Category: Brazil

Despite doom and gloom for emerging markets and the auto industry, car makers are reportedly sticking with Brazil. Both General Motors and Peugeot are keeping in place longer term Brazil investment plans, Dow Jones reports from the International Auto Show in Sao Paulo. The newswire notes a 4 year $1.5bn-$2.5bn commitment from GM, which says it will not downsize in Brazil. It also reports that Ford will invest BRL3.4bn in South America in the 2007-2011 period, of which 85% will be directed to Brazil. And the subsidiary Peugeot in Brazil will maintain its planned BRL200m investment for 2008, the local president says, according to Dow Jones. The newswire reports Peugeot has an investment budget of BRL500m to use in Brazil for 2008-2010.

Larger Brazilian banks will likely continue purchasing assets, particularly loans, from smaller banks, says Peter Shaw, MD at Fitch. “We’re likely to see acquisition of assets, though not acquisition of franchises,” Shaw tells investors at a Brazilian Chamber of Commerce panel in New York. He emphasizes that he does not expect the financial crisis to bring a round of consolidation among banks, as in the past. Rather, the larger banks will continue purchasing loan packages from small and medium-sized banks. Banco do Brasil has bought some BRL1.5bn in loan portfolios in the last 18 months, it said earlier this month, and plans to buy up to BRL3bn more. Banco Bradesco CEO Marcio Cypriano said in a Monday teleconference, according to local and wire reports, that he expects no significant merger and acquisition activity among Brazilian banks in the near future, but that his will look to buy portfolios from smaller shops.

The state of Sao Paulo will tomorrow (Wednesday) auction off five 30-year tollroad operating concessions worth BRL11.5bn. The sale coincides with the worst environment for Brazilian infrastructure financing in years. While the country’s large concession operators including CCR, CIBE, Ecorodovias, BRVias and Spain’s OHL, are expected to participate, hostile conditions are seen reducing the number of international bidders, which may undermine the process’ competitiveness. Concessions will be awarded to bidders that offer the lowest toll fare for each of the 5 roads. Those include Marechal Rondon’s East and West segments, Dom Pedro I, Raposo Tavares, and Ayrton Senna/Carvalho Pinto. Small and medium-sized operators and new entrants are also likely to decline to participate given their lesser balance sheets and limited access to capital, says a PPP specialist at a regional multilateral. Still, many of those expected to participate enter the crisis with strong balance sheets, says the executive, noting the average debt to Ebitda ratio for this sector in Brazil is 3.5x, and that most of the top participants including OHL, CCR, and Ecorodovias are well below that. Odebrecht, which has no tollroads in its portfolio, says it will also be participating. Like most bidders, its executives are counting on substantial support from local state and multilateral lenders to replace the bank market as a provider of funds.

Large scale Brazil infrastructure projects are feeling the squeeze of an ever worsening liquidity crunch that makes long term financing impossible. “Bidding conditions are extremely challenging and the effect of the liquidity crisis is acute,” says Fabio Russo, head of project finance at CCR, a leading road concessions operator. For new projects, developers are falling back on short term BRL-denominated bridge loans which today come at rates of CDI plus 300bp-500bp, compared to less than 100bp CDI just a year ago, he says. “This market is shut down right now,” says Scott Swensen, a partner at infrastructure private equity fund Conduit Capital, speaking from Sao Paulo. He notes that banks have closed doors to new, long-dated commitments. “If you get a new concession you may have real issues,” Swensen adds, noting his shop’s main deals are still a ways off from financing. Odebrecht, which several months ago won a concession to operate 3 twin drilling platforms for Petrobras, has had to halt a $1.3bn long-term loan originally aimed at the international syndications market. It has fallen back on short term BRL bridges with Itau, BNP and ABN (Santander) to support construction over the next several months. The $1.3bn loan facility via BNP, RBS and Santander has been put on hold until further notice. “The big question is what will happen with the market as we move into next year,” says Felipe Jens, head of infrastructure and project finance at Odebrecht. He notes his firm will look to rely heavily on state-owned financing sources like BNDES, Nossa Caixa and Caixa Economica Federal to finance upcoming projects. Odebrecht is part of a consortium that will bid for up to 5 packages of toll roads in Sao Paulo this week.

Brazil’s foreign reserves, which stand at some $205bn, are not in danger of falling to levels that would threaten the country’s stability or affect its balance of payments, say economists. The central bank (Bacen) has rolled out heavy artillery in the past month and a half to combat severe liquidity constraints and to help ease the pressure on the currency, which has weakened close to 50% since August 1. That has included making ample use of its dollar reserves to stem the deprecation through auctions, providing swap contracts and extending special lines to exporters. Still, the level of reserves has barely been scathed. On October 1 they stood at $207bn, up from the $205bn on September first and the $204bn on August 1. On January first they stood at $181bn. Santander Brazil economist Alexandre Schwartsman says Bacen has acted correctly and is using the reserves appropriately. “That’s exactly what they’re there for,” he said, noting that for the time being he doesn’t see any risk of depletion. Other sellside strategists say they are in agreement. Goldman Sachs notes it is encouraged by the fact Bacen’s reserves have been dented less than 2% in September, which accounts for the part of the crisis’ most acute period so far. The shop adds Bacen’s strategy to use swaps to intervene in the market is an efficient way of aiding corporates without blowing through its reserves. Through swaps, it can meet the market’s demand for FX protection and sell reserves in the spot market only when necessary above and beyond what it is offering in swaps.

