Brazil guide: Equities – A hint of things to come?
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Brazil guide: Equities – A hint of things to come?

What had looked like a promising year for Brazilian share issues failed to live up to expectations.

In a year of breakthroughs for Brazil’s banks, perhaps the most emblematic of the threat they pose to the established ranks in the international capital markets was April’s follow-on transaction for steel maker Gerdau. A consortium of three banks led the R$5.54 in the biggest Brazilian share since 2010’s Petrobras follow-on (worth $70 billion if the shares taken by the government are included). International institutional investors were critical to a transaction of that size, but Gerdau rejected the argument pitched by US and European banks that it was essential to have a role for at least one international bank. The bookrunners were Bradesco, BTG Pactual and Itaú. Gerdau sold 224.2 million preferred shares at BRL19.25 a share and 78.2 million common shares ate BRL15.60. The prices represented a 0.6% discount to the common share’s closing price on the previous trading day and no discount to the closing price for the common shares. However, the share price had dipped by about 3% immediately prior to the execution.

Competitors said the transaction would have been more successful had the company broadened its distribution through an international investment bank. Bankers on the deal deny this, and point to the sheer size of the transaction as the cause of the slight weakening in Gerdau’s share price. However, beyond its performance, the operation’s significance is that it shows that deals involving only Brazilian banks can execute large international equity transactions.

Speaking to Euromoney a couple of months after the Gerdau transaction, Roberto Setubal, president of Itaú, wasn’t in a mood to downplay the significance of the trade to the Brazilian banking system. "The Gerdau operation was a landmark – a remarkable thing. It was the first time in a meaningful operation that we had only Brazilian companies heading the bookrunning, and it was very successful," he said. "I believe that shortly Brazilian companies will be very comfortable with only Brazilian banks leading on deals like this. It’s evolution for us. It’s a trend; [Gerdau] will not be something unique; we will see more and more of this happening in the future." Meanwhile, 2011 was supposed to be a very busy year for Brazilian IPOs. Petrobras, which had been hanging over the BM&FBovespa for most of 2010, had kept smaller transactions away. The expectations were high for new listings, and the first deal to market, Arezzo Industria e Comercio, got the year under way in strong fashion. The Brazilian shoemaker priced at the end of January, selling R$566 million of shares at the top of its range of R$19; the deal included a 15% greenshoe and a 20% hot issue.

But the deals that followed failed to live up to Arezzo’s example. Sonae Sierra Brasil priced a couple of days later at R$20, against a range of R$21.5 to R$26.5. Other deals faltered, coming in at the bottom of their range or below. Investors were said still to be wary following the previous wave of IPOs in 2007. The first half-year saw fitful rather steady issuance, failing to create any momentum. By mid-year, as the global economic crisis brought risk aversion and global funds flowed out of Brazilian equities, the market was in effect closed. The last to come was education company Abril Educacão which raised R$428 million in an IPO on 21 July, although true to form it priced at R$20, below its range of R$21.75 to R$26.75. Since then there has been only one deal, a R$1.7 billion follow-on for wireless operator TIM Participações, and that was a ‘sure thing’, with its parent Telecom Italia exercising its rights to 66.9% of the sale.

Bradesco joins the leaders

Last year’s leading banks again dominated the advisory league table for Brazilian equity deals. Itaú BBA, BTG Pactual and Credit Suisse were all again in the top four places, ranked first, second and fourth respectively. Last year these three banks made up the top three places but this year Bradesco BBI has broken into the top of the table. In 2011 (year to date) Bradesco has acted on 10 deals worth $1.6 billion, equivalent to a market share of 15%. This compares to 2010 when the bank had market share of 5.5%, with a volume of $2.7 billion on eight deals and was ranked 10th.

Luiz Trabuco, president of Bradesco, believes that the co-ordinating bookrunner role that Bradesco performed for the mammoth Petrobras transaction established the bank’s credibility as a serious equities player, and he claims the banks has the relationships with a host of potential IPO candidates to mean that Bradesco BBI can continue to improve its league table ranking (for the full interview with Bradesco’s Trabuco see Euromoney’s November issue).

Top Brazil ECM Bookrunners - By Deal Volume
2011 YTD Q1-4 2010
Bookrunner Rank Deal Value ($m) No. %share Rank Deal Value ($m) No.strong> %share
Itaú BBA 1 2,792 22 25.5 3 5,084 15 10.3
BTG Pactual 2 1,942 12 17.8 1 5,338 22 10.8
Banco Bradesco BBI SA 3 1,644 10 15.0 10 2,731 8 5.5
Credit Suisse 4 1,334 13 12.2 2 5,298 20 10.7
Bank of America Merrill Lynch 5 629 4 5.8 4 4,755 6 9.6
Goldman Sachs 6 596 5 5.5 9 2,733 6 5.5
Santander 7 528 7 4.8 5 3,761 10 7.6
Morgan Stanley 8 398 4 3.6 11 2,215 3 4.5
Banco do Brasil SA 9 229 2 2.1 8 3,310 5 6.7
JP Morgan 10 220 3 2.0 7 3,458 6 7.0
Total 10,935 30 100.0 49,330 42 100.0
Source: Dealogic
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