Brazil prints R$3 billion bond for liability exercise
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Brazil prints R$3 billion bond for liability exercise

Deal part of liability management exercise; Pemex pioneers LatAm Aussie dollar market

Brazil closed a rare R$3 billion ($1.6 billion) global real-denominated bond on April 17 as part of a liability management exercise that attracted an order book of more than R$5 billion. The sovereign priced the 12-year bond at 99.82 with an 8.5% coupon to yield 8.6% and then used R$1.7 billion to buy back existing 2016 and 2022 global real-denominated bonds. Both outstanding issues paid a coupon of 12.5% and the sovereign paid holders $120.50 for the 2016s and $130.00 for the 2022s per $1,000 of principal.

HSBC and Goldman Sachs managed both the sale of the 2014s and the tender process.

The deal was closed during a week when funds flowed out of local-currency emerging market funds. The strong order book was in part a function of the parallel liability-management exercise – with 50% of orders going to holders of notes involved in this process – and partly because of investor interest in participating in a global real bond with rare liquidity.

"Global Brazilian real trades – and global local-currency transactions generally – are more difficult to execute, so the fact we received orders of more than R$5 billion makes this a huge deal," says Katia Bouazza, co-head of global capital markets, Americas, at HSBC. She says the Republic of Brazil had been targeting this trade for a long time.

of the R$ was used to buy back 2016 and 2022 bonds

McDonald’s franchiser Arcos Dorados immediately followed Brazil with a re-tap of its real-denominated 2016s. Bank of America Merrill Lynch, Citi and Credit Suisse managed the R$275 million reopening, which has a coupon of 10.25%, opening at 102.529 to yield 9.5% and pay a concession of 30 basis points. The deal attracted orders of about R$500 million. A banker who worked on the deal said uncertainty about political intervention to distort the exchange rate of the real played a role in dampening international investor demand for the deal. "The global Brazilian real deals have a lot of moving pieces – the IOF [tax] has been part of the equation but that’s only one of any number of moves that Brazil is doing to try to weaken its currency," the banker says. "I’m not going to say the global Brazilian real market is closed because we did a successful trade, but I don’t think it’s flying because I don’t think people have a clear view of where the real will settle."

However, Bouazza says that despite the recent volatility of the real, investors in the sovereign transaction were attracted to the long-term fundamentals of the Brazilian currency.

"[Demand was] in part a currency play over the longer term, as well as a function of investors switching from smaller transactions to a larger, more liquid transaction," she says. "The sovereign wanted to establish a benchmark in the mid-part of the curve that was liquid, identifiable and well traded."

Meanwhile, HSBC opened up the Australian dollar market for Latin American issuers with an A$150 million ($155 million) five-year bond for Pemex. The Mexican state-owned oil producer priced a 6.125% coupon at 99.715 to yield 6.193%, a saving of 25bp inside the credit’s dollar curve after executing a currency swap. Bouazza says the bond was bought by more than 50 investors in Asia and Europe and that the RegS deal "is similar to a medium-term note in terms of attracting investors who want small allocations but keep returning".

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