Asian ties prop up deals

Brazil has the largest Japanese colony in the world, descendants of immigrants who left their homeland in the early years of the last century to flee poverty. Few Brazilian-Japanese retain the customs of their forebears or even speak any Japanese, but Jorge Arruda, head of Nomura Securities’ office in São Paulo, says the community has helped to establish a strong link between the two countries that still counts for something in the financial markets. Brazil issued its first Samurai bond in 1973, has a perfect payment record in yen and has become one of the most active emerging market issuers in yen.

This has enabled Brazil to raise unexpectedly large amounts of yen financing this year at prices it could not even dream of in the dollar markets, although this has required careful planning and quite sophisticated structures. The government and its national development bank BNDES have raised a total ¥530 billion (equivalent to around $4.5 billion) in the Samurai market since the beginning of last year, with retail investors taking two-thirds of the paper. Prior to these issues, the country had only ¥38 billion-worth of bonds outstanding in the market and so yen-denominated debt still represents a tiny portion of the country’s total external debt. Yet Brazil is now the largest emerging market issuer in yen-denominated debt, followed by Mexico with ¥490 billion outstanding.

The government issued a ¥200 billion ($1.6 billion), two-year Samurai bond in late July, the largest by an emerging market issuer ever. It was also one of the largest single-tranche Samurai issues yet.

In August, Banco do Brasil raised $300 million in a five-year worker-remittance securitization deal. Shortly after, Banco Itaú raised most of a 10-year, $343 million-equivalent subordinated debt issue in Japan in August. This was the first Tier-2 issue by a Brazilian bank, was the longest-term private placement by a Brazilian issuer and carried the longest term for any Latin American private placement in yens.

An Appetite for Risk
The tremendous liquidity and low returns in Japan’s financial system means that it is one of the few places left with an appetite for Latin American risk in general and Brazilian risk in particular. Furthermore, says Stefano Gherzi, managing director at Nomura International in London, Japanese investors are “Buying [securities in] other currencies than yen. There is a perception in Japan that there is a managed depreciation of the yen is a possibility in the next two or three years.”

The US dollar and the euro are becoming more popular among retail investors in Japan who form the backbone of the country’s financial system.

Itaú, for instance, placed most of its issued dollar-denominated debt in dollars in Japan. Paulo Soares, senior managing director in the international department of Banco Itaú, says, “In Japan, when you pay some interest, they get quite excited. There is appetite there, and we got the right return for our rating. We issued in yen at par with a 4.25% coupon, which is 285 basis points over equivalent Japanese Treasurys.” The loan yields 455 basis points below the equivalent Brazilian sovereign.

The sovereign’s issue was impressive because of its size and strong reception at a time when the market was reeling from the impact of the Argentine crisis. Bookrunner Nomura Securities and joint-lead Daiwa SMBC upsized the bond from an original ¥180 billion, defying comment in the market at the time expecting the Samurai market to spurn Brazil, just as the dollar and euro markets had done recently. Earlier