Cielo, a Brazilian card-payment processor, created a new record low-yield for a Brazilian corporate issuer of 10-year debt. The $875 million transaction was rated BBB+/Baa2 and priced at 99.316 with a 3.750% coupon to yield 3.833% or US treasuries plus 225%.
The deal enjoyed the over-subscription that has characterized the recent international debt capital markets for Latin American issuers, attracting a book of $6.4 billion.
|Leandro Miranda, managing director and head of fixed income for Bradesco BBI|
"This transaction will change the course of history of Brazilian corporate bonds," says Miranda. "[Price] is going to go much closer to the US. Emerging market accounts and US investors are willing to diversify their portfolios into bonds from different regions, and especially the Brics. The amount these investors are willing to invest is far higher than the [volume] of securities that is being offered and the competition will drive the yields down."
The chart below shows that despite some talk of a bubble in Latin American credit, there could still be room for the spread over treasury to compress. The average spread for BBB-rated bonds from Latin America has fallen by 49bp since 2009, while US companies with the same international ratings have enjoyed a fall, on average, of 163bp.
Brazilian BBB-rated issuances have seen average spreads fall by just 12bp in the same period and have an average spread of 326bp over treasuries in 2012. The data show that Chilean corporates enjoy the tightest spread: in 2012, the average spread for 10-year BBB paper was 261bp over treasuries. Meanwhile, the compression of the average of this benchmark from Mexican issuers has fallen by the most between 2009 and 2012, by 142bp.
The small fall in Brazilian corporates makes the price of Brazilian issuance more comparable with European bonds, with an average spread of 326bp over treasuries for Brazilian BBB debt compared with a European average of 316.
The timing of the transaction enabled the low pricing. "We had a number of conversations with important anchor investors and we decided to launch when we felt liquidity was very high and there was a total lack of bonds in the secondary market," says Miranda. "The amount of money available from investors was much higher than the asset available and Cielo came in the magic moment. A lot of cash was looking for a good asset."
The bookrunners tweaked the ration of orders to final allocation to favour secondary performance, and to facilitate the issuers return to the market, which they say was critical to enable strong after-market performance when pricing a deal so low. North American investors accounted for 45% of demand but received 54% allocation; Europe represented 35% of orders but was allocated 27%. The bookrunners also favoured asset managers who were allocated 49% of the paper over private banking investors and hedge funds.
Investors were attracted to the ownership structure of the credit, with Banco do Brasil and Bradesco both owning 28.65% of the company. It is also a very high margin business, with Cielos adjusted ebitda margin of 63.5% in September. The company also has a majority market share and, with its main competitor Redecard, accounts for more than 95%.
As Redecard has no outstanding bonds, the bookrunners used BM&FBovespa as a comparable, along with Banco do Brasil and Bradesco, although bookrunners were keen to stress that Cielo is not a bank. "We had a terrific and unique credit risk and we gave preference to the right investors to create momentum and scarcity related to this company," says Miranda.
Bradesco and Banco do Brasils participation on the transaction is no surprise, given Bradescos stake in Cielo Goldman Sachs had a pre-existing relationship with Cielo after advising on its acquisition of Cielo USA but Miranda says the deal is an important stage in the emergence of the investment bank nonetheless.
He also says that Bradesco will be able to leverage other relationships it has in the market to compete. "We are a relationship bank with more than $250 billion of loans [outstanding] to Brazilian corporates," says Miranda. "When you think of a Brazilian company, you are very likely going to see that it is a client of Bradesco."
However, despite not being shy of competing on a balance-sheet basis, he argues the pressure on execution is substantial. "We are the new kid of the block," says Miranda. "We cant make a mistake. We cant take bad credits to the market. It is very important that investors are very happy with every deal we take to the market, because in that way every deal we bring to the market will have investors attention."