Brazil: Cielo and Petrobras give grounds for optimism

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‘Deal surge’ predicted; Goldman Sachs urges caution.

By Rob Dwyer

Cielo’s landmark R$4.6 billion ($1.5 billion) local bond has lifted hopes that the volatility that has severely restricted local debt activity – and halted international debt capital markets issuance completely from Brazilian borrowers – is receding. Cielo, a credit and debit cards company, is one of the leading Brazilian blue chips and the deal was the second largest ever sold in Brazil’s domestic markets. Demand was more than R$12.2 billion, equivalent to one-third of the total volume distributed in 2014.

The deal represented a reopening of the CVM400 market (unfettered marketing and distribution structure) with restricted-distribution deals previously dominating year-to-date. Asset managers took most of the paper (91.1%) with the remainder being distributed to insurance companies (8%), banks (0.9%) and private banking clients (0.8%).

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The lead coordinator Bradesco BBI, along with joint leads BTG Pactual and JPMorgan, claim to have repriced the Brazilian credit market and provided a benchmark for other issuers to come. The large book enabled the banks to tighten pricing, from initial guidance of around 109% of CDI to close at 105.8% of CDI – a level that is below capital markets funding costs for leading Brazilian banks.

New deal surge

“There is now a reference for other deals to rely on,” says Renato Ejnisman, head of Bradesco BBI and member of Bradesco’s executive committee. Speaking to Euromoney before the publication of Petrobras’ audited accounts on April 22 he said he believed the combination of Cielo’s deal and the removal of the Petrobras accounts issue would lead to a “surge in new deals”.

Ejnisman says the success of the deal not only relied on the high quality of the issuer’s credit but also what he believes is the beginning of a new phase for Brazil. “It may be too soon to say, but this could be the inflection point that we have been anticipating,” he says. “The [government’s] fiscal adjustment is starting to show a lot of traction and there are signs that we are seeing a turnaround. The real has appreciated by almost 10% in the past few weeks, there has been a fall in the CDS spreads for Brazil and even this issuance by Cielo is a sign of this inflection point.”

Renato Ejnisman Bradesco
There is now a reference for other deals to rely on

Renato Ejnisman, Bradesco

This sense of optimism isn’t restricted to the domestic debt capital markets. “We expect activity from Brazil to pick up relatively soon,” says Alberto Ardura, head of capital markets and treasury solutions Latin America at Deutsche Bank. “The market is open, yields for Brazilian credits have been improving for the past two weeks and we expect that to continue. At this point there is no lack of appetite for Brazilian credit. As spreads continue to come in we do expect issuance activity to resume.”

However, despite the recent rally in asset prices there are many voices warning that it is premature to say the Brazil has definitely reached an inflection point. Goldman Sachs has launched a new tool, called Nowcast, to help the bank track Brazil’s macroeconomic situation. The bank says that the fiscal adjustment has “to a large extent, yet to start in earnest and is also the macro variable that is most likely to take the longest time to reach the desired level. Some key fiscal measures have yet to be approved by Congress while others will come fully into effect throughout the year.”

However, Ejnisman says that over 400 investors attended a recent conference his bank hosted and he sensed that a new entry point may have been reached. Of those international investors present, he said that “those who were averse to Brazil are now intrigued, and those that were intrigued are now moving to being genuinely interested [in investing capital] again”.

For some economists, this sense of optimism underplays the downside risks: unemployment is rising, and public and private credit is decelerating. Inflation is above 8% and still rising and the political situation remains complicated (as Euromoney went to press Petrobras reported $2 billion losses from corruption which will further challenge President Dilma Rousseff’s governability challenges).

Recent rainfall has alleviated the immediate risk of power rationing but it remains a possible threat to growth later this year and in 2016. China also appears to be slowing and an increase in US interest rates may pull capital out of emerging markets such as Brazil.

Confidence

Despite Ejnisman’s upbeat assessment of Brazil’s imminent recovery, Bradesco’s own projection for 2015 GDP growth is -2.0%, a long way below the latest central bank’s survey figure of -1.01%. With a sharp recession about take hold of the economy and a slew of downside risks, what is the source of the belief in Brazil already reaching this inflection point?

The key to the potential discrepancy is probably outlined in the introduction to the report that introduced Goldman’s new Brazilian GDP tracker. It said: “Confidence is central, for if it fails to recover in the next few months required macro adjustment to rebalance the economy will likely last longer and bite deeper than if the domestic economic agents become more upbeat and persuaded that the current macro policy mix will ultimately restore macro balances and swiftly clear the path for a cycle of solid, balanced, noninflationary growth.”