Latin America: Mexico leads but Brazil stirs from ECM slumber
Demand rising, busy second half expected; Par Corretora holds key to Brazil return.
by Rob Dwyer
Unifin’s successful Ps3.14 billion ($206 million) IPO in May confirmed Mexico’s status as the region’s strongest primary equity issuance market. However, with Par Corretora da Seguros’ IPO slated for early June, Brazil is showing signs of reawakening the interest of international investors – bankers are confident of a small flurry of deals from the region’s largest market in the second half of the year.
The flow picture is improving at the margin, there is greater FX stability and activity is coming back
One of them, Caixa Seguros, is understood to have mandated its banking syndicate and is hoping to raise much-needed capital for the publicly owned bank in the second half of the year.
A banker on the Unifin deal says that despite its small size – which is a negative for international investors who prize transaction liquidity – the deal drew plenty of demand from international portfolio managers. It was roughly 50% allocated to international accounts, which were drawn to the deal for its pure Mexican play and the fact the company offers exposure to the difficult-to-find SME-segment.
“Unifin offers very strong growth in a niche leasing space within finance in which investors haven’t been able to [previously] participate. The company’s growth is very attractive – it has been growing by a compound annual growth rate of between 30% and 40% on both the revenues and the income side in the past five years – and so that, plus lack of competing product drove the deal,” says the banker.
Unifin priced at Ps28 – mid way in its range of Ps25 to Ps30; the deal was strongly oversubscribed. That didn’t prevent some sniping. “A small deal like Unifin shouldn’t have opened the market – it should have followed a big deal, such as Gicsa [currently in the market] and not the other way around,” says one banker away from the transaction.
Mexico’s stronger economic outlook is attracting equity flows into the region, which is boosting the prospect of success for other deals.
Some ECM bankers in the region say investors are complaining about valuations in the market, which is a sign of its popularity. Currently, Mexican real estate companies Gicsa, Fhipos (a commercial Reit) and Javer are marketing transactions.
Investors are watching the Gicsa deal carefully, as it will reopen the Mexican market for large-cap deals, but the Brazilian Par Corretora transaction is being more keenly followed as a successful execution would reopen the IPO market, which has been inactive since animal health company Ourofino’s R$418 million (then $172 million) offering in October 2014 – a year that saw only two ECM deals altogether. More recently, Telefonica’s $4.9 billion-equivalent follow-on was a positive development, but with few orders coming from new accounts the deal generated less certainty about the market’s revival than the headlines suggested.
Mariano Espada, managing director and head of UBS’s Latin America equity capital markets group, says market sentiment is slowly but safely improving across the region: “In the first quarter the demand for Latin American ECM simply wasn’t there on the back of unprecedented regional outflows and volatile markets. However, the flow picture is improving at the margin, there is greater FX stability and activity is coming back. We feel the second half of the year will be far more constructive.”
Espada also says valuations in Brazil, combined with progress on economic policy direction, make this market a very interesting proposition: “There are now very few investors who are overweight Brazil; progress in fiscal reform policies could be a strong catalyst towards a more constructive view/appetite towards the country – with large-cap issuance the way to potentially express that improvement in appetite for Brazilian assets.”
Brazil’s Par transaction reportedly launched close to being covered after a large anchor order from Gavea Investimentos, worth R$140 million of the total R$507 million (valued at the mid-point of its range of R$11.25 to R$11.60).
JPMorgan also used a large anchor order (from General Atlantic) in Brazil’s last IPO – for Ourofino – as part of its pricing strategy. One competitor critiques the use of large anchor orders, saying: “You only anchor a deal that you perceive has a high risk of not getting done – there is no other reason. So when you have a very high quality transaction that you know will have an appealing valuation – and you know you are selling what investors want – then I think it’s better to signal that confidence through the more open allocation strategy of a US-style structure. That also enables a tighter roadshow – you get in and out of the market with less exposure to market volatility.”
As with Unifin, large blue-chip international accounts are understood to have placed orders for the Par Corretora transaction, despite the small issuance size. The sector, finance, is an appealing one for international investors despite the macroeconomic challenges and the performance of BB Seguridade – the largest IPO in the world in 2013 – also helps build interest. This has also led to Caixa Economica Federal advancing its plans to make an IPO for its insurance arm, Caixa Seguros, in the second half of the year in what will be a key test for market appetite for Brazil.
There is some debate about what the Par Corretora deal will say about appetite for Brazilian equities generally, given its structure and use of anchor accounts.
“Par will be a data point, but it’s a $200 million transaction and pretty much covered at launch, so I don’t think it will tell us much about the outlook for the market,” says one senior ECM banker based in New York. “Have the Globant deals in the last couple of years told us much about demand for Argentina? But any positive news that attests to a healing in the market is to be welcomed.”
A banker working on Par Corretora agrees that the deal would be a good data point, but adds: “What gives us more confidence is the dialogue we are having with investors away from this specific conversation. We are seeing a desire and a willingness to invest in the right opportunities.”
Another banker says where the deal prices will be less important than its post-execution performance. “We bankers tend to think about success by where a deal prices in the range, but investors look at the aftermarket and a good post-deal performance will increase appetite for other deals,” he says.
William Mcarthur, Latin America equity capital markets director at Bank of America Merrill Lynch, says FX also plays a role in generating demand for Latin American equity transactions: “Obviously it depends on the type of investor and their risk appetite, but when sponsors are using a transaction to monetize an investment, FX valuation and volatility are crucial components of their funds’ returns. However, in my experience, FX is rarely the main concern – investors are either sold on macro stories or they are not.”
But the biggest factor for successful execution of Brazilian equity deals in the second half, says one banker, is the attitude of the issuers themselves. “It is extremely challenging to do deals in Latin America – the mindset of issuers is completely different [to other regions],” he says. “It’s completely focused on the last penny, and you can spend hours explaining why it is important to have high-quality accounts in the book, but issuers don’t care as long as they can see an extra penny. And if we meet with companies after deals and the stock is going down, the first question is: how do I buy my stock back? Sometimes we laugh, but it’s real.”