Category: Brazil

As expected by market consensus, Brazil’s central bank decided unanimously to keep its monetary policy rate at 8.75%. Morgan Stanley forecasts that the rate will increase to 11.00% by the end of 2010. Bank of America Merrill Lynch meanwhile expects the rate to stay at 8.75% until 2011, as the country’s economy is recovering earlier and faster than most countries in the region. Market consensus is that the policy rate will climb above the 10.00% mark by the end of next year. The bank has cut 500bp so far this year.

Market participants were vigorous in their protests Wednesday against a decision by the Brazilian finance ministry to levy a 2% tax on inbound capital flows, including equity, that pummeled the markets Tuesday. In addition to a chorus from economists, bankers and various representatives of the Brazilian stock exchange, Arminio Fraga, former central banker, chairman of the BM&FBovespa weighed in on the debate with an interview in Estado de S. Paulo that warns of a loss of liquidity. “I think it’s unfortunate they did this,” says Jerome Booth, head of research at Ashmore, which manages around $31bn across EM. “I think it’s linked to the political cycle,” he tells LatinFinance, noting the tax breaks with a trend he sees that might some day allow the BRL to become a reserve currency for central banks. One Brazil-based senior banker says rumors have circulated that taxation on equities may still be repealed and raised for fixed income, given the amount of criticism it has received. “In taxing equities, you’re taxing investments of risk capital, which is not dissimilar to FDI,” says a local banker.

Brazilian regulators have signed off on the BRL810m 2019 domestic bond from wireless operator Vivo. Vivo is issuing the notes in 3 tranches amortizing in succession. A BRL98m first tranche pays 108% of DI rate, a BRL640m piece pays 112% of DI, and a final BRL72m fixed-rate piece pays 7%. Proceeds are headed for repaying Vivo’s outstanding promissory notes and reinforce working capital. Itau is coordinating the sale, rated AA on a national scale.

Brazil’s central bank is widely expected to leave its monetary policy rate unchanged at 8.75% today after having cut 500bp so far this year. “It should surprise no one when the central bank stays on hold and keeps the policy interest rate once again unchanged at 8.75%,” says Morgan Stanley, which forecasts that the rate will increase to 11.00% by the end of 2010. Bank of America-Merrill Lynch expects the rate to remain unchanged at today’s meeting and Brazil to stick at 8.75% until 2011, as the country’s economy is recovering earlier and faster than most countries in the region. Market consensus is that it will climb above the 10.00% mark by the end of next year.

Brazil software company Totus has announced it is acquiring financial technology and consulting company TotalBanco for BRL12.2m. Totus will pay BRL10.8m to the controlling shareholders of TotalBanco for the 70% stake. Additionally, the controlling shareholders of TotalBanco granted Totus an option to acquire the remaining 30% of the target’s capital stock, exercisable on or after January 1, 2011, for up to BRL12.2m based on the achievement of certain targets set for TotalBanco for fiscal years 2009 and 2010. TotalBanco’s operation complements TOTVS’ credit and card management portfolio, incorporates new leasing and credit management solutions for companies as well as expands core banking offering, allowing integration of investment management and back end credit management, Totus says in a statement.

Petrobras is heard aiming for tranches of 10 and 30 years in its benchmark bond sale expected to price as soon as Thursday, according to investors. The Brazilian government-controlled oil producer is on the road until Thursday pitching the bond sale, expected to be at least $1bn. Citi, HSBC, JPMorgan and Santander are managing the sale. Petrobras hit the dollar markets in January for $1.500bn in 7.875% of 2019 bonds to yield 8.125%, and reopened them for $1.250bn at a yield 6.875% in July. The oil producer is rated Baa1/BBB/BBB minus.

Brazilian equities traded off 2.88% and the BRL weakened 2.15% Tuesday as investors retreated in the face of a new 2.00% tax on short term capital inflows. The IOF tax, which went into effect yesterday, is being levied on all securities. Last year between March and October a 1.50% charge was imposed on fixed income securities. Analysts say Brazilian equities should continue to suffer, albeit to a limited extent, as foreign investors reduce purchases. “The equity market will be hit in coming days, as foreign flows had increasingly sustained both the FX and local equity market, with local investors on the sidelines,” says JPMorgan. It adds that the impact will be short lived since fundamentals driving foreign investment into Brazil remain strong, and the BRL should not necessarily weaken as a result. “If the measure is effective, local capital markets should suffer,” concurs Alexandre Schwartsman, Santander’s chief Brazil economist. “As a result prices should be negatively affected, a development that would also reduce the appetite of local companies to access local capital markets, chiefly on the equity side,” he adds, noting he is not convinced that the government’s measure will be entirely effective. Itau’s Carlos Constantini stresses the limited, albeit initially negative impact. “In theory, investors would only require an additional return of 2% to invest in Brazil for a year; and money flows into the country have been incredibly strong in the past few months and it is unlikely that a 2% tax will significantly reduce investor’s appetite for Brazilian equities,” he says. The BM&FBovespa registered 66,800 trades on its derivatives market segment, setting a new record Tuesday.

Brazilian developer Brookfield Incorporacoes has priced a BRL580m follow-on at BRL6.80, a 3.0% discount to Tuesday’s close and 9.5% concession to Monday’s finish. Brazilian stocks took a 2.9% hit Tuesday as investors shunned a new 2.0% tax on incoming capital flows. Bankers on the deal blame the move for the high discount on Brookfield. However, Brookfield underperformed the Ibovespa by 3.6% and then had to offer an additional 3.0% discount, suggesting demand for the offer was tepid. Still, Brookfield succeeded in raising BRL578m in the offering, which consisted of 85m shares – 15m of which were secondary units from by selling holders. The amount falls within the BRL500m-BRL700m the company had targeted in early September. No hot issue was exercised, according to bankers. Part of the discount may be driven by investor dissatisfaction with Brookfield’s inability to meet growth expectations, says a banker away from the deal. A real estate investor at a large equity fund agrees, noting favored companies tend to be those that are seeing a ramp-up in capacity. “We need to discern between those companies that are raising funds to make opportunistic acquisitions and those that are trying to cover up their working capital positions,” he says, referring to specifically to homebuilding. Brookfield says in its prospectus that 40% of proceeds would go toward working capital, while the rest would be used for acquisitions and portfolio investments. PDG Realty’s IPO, priced at the beginning of this month and among the more popular offerings among investors, said just 10% of its follow-on proceeds would be used for working capital, while the rest was earmarked for increasing capacity, construction and new investment. On Brookfield, Itau BBA led, with Credit Suisse, BTG Pactual and Bradesco BBI as joint leads. HSBC was co-manager. Next up for Brazilian equity is CCR, due to price today, and Iguatemi Thursday.