Capital markets: CVRD issues landmark convertible
Latin America’s largest issuers have for a while been competing on pretty much a level playing field with their competitors in fully developed countries. That’s important for Brazilian miner Companhia Vale do Rio Doce, which in the wake of its acquisition of Canada’s Inco is now one of the world’s four largest mining companies, alongside BHP Billiton, Rio Tinto, and Anglo American.
With that sort of competition, no company wants to have to overcome a zip-code problem before it can start to compete. But until now CVRD has always had a certain Brazilian air to it. Sometimes, that’s an advantage: given how liquid Brazil’s banks are means that it can generally borrow money at razor-thin spreads. But more often it’s still a disadvantage when it comes to raising international capital.
With its issuance in June of $1.9 billion in hybrid securities, CVRD has shown that Latin America’s largest companies – think Cemex, or América Móvil – are very much capable of transcending their nationalities.
For one thing, CVRD and its bankers – Citi and JPMorgan – decided to issue a mandatory convertible bond. You might remember mandatory convertibles from five years ago or more: they were briefly popular among technology companies. But they’re the kind of exotic and hard-to-understand instrument that any capital markets desk would never try to sell to an emerging market investor base.
On the other hand, the appetite for CVRD equity – and mandatory convertibles are essentially a forward sale of equity – is no longer particularly strong among emerging market specialists.