Equity capital markets: Brazil suffers IPO indigestion


Sudip Roy
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Equity issuance volumes, especially IPOs out of Brazil, will pick up in the second half of the year, according to senior bankers in Latin America, after the credit crunch put a halt to the region’s four-year boom.

They warn, however, that the market will only be receptive to big, liquid transactions, at least $500 million in size, and by companies based in certain industries, such as agribusiness and oil exploration and production. "The Brazilian IPO market is about finding the right industry and the right size," says Evandro Pereira, head of Latin American equity capital markets at UBS, who reckons that there could be up to 20 IPOs out of Brazil this year. That compares with 75 in 2007. Many of those were the types of issues that Antonio Quintella, head of Credit Suisse’s Brazilian operation, believes will be hard to execute this year. "In the last couple of years a lot of early-stage companies have listed. We’ll see some of those but more likely we’ll see larger issues, given the premium on liquidity," he says.

Pereira agrees: "The Brazilian market is having indigestion problems. Small-sized IPOs are having difficulties. The market is not ready for second-tier stocks."

Low prices

So far this year, not a single deal out of Brazil has been priced within the indicative range. Consumer goods company Hypermarcas, for example, priced its IPO in April at a 15% discount to the bottom of the suggested range. The smaller-than-expected $365 million transaction, for which Citi and Merrill Lynch acted as bookrunners, then struggled in the secondary market. Retailer Le Lis Blanc also encountered difficulties for its $91 million IPO. The transaction, lead managed by Merrill Lynch and Morgan Stanley, was postponed twice before it was launched. The stock then tanked in the secondary market.

In contrast, the $1.6 billion secondary offering from Gerdau, Brazil’s biggest steelmaker, has performed strongly since it came out in April, although that too was priced at a small discount. JPMorgan and Banco Itaú were the bookrunners.

One eagerly awaited transaction is the IPO for OGX, an oil exploration company created by Brazilian billionaire Eike Batista. The deal, which is due soon and for which UBS will be bookrunner, with Credit Suisse, Merrill Lynch and Itaú BBA acting as co-leads, could raise as much as $3 billion. "Anything out of the energy sector in Brazil will be well received," says Pereira.

The IPO will not be the first time that OGX has raised money via an equity placement. Last December it raised R$2.29 billion ($1.38 billion) through a private share offering. With the public markets open to just a select group of issuers throughout much of the last quarter of 2007 and the first few months of this year, many firms have ventured down the private placement route, often to great success.

Still, the banks and corporates will be relieved that the public markets are showing signs of life again. Bankers, moreover, expect to see more issuance outside Brazil too. "The percentage of IPOs outside of Brazil will increase, although Brazil will remain the biggest market," says Pereira.

Already this year, Argentine agricultural company Cresud has raised $288 million via Citi and Deutsche Bank (although that was a rights issue), while last month Mexican silver producer Fresnillo launched a £900 million ($1.8 billion) IPO on the London Stock Exchange. JPMorgan Cazenove was sole bookrunner on that trade. About a handful of Mexican transactions are expected to come to market this year, including the stock exchange, while in Argentina a deal by oil firm Repsol YPF is in the pipeline. A small number of transactions might be done in Colombia and Peru too.