Brazil’s economy must absorb a lot more pain before it starts to grow again. Until then, investors will stay away, and the deals won’t come.
ECM bankers are straining to see an inflection point in the Brazil story – a point where the upside risks look more tempting to investors than the downside risks look scary. It’s clearly in bankers’ best interests to see the market turn – the scraps of primary issuance volumes in recent times haven’t generated anything like projected revenues for ECM teams. Investors are interested in new deals out of Brazil – bankers say, trying to convince everyone including themselves – but there has yet been little proof.
Then there are the Brazil-specific issues. Investors have, for some time, been generally wary of Brazil deals. Poorly structured deals that are thinly-veiled shareholder payouts, or wildly over-optimistic valuations based on little in the way of data, have made equity deals struggle in much more benign macroeconomic environments than the one Brazil currently faces.
Some equity bankers blame the culture of corporates wanting to squeeze every last penny out of a deal – caring nothing for building books with solid investors and viewing positive aftermarket performance as money lost on the table.
Unless this attitude from investors (of course there are a few – precious few – exceptions) it will be very difficult to see momentum return to Brazil’s primary equity issuance. The responsibility for this culture change falls to the underwriters – to educate and explain the art of ECM. But with Latin America’s ECM banking teams surviving on fumes, what are the chances of the banks collectively showing sufficient restraint and valuation discipline to foster this market for the medium term?
Mandates will continue to go to the banks that tell management teams that they can raise the most money and so there will continue to be a strong element of padding valuations rather than sober appraisals. And that will mean many deals will not get done – even when Brazil returns to being a positive macro story. Whenever that may be.