they had to scale back as the revenue opportunity evaporated.

The local banks saw off the challenge the last time around – although Bank of America Merrill Lynch did take a 15% market share with five deals in 2016. And little has changed in the market to suggest that international banks would find gaining market share any easier this time around.

Although BTG Pactual is a wounded competitor – in 2015, before its near collapse, it enjoyed a 41% share of ECM fees, falling to just 7.7% last year – international ECM bankers concede that the local equities franchises of Bradesco BBI and, to a lesser extent, Banco do Brasil are much stronger than they were between 2008 and 2012.

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