For 2009, Credit Suisse forecasts a drop in Brazil’s GDP growth to 1.3% down from previous expectations of 2.8%, a rise in average annual unemployment to 9.0% from 7.9% in 2008, a decline in trade balance to $14bn from $24bn in 2008 and a drop in primary surplus to 3.4% of GDP from 4.5% in 2008. It also expects the country’s international reserves to remain stable at $190bn, and the real’s value to stay at BRL2.20/USD until the end of 2009. The shop forecasts that the Selic rate will only be cut by 25bps in 2009 to 11.25%.
Category: Daily Brief
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Banco Industrial Outlook Seen Worsening
Fitch has cut to stable from positive the outlook on the BB ratings of Banco Industrial amid a worsening environment in capital markets that complicates capital enhancement alternatives. Guatemala’s biggest bank had been trying to do an IPO earlier this year, but opted instead for a $35m 2068 Tier-1 hybrid paying 9% for 10 years and Libor plus 600bp thereafter. The April offering through Credit Suisse was placed only with Guatemalan investors and fell well short of a $100 million target size. The prior positive outlook from Fitch reflected perception that capital adequacy would improve following certain strategies that the management has pursued. “Weakening economic prospects are likely to impact Industrial’s impairment loan ratio, its provisions and overall performance, a confluence of factors that is consistent with Industrial’s current ratings, hence Fitch’s outlook revision to stable,” says the agency. It notes that Industrial maintains a robust franchise in Guatemala, low level of loan delinquency, improving efficiency and profitability, and adequate funding and liquidity. However, it also has a tight capital position following ample organic and acquisition-driven growth over the past two years, limited and declining loan loss reserves and modest revenue diversification. If Industrial hits difficulties, Fitch believes the government of Guatemala would have a vested interest in supporting it, given ample deposit market share.
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Peru Miner Drills for M&A Funds
Peruvian miner Milpo is out with a $130m loan to help it pay for a 70% stake in Minera Atacocha. The 5-year final, 3-year average life facility pays Libor plus 425bp, and is being marketed to a limited group of banks that will form a club-like consortium to help get the deal printed by year-end, say people close to the process. The transaction is heard gaining traction with two commitments already and as many more expected by next week. Market participants away from the deal who are seeking a new benchmark for time sensitive loan syndications are watching the deal. At first blush, the pricing at Libor plus 452bp appears high, especially given the tight structure: low leverage of around 1x, a stringent covenant package, and a senior secured facility backed by export receivables. But bankers both on and away from the transaction acknowledge that in today’s market, loans needing to get done must pay up for liquidity. Some international banks are heard funding themselves at more than Libor plus 150bp. Credit Suisse, which advised Brazil’s Grupo Votorantim on its cross border bid for a 30% stake in Milpo earlier this year, parlayed its initial role into a financing mandate and is leading the deal. Voto is Milpo’s largest shareholder.
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Merrill LatAm Unlikely to Escape Merger Scythe
As Merrill Lynch and Bank of America (BofA) shareholders cast votes on the proposed merger today, questions surrounding the extent of the post-vote carnage swirl both internally and among the banks’ haggard competitors. The deal is expected to go through, forming a temporarily bloated entity employing some 370,000 people, according to one internal estimate. News reports citing market speculation in the days leading up to the vote suggest up to 30,000 could be eliminated globally. For Merrill’s LatAm business, insiders express cautious optimism that its relatively high profitability compared to other regions covered by the bank will shield it from the worst of the layoffs. “LatAm is profitable. There aren’t any areas within the region that have lost money on a net basis,” notes a senior official at the firm. LatAm barely overlaps with BofA’s existing businesses, which is an additional plus, and BofA has said it wants to keep the Merrill’s international businesses, especially those exposed to higher growth regions. However, BofA’s interest in LatAm beyond Mexico has long been in doubt, and some Merrill businesses are likely to be shut or significantly downsized by merger-related redundancies. There is added pressure from forecasts of a dramatically reduced LatAm fee pool in coming years versus estimates made 12 months ago when Merrill was beefing up. Among more vulnerable sectors are lines that generate less profit. ECM is one business that appears more exposed to bearish public markets that have for months shunned new transactions, say internal executives. The shop’s Brazil office, heard employing some 200 people, may also be “right sized,” to use the polite term. “There will be cuts, though I don’t think they’ll cut to the bone,” notes the Merrill official. Thursday, Credit Suisse announced an 11% reduction in global headcount following a 10% cut only a month earlier. Morgan Stanley, Citi, Goldman Sachs and JPMorgan have also trimmed a minimum of 10% in the past 2 m
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EM “Shot in Thigh in Nightclub”
From the somber tone of this year’s EMTA annual meeting in New York, it would seem that EM is dead. A relatively thinly attended round of buy and sell side panels at the traditional location – Citi’s Tribeca HQ in New York – exuded bearishness, but the consensus is for significant spread tightening, albeit from oversold levels. The main problem for EM – besides lack of cash inflows – is that US high grade is yielding far too much for investors to look elsewhere. According to JPMorgan, US high grade will return 17% next year, versus close to 20% in EM. On top of that, the US government has taken a direct stake in 23% of that market, making a switch to EM very hard to justify, says JPMorgan. “The reputation of emerging markets and its value as a diversifier just took a huge downgrade,” says David Rolley, senior portfolio manager and head of global fixed income at Loomis Sayles, which has over $100bn under management. “You might say we’ve shot ourselves in the thigh in a nightclub or something,” he adds. However, the investor says EM yield is still decent and that the consensus is for fewer defaults than in developed markets. “The structural case for these assets has always been profound . . . the default rate in EM is actually lower than the default rate in the US – this stuff is cheap,” adds Rolley. “If you look at it from 3-5 years out, I think you have to be massively bullish about emerging markets, because they are not the ones facing these policy dilemmas, making these huge policy mistakes,” says James Barrineau, head of economic analysis at Alliance Bernstein, referring to the US. Asked where the EMBIG will end next year, JPMorgan and Credit Suisse both predict 600bp, from 797bp Thursday, while Deutsche Bank and Merrill Lynch see further compression to 500bp and 575bp respectively. “That implies 20% returns next year, the question is how much volatility will we face in between,” says Joyce Chang, head of global EM and global credit research at JPMorgan. She tell
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Few Corporate Defaults Expected in 2009
Thanks largely to liquidity support from governments, EM corporates should see low default rates in 2009, says Anne Milne, head of Deutsche Bank’s LatAm corporate bond research group. “We see almost no default next year in Latin America,” she tells investors at an EMTA event in New York, adding that her shop forecasts a 4.0% default rate in EM. JPMorgan and Merrill expect 1.0% and 3.0% respectively, versus 0.3% currently. The most probable candidates are Argentine corporates having difficulties long before the credit crisis, she says. Milne places Brazil and Mexico as among the best EM corporates going into 2009, citing the Brazilians’ low short-term debt and available BNDES support and Mexico’s liquidity support. She says her shop likes industry leaders and quasi-sovereigns like Petrobras, Vale and Televisa in a conservative portfolio, as well as Braskem, CSN, Embraer, Gerdau and Odebrecht for the moderate investor. She also tips top tier Argentine oil companies that have not defaulted, and TGS, for more aggressive allocation. Though hedge funds and others with a shorter-term view may be mostly gone, Milne sees the buy-side slack next year picked up by local market investors. Generally in EM, analysts are concerned about the private sector. “The sovereign looks great, the problem is the corporates,” says Joyce Chang, head of global EM and global credit research at JPMorgan. “They have about $210bn to roll over,” she adds.
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Oil Hedge, Infrastructure Boost Mexico
Put options to sell oil at $70/barrel over the next few years and more than MXP100bn in the budget for infrastructure projects should allow Mexico to maintain a constant fiscal policy in 2009, says finance undersecretary Alejandro Werner. “We will be able to implement the 2009 budget without any problem,” the official tells investors gathered at an EMTA event in New York, despite a forecast of 1.8% for 2009 economic growth that could trend toward the downside. Werner says the hedge and about MXP96bn in 3 oil stabilization funds will allow the government to adopt strong countercyclical fiscal policy for more than the next 12 months. He also expects the government’s infrastructure agenda – including MXP35bn in toll road concessions, MXP30bn in suburban train projects and the MXP50bn+ Punta Colonet port project – to stimulate growth. Funds from the MXP270bn Fonadin infrastructure fund and development bank Banobras can fill the void left by private sector lenders, Werner says.
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Odebrecht Ethanol Sub Lands BNDES Credit
Brazilian ethanol producer ETH is set to receive a BRL1.15bn loan to help finance the construction of 3 production facilities. The 10.5-year facility pays interest at the TJLP rate plus a spread of approximately 2.5%, according to an ETH finance official. The 3 mills in the states of Sao Paulo, Goais and Mato Grosso do Sul should be fully operational by 2013, at a cost of BRL1.9bn.
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ISA Prices COP105bn Local Retap
Colombian state-controlled electricity grid operator Interconexion Electrica has priced COP104.5bn ($46m) in reopened 2026 bonds. The notes paying a coupon of the IPC rate plus 4.58% were discounted through an auction mechanism resulting in a yield of IPC plus 7.1%. The transaction was 1.63x subscribed. Citi, Correval and Bancolombia managed the sale, rated AAA on a national scale.
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Ferromex Repays Debt
Mexico’s Ferrocarril Mexicano has paid off MXP1.2bn in 5-year floating-rate local notes due Thursday, it says. Ferromex, the railroad unit of copper miner Grupo Mexico, said the paid using its own cash, and is left with $8m in bank debt due next year, MXP1bn in peso notes due 2014, and MXP1.5bn in peso notes due 2022.