Duke Energy unit Geracao Paranapanema has placed a BRL340.9m 2-tranche debenture issue with 38 Brazilian investors, including 27 investment funds, it says. A BRL249.8m 2013 series pays DI plus 2.15% and a BRL91.1m series 2015 pays a fixed rate of 11.60%. Proceeds will repay maturing debt. The transaction was rated Aa3/AA minus on the national scale. Citi and Itau managed the sale.

EM held on bravely until the end, but markets now appear to be throwing in the towel. Escalation in the global crisis is having a severe impact on LatAm, where even Brazil is starting to deteriorate, particularly in the corporate sector. Panic selling and technicals exaggerate the nosedive, but some are starting to worry that robust gains of the last five years could be wiped out. “Now that the markets have turned and the economies in the region have begun to weaken, it seems as if just about every easy extrapolator is condemning the region to doom,” says Morgan Stanley in a research note Friday. “The downturn in Latin America is just getting underway . . . the region is facing its most serious threat in decades,” it warns. Stocks are being whacked hardest, with Citi noting that Brazil is among the worst performing in the world – down more than 50% year to date – and blaming not just flight from risk, but also growth deceleration. Bad news is compounded by fresh redemptions, particularly from dedicated equity investors, and sharp losses across the board for those focused on the region. According to EPFR Global, last week EM equity funds lost around 10% of their value. Citi also worries about the LatAm policy response. “As the crunch tightens, recourse to less orthodox responses is likely to increase,” says the shop, noting last week’s Argentine pension fund grab. JPMorgan meanwhile revises its view on external EM debt technicals to neutral from positive following a client survey showing that cash balances are not high enough to deal with accelerating retail outflows, which are creating a vicious cycle of redemptions. US assets are the only bright spot, with the USD seeing a firm revival versus LatAm currencies. “As some emerging markets once again show their risks, it is interesting that the global investors have quickly forgotten “de-coupling” and are rushing to Treasuries’ safety,” says Merrill Lynch. We are in highly volatile uncharted waters here, with more down

Brazil’s central bank (Bacen) plans to offer up to $50bn worth of FX swaps to help corporates hedge their exposure to the dollar. The contracts will be issued as the bank sees fit. This is one of many instruments Bacen is deploying to mitigate the impact of the most recent turn in the financial crisis which has seen the currency weaken 18% since October 1 and 48% since August 1. One of the main causes for this latest drop is the fact Brazilian companies, especially exporters, are rushing to cover their exposure to derivatives tied to the dollar, says Santander Brazil economist Alexandre Schwartsman. “Companies are trying to net out their positions by buying dollars in the futures market,” he says, adding he estimates roughly two thirds of the depreciation can be accounted for by corporates’ domestic demand for dollars. Schwartsman believes the pressure on the BRL is likely to be temporary while companies cover their positions and should ease by the end of the year, leaving the currency in the BRL2.0-BRL2.10 range. “Overall the [$50bn] program should gradually reduce technical dislocations in the market,” notes Goldman, adding other elements of the program include FX spot sales, FX repos for trade finance and FX swap sales. The BRL rose 2.5% Thurday to close at BRL2.31.

Brazilian utility Sabesp is moving ahead with a plan to sell BRL220m in debentures split into 2013 and 2015 tranches. A BRL100m 2013 tranche will pay 2.75% over DI, and a BRL120m 2015 piece will pay a fixed rate of 12.87%. The issue is rated A minus on a national scale. Proceeds will help pay down BRL300m in debenture maturities coming due in March. HSBC is managing the transaction, with Citi, Caixa Economica Federal and Banco do Brasil as co-managers. The Sao Paulo state water and sewage utility filed a BRL3bn local bond program in August.

While most of Brazil’s local and international investment banks stop to reassess their growth strategies and in many cases begin to pare down cost structures, South Africa’s Standard Bank is on a hiring spree, looking to add up to 30 executives by year-end which would bring its Brazil headcount to around 150. “Our growth plan for Brazil hasn’t been altered because of the crisis,” Fabio Solferini, CEO of Standard Bank’s Brazil operations, tells LatinFinance. Solferini joined Standard in 1998 to help start its LatAm business. Since then, the bank has been an opportunistic niche player in the region, placing cross border bonds and providing loans. It most recently developed and active local securitization business in Brazil. Standard is looking to hire, among other things, a team of Brazil M&A bankers and is already in talks with senior-level candidates, says Solferini, who notes the bank’s goal is to provide a full range of investment banking products with the exception of equities, which the bank doesn’t offer anywhere. Today, the bank has local and cross border DCM, securitization, structured and trade finance, project finance and acquisition finance. Standard is also setting up a private equity investing arm focused on Brazil that will invest the firm’s own capital in deals, says the CEO. Standard’s capital base in Brazil stands at BRL350m, with an extra $90m or so earmarked for deployment in 2009, says Solferini. “When things get tough, [Standard Bank] continues investing,” claims a New York-based MD at the firm focused on LatAm, noting the bank bought BankBoston’s Argentina business in 2006 and built up Brazil during the 2002 election. Standard executives say now is a good time to be hiring in Brazil as several shops, including Goldman Sachs and Credit Suisse, begin to cut their global workforces to reduce costs. Standard has investment banking offices in Argentina and Mexico, but Brazil is the main focus of the current push, says Solferini. Bill Dorson, head of