Category: Brazil

Analysts expect Moody’s to raise Brazil from Ba1 to investment grade, following a review announced Monday. Goldman Sachs says that the upgrade is “highly likely” and adds that it will be a significant event. Having an investment grade rating by all 3 rating agencies, the shop says, will “open up a broader universe of strictly investment-grade investors, which could be particularly positive for corporate bond issuance.” Bulltick Capital, meanwhile, says the review “will not be an overwhelmingly market-moving event as this move was likely long overdue, expected by the market (and therefore likely priced in), as Moody’s was the only major rating agency with Brazil below investment grade, and many institutional investors such as major insurance companies can invest in a sovereign that has two out of the three investment grade ratings.” S&P and Fitch have a BBB minus rating for Brazil. Moody’s placed Brazil on review for possible upgrade based on the economy’s demonstrated resilience to shocks over the past year.

Brazilian miner Vale has raised $941.7m through the issuance of 2012 convertible notes. The company launched the deal Monday evening and saw its common shares take a 7.2% plunge yesterday as investors, apparently displeased with the dilution and lack of clarity on use of proceeds, dumped the stock. The Bovespa dropped 2.3% on the day. Negative sentiment appears to have made pricing the jumbo, LatAm’s first convertible since Vale’s last $1.9bn tap in June 2007, somewhat of a challenge for the company and its leads Citi and JPMorgan. The deal consists of 2 classes of 6.75% coupon 2012 notes backed by 5.85m ordinary shares priced at $15.88, and 12.98m preferred shares priced at $13.73, respectively. The coupon on the 3-year notes came at the wide end of the 6.25%-6.75% price talk, while the conversion premium was set at 17.5%, the bottom of the 17.5%-22.5% range, say executives on the trade. A lower conversion premium is less desirable for the issuer, since it increases the chance of a conversion at a lower, more dilutive level Details on the book were not available as of press time, though the single remark from an executive at one of the underwriters was that it was “oversubscribed.” The deal should be seen understood as a straight equity issuance with Vale buying a call option over the coming 3 years at anywhere between $15.88 and $18.66, and selling investors a call at anywhere above $18.67, says a banker on the deal. The company remunerates investors for this optionality with a semi-annual coupon payments of $31.8m. This is the second big convertible Citi and JPMorgan have led for Vale in 2 years. The transaction should help the two companies’ league table standings for 2009. Competitors claim the deal was won by offering a small fee, heard in the 50bp area, compared to around 200bp-300bp for ordinary US convertible deals. Bankers on it decline to comment on the commission.

Brazilian development bank BNDES has approved a BRL1.5bn credit line for steelmaker Gerdau, it says. The funds will be available through 2013, to fit Gerdau’s $3.6bn 2009-2013 investment plan. The Gerdau Acominas, Gerdau Acos Longos, Gerdau Acos Especiais and Acos Villares units will receive proceeds, to upgrade and modernize capacity for certain product lines, logistics, energy generation and environmental projects.

Moody’s says it is reviewing Brazil’s Ba1 rating for possible upgrade, based on the economy’s demonstrated resilience to shocks over the past year. “As a result of a negative turn of events in the international arena, Brazil has experienced the equivalent of a severe stress test of major proportions in the past several months,” says Mauro Leos, Moody’s regional credit officer for LatAm. He adds that the crisis uncovered underlying structural strengths that Brazil built up over the last decade that, until recently, had remained untested given the favorable global environment of recent years. Confronted with a wide array of adverse conditions, the Brazilian authorities’ policy response has been effective in containing the impact of the global crisis, thus providing evidence of increased resilience to shocks, a characteristic integral to an investment-grade credit profile, says Leos. Even though the economy will contract and fiscal accounts are expected to deteriorate, Brazil’s overall performance has exceeded initial expectations relative to a number of other countries with similar or higher sovereign ratings, the agency adds. Moody’s will assess the country’s medium-term credit prospects, placing particular emphasis on the fiscal outlook and conditions required for sustainable growth. “The review will also examine the authorities’ commitment and ability to implement actions required to restrain fiscal deficits and further reduce debt ratios in the coming years,” says Leos. “From a sovereign credit perspective, the latter will be particularly critical given that the debt metrics of the Brazilian government are expected to continue to exceed the corresponding mean for Baa-rated countries,” he adds. Moody’s upgraded Brazil to Ba1 from Ba2 in August 2007. A move to investment grade would bring it in line with S&P and Fitch. The agency is also considering raising Ambev from Baa3.

Brazilian regulators have approved an issue of BRL1.05bn in promissory notes from Votorantim Financas. The 180-day paper pays interest at 109% of the DI rate. The proceeds will be used by the company to pay outstanding promissory notes, which will mature later this July. Banco Votorantim managed the sale, rated A-1 on a national scale.

Brazilian electricity distributor Rede Energia has completed a BRL300m 1-year promissory note issue at 120% of DI. The entire issue was bought by bookrunner Banco do Nordeste, according to regulatory documents. Rede Energia will use proceeds to finance its buyback of up to $300m in outstanding perpetual bonds that closed June 26. Rede will repurchase $78.4m of the outstanding $575m in 11.125% of perpetuals, in a process run by Banc of America and Planner Securities.

Brazilian toll road operator CCR has launched the sale process for BRL500m in domestic bonds to help fund the construction of the BRL2.5bn portion of the Sao Paulo ring road. The offer will be divided into a 2012 tranche paying up to 121% of DI, and a 2014 paying ICPA plus up to 8.95%. The exact amounts and price will be decided during bookbuilding via. UBS Pactual and Banco do Brasil. The transaction is part of some $500m-$900m in long-term financing CCR will seek this year to replace short term debt raised to kick start some of the large infrastructure concessions it is managing, which will likely include an IDB A/B loan.

Brazilian water utility Sabesp is preparing a debenture issue to replace the BRL650m in 180-day promissory notes it sold earlier this month. “This year we should return to the domestic market to roll over the promissory note we’ve done,” Mario Sampaio, Sabesp director of capital markets and investor relations, tells LatinFinance. The transaction should happen in the second half of 2009, he says, at the longest tenor possible, which today is roughly 3 years. He adds that the utility is also considering a sizeable debt offering at the end of the year or early 2010 to help fund refinancing needs it will have in 2010. Sampaio says Sabesp would consider both domestic and international bonds. “Our priority is the Brazilian market, which in our view is improving, to limit our FX exposure,” he says.

Brazilian infrastructure group Odebrecht is looking at ways of taking out part of the financing for the BRL3bn Dom Pedro I brownfield road project in the state of Sao Paulo, including a possible cross-border BRL-denominated bond. Odebrecht last month closed a BRL1bn 18-month fully non-recourse project financing for the road through Santander, Banco do Brazil, Banco do Nordeste, HSBC and Banco Votorantim. It priced at CDI+5%. To refinance the BRL1bn, the issuer is assessing a long-term loan from BNDES, and also talking to the IDB, though it is reluctant to borrow in dollars amid concern about lack of liquidity at the long end of the swap curve, and the need to hedge refinancing risk. Odebrecht is also considering local debentures, or if the market is there, international bonds. “It would have to be in reais,” Felipe Jens, head of infrastructure and project finance at Odebrecht, tells LatinFinance, referring to the denomination of a potential issue. He adds that Odebrecht would be looking for a maturity over 10 years and a size around BRL1bn. “We have to see what price, more than anything else,” adds Jens. However, Sao Paulo-based bankers say that such a trade would be very challenging for a corporate in local currency, a deal that has only ever been done cross-border by the sovereign. Jens says that Odebrecht is in no hurry to issue, and will not do anything this year. The issuer is looking to accumulate records for operational cashflow to bolster its case for financing the 30-year Dom Pedro tollroad concession. Odebrecht has no need to raise more funds this year, based on the current level of investment.

Brazil’s BBB- (stable) rating is supported by commitment to prudent macroeconomic policies, but constrained by sovereign obligations, according to S&P. “The government’s relatively high debt level and still-high interest burden remain major weaknesses to the ratings on Brazil,” says S&P credit analyst Sebastian Briozzo. “These two factors will require fiscal responsibility over the medium term.” The agency says president Lula’s strong popularity should facilitate implementation of policy to deal with significant economic challenges this year, but raises concerns about the presidential election in 2010, when the economy is seen recovering only gradually. S&P expects Brazil’s GDP to decline by about 1% in 2009 compared with 5.1% growth in 2008. It adds that the general government deficit will reach 3.0% of GDP in 2009, deteriorating only slightly compared with a deficit of 2.1% in 2008. This assumes a primary surplus for the nonfinancial public sector of 2.0% of GDP in 2009, less than the government-reaffirmed target of 2.3% of GDP, or 2.5% when including public-sector enterprises.