As world markets implode, LatAm bolsas have seen a phenomenal reversal of fortune, popping the bubble that inflated in the previous two years. In the year through mid-September, Brazil’s Ibovespa was down 23%. In the corresponding period of 2007 it had risen 20%. In short, the local equity market has given back nearly all its gains since December 2006.
Equity strategists at shops including Citi and Morgan Stanley have placed the country at the top of their performance list for the remainder of the year, citing excessive overselling in both Brazil equities and commodities. Citi sees the Bovespa closing at 62,000 at year-end, a downward revision from the 66,000 it had predicted earlier. September 16 it closed at 49,228.
“Brazil is once again becoming one of the cheapest markets in EM,” says Will Landers, manager of BlackRock’s LatAm funds, which total $8 billion. “Brazil’s companies are now trading at a P/E ratio of eight times 2009 earnings,” he adds. Landers says they started the year at nine times and traded up to 12-13 times in May following the country’s elevation to investment grade.
Flows Threaten IPOs
Equity bankers in Brazil still see a huge disconnect between the secondary and new issue markets. “The [primary] market is shut right now and investors are taking a very short-term view on their positions,” says the head of sales and trading at a Brazilian shop. “That’s very bad for new issues,” he adds.
An aggressive pullout by global investors from riskier asset classes including LatAm spells trouble for the region’s IPO hopefuls. Brazil equity funds have so far this year lost $173 million, just barely staying above water, according to EPFR Global. In the first two weeks of September, outflows totaled $190 million. LatAm equity has meanwhile seen redemptions worth some $2.79 billion in 2008 through mid-September, with $1.84 billion in the first two weeks of that month alone.
“[The outflows] are definitely very worrisome for anyone trying to bring an IPO right now,” says Evandro Pereira, head of ECM at UBS Pactual, whose shop is not participating on any of the filed deals.
VisaNet, San Antonio and El Tejar are hoping to bring Bovespa transactions in the fourth quarter. But bankers and investors say they would be surprised if more than one makes it out.
“Unless there’s a desperate need for the funds I would wait until 2009,” adds Landers, referring in particular to VisaNet’s IPO. The credit card company filed for a deal in early September which is expected to be the largest of the three offerings and the one with most potential to succeed.
VisaNet is joint-owned by Bradesco, Banco do Brasil and Banco Real, has hired Bradesco’s BBI unit to lead the local offering alongside BB Investimentos, Santander, JPMorgan and Goldman Sachs. In mid-September it had not updated its filing to provide details on size and price.
VisaNet’s offer will be closely compared to Redecard, which did its IPO in 2007 and priced a follow-on in March.
San Antonio Internacional, the GP Investments-controlled oil and gas servicing company is also on file with a Brazil depository receipt (BDR) IPO via Credit Suisse, Itaú BBA, Credit Suisse and Deutsche Bank. Bankers away from the deal see it as an attractive company with a good story and a strong sponsor backing it. But they add that may not be enough to get a deal out.
San Antonio has assets in Argentina, Venezuela, and Bolivia, as well as Brazil, Mexico and Colombia. Investor aversion to risk, no matter who is backing it, is very high, say bankers. But a banker on the transaction said in September it had not been pulled. San Antonio has until late October before its latest numbers go stale.
The same may apply to El Tejar, the Argentine farm contractor with a large portion of its assets in Uruguay and southern Brazil. It is also seeking a BDR issue via Morgan Stanley and Itaú. While operating in what is likely Argentina’s most reliable and attractive sectors, the zip code risk makes it the least likely of the three hopefuls to make it out this year, say bankers and investors. LF