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Brazil: Tender offer failure equals good news

Investors might be keen to get out of Latin American assets right now, but that doesn’t mean they’ve fallen completely out of love with Brazilian debt. The Brazilian government tried to take advantage of the turbulent markets by announcing a $4 billion tender offer in June; the offer was a spectacular failure, attracting just $1.2 billion in bids.

“The overwhelming message we got was that we like Brazilian debt very much, and we’re not willing to part with it for cash,” says co-lead manager Credit Suisse’s Brazil head José Olympio. “Although the government would have liked to buy more debt, it was a pleasing message.”

Carlos Kawall, Brazil’s treasury secretary, told journalists: “We’ve identified that demand was less than expected. The fact that demand was weak, especially in shorter papers, indicates that investors are happy to keep our paper even at a time of greater volatility.”

Analysts reckon that many investors are betting on Brazil’s credit risk continuing to improve. Why tender the bonds, which will be redeemed in two or three years anyway and are paying out a 10% coupon? Indeed, far from selling their Brazilian sovereign debt, investors are to some degree moving into it, as a safer alternative to many of the corporate bonds that have been coming to market over the past couple of years. It might not be the best news from the Brazilian liability-management point of view but it does bode well for Brazilian debt over the medium to long term.

The offer involved 20 different bonds mostly concentrated at the short end of the curve although also some longer-dated notes.

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