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Capital Markets

Debt capital markets: Banco do Brasil bond breaks FIG silence

Investors offered a banking growth story; No shortage of liquidity

Banco do Brasil’s $500 million transaction in November shows that the senior unsecured bond market for Latin American FIG remains open. With European issuers struggling to access the markets, Banco do Brasil’s successful transaction, the first FIG deal in the region since June, shows that regional banks will be able to raise funds and might even benefit from a desire from FIG investors to diversify their portfolios with Latin American banking credits.

Banco do Brasil priced its five-year 3.875% notes at 99.413 to yield 4% (treasuries plus 312 basis points). Demand came largely from the US, Europe and Latin America and bankers reported that retail demand was particularly strong. Despite the general atmosphere of risk aversion the pricing achieved was attractive.

The right window

"Given the general risk aversion in the market it was important to spot the right window to deliver this transaction, especially as there hadn’t been any other Latin America FIG deals since June this year," says Roberto D’Avola, head of Latin America debt capital markets for JPMorgan, which led the deal with Banco do Brasil, Bradesco, Citi and HSBC. "Although there has been a lot of volatility lately in FIG globally, we felt very strongly about the issuer. In addition to that, the fundamentals for financial institutions in our region are completely different from what we have seen in the rest of the world. We felt very good about the window and it worked very well. We achieved a very low yield; it is the lowest yield and coupon for five-year paper from a Brazilian financial institution."

Roberto D’Avola, head of Latin America debt capital markets for JPMorgan
“The supply coming to the market could be very interesting – we could have a first half of 2012 with as many transactions as we saw in the first half of this year”

Roberto D’Avola, JPMorgan

While European banks face difficulties in raising unsecured debt that is needed to rebuild regulatory capital – increasingly looking to covered bonds and private placement transactions – Latin American financial institutions offer FIG investors a growth story. Banks in the region are seeking to access the markets because credit growth in their domestic markets exceeds growth in deposits. The larger countries in the region are growing particularly quickly and as these markets continue to grow so do their banks’ balance sheets. With the ultimate users of credit demanding more loans, the banks will continue having an interest in funding themselves.

Latin American banks retain flexibility in financing options, with D’Avola saying he believes Banco do Brasil could have completed a transaction with a longer tenor but the issuer’s strategy was to establish a strong, senior-unsecured five-year benchmark deal.

"Financial institutions in Latin America offer a great opportunity to investors. In other transactions, such as those we did for Bancolombia, we have seen that there is a lot of demand from global FIG investors," says D’Avola. "The financial systems in Latin America are very robust; this generates an opportunity for some investors to diversify away from some of the markets they typically invest in. Having said that, no one is immune from the current high volatility prevailing in the market, no matter how good an issuer. If it is not the right day your deal may not be done."

Bankers report a potential strong pipeline for the first six months of next year, not just in FIG, which is expected to be largely opportunistic in nature. New-issue premiums are, generally, very volatile, with some issuers paying up to 30 to 35bp, while the new-issue premium on another deal was as low as 10bp. "As volatility comes down new-issue premia stabilize. When the issuer is a quality credit that investors don’t have too many opportunities to get exposure to, then NI premia get compressed," says D’Avola.

of orders for the Dominican Republic’s $250 million re-tap

In recent years Latin American issuers have been more active in the first half of the year and the present global slowdown in international capital markets activity is only reinforcing this pattern. However, with strong fundamentals and waiting supply, bankers have high hopes for volumes next semester as long as nothing happens to heighten global volatility. Liquidity seems not to be an issue. In November a Peruvian debut issuer, Lindley’s $320 million deal, attracted a book of $2 billion; a $250 million Odebrecht re-tap of a perpetual attracted demand of $750 million; and a $250 million re-tap from the Dominican Republic drew in $2 billion of orders.

Great year

"There were some large transactions that didn’t happen in September and October so I think the first quarter of 2012 will definitely be very interesting," says D’Avola. "If we see volatility coming down, this could potentially create a very interesting market dynamic for issuers in our regions – fundamentally those very solid credits that have lots of growth potential. Also, our region, in terms of its economics, has very good growth prospects relative to other places in the world. This in turn, causes investors to focus on Latin America. The supply coming to the market could be very interesting – we could have a first half of 2012 with as many transactions as we saw in the first half of this year."

Dollar-denominated deals are expected to dominate, with the global local-currency transactions preponderance a function of slowing local-currency inflows into the region. However, if investors begin to re-send flows to emerging markets in relatively large sizes, yields in local currency will come down, and that will generate the opportunity for that market to resume.

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