Brazil launched Latin America’s largest-ever voluntary bond swap on August 9, with a $5.16 billion, 40-year global bond with an 11% coupon. The issue was also the longest-dated non-investment grade issue yet from an emerging market. Brazil had originally announced that it would sell just $1 billion-worth of bonds. The bond was sold yielding 13.732%, or a spread of 788 basis points over US Treasurys.
Brazil issued the bond with a call option, allowing the government to buy back securities after 15 years at 100% face value. Daniel Gleizer, the central bank’s international director, says the deal “demonstrates that the market is ready to buy 40-year securities from Brazil, and demonstrates our confidence that after 15 years we will be able to refinance these bonds on better conditions as our risk premium goes down.” The government expects the transaction will save $1 billion in net cashflow over the next 10 years.
The exchange, led by Chase Manhattan, Goldman Sachs and Morgan Stanley Dean Witter, allowed investors to swap any Brazilian Brady bond, except for IDU bonds that are close to maturity, for the new bonds or offer cash. The transaction attracted $5.6 billion in Brady tender offers and $2.75 billion in cash orders. The deal retired $5.22 billion of Brady debt, easing Brazil’s amortization schedule. Brazil decided that rather than making Brady bond prices the variable in the equation as is usual, it set prices and made investors bid on the new bond’s pricing. Brady prices rallied ahead of pricing, pushing the central bank’s set Brady price down so Brazil had to offer extra yield. Hedge funds sent in large cash orders attracted by the new bond’s cheap pricing, but Brazil decided only to accept bonds.
The deal’s transaction underscores renewed confidence in Brazil as it recovers from last year’s currency crisis and short recession. The bond was issued the same day the Brazilian government sold $4.1 billion in Petrobras shares, the largest equity offering yet from Latin American. Shortly after, Moody’s Investors Service placed Brazil’s B2 rating under review for a possible upgrade.
Moody’s said the review is based on “the opinion that Brazil’s economy is experiencing significant on-going structural change which, if successfully implemented, should be positive for the country’s long-term creditworthiness.” Although the upgrade is likely to cut borrowing costs going forward, its impact is limited since Moody’s currently rates Brazil one notch lower than Standard&Poor’s, which rates the country B+ with a positive outlook.
Investors overwhelmingly accepted Ecuador’s offer to swap $6.65 billion of defaulted Eurobond and Brady bond debt in exchange for a $3.95 billion bond issue in new 12- and 30-year bonds. Salomon Smith Barney and JP Morgan managed the swap, with Citibank acting as the exchange agent. Bondholders took a 40.6% reduction in the principal amount of Bradys and Eurobonds, a smaller cut than first feared. The 30-year global has a step up semi-annual coupon of 4%, rising 1% each year from 2001 to a maximum of 10%. The 12-year global of up to $1.25 billion comes with an 11.5% coupon. But investors will have to accept a larger cut in principal.
Bear Stearns and JP Morgan were joint-lead managers in a highly successful $1.5 billion Mexican bond, a milestone in the country’s move away from an emerging market investor base to a new universe of investment-grade buyers. The new 2006 bond pays a semi-annual coupon of 8.50% and was priced at 99.677% to yield 241 basis points above the benchmark US Treasury five-year note. Jorge Cantonnet, the head of emerging debtcapital markets at Bear Stearns, commented that heavy demand pushed the original issue size up from $1 billion. The issue was oversubscribed with orders of more than $3.5 billion.
Latin America’s biggest borrower, Argentina, sold Eu 500 million in seven-year bonds. The issue has a 10% coupon and was priced to yield 500 base points above German bunds. Argentina had to delay the sale for one day due to concern over deteriorating public finances in Argentina and the volume of bond issuance. The country needs to issue $14 billion in debt this year. To date, Argentina has raised $10 billion. Market reports say Deutsche Bank and Credit Suisse First Boston had to keep 20% of the bond on their books. They pitched the bonds to institutional investors to take advantage of a DM1 billion Argentine bond that matured later in the month. Investors complained that this was the third consecutive euro issue to come to market that has traded down. Others thought the issue was too big. Argentina later successfully issued a five-year ¥61.5 billion Samurai bond with a coupon of around 4.85% through Nikko Salomon Smith Barney and Nomura Securities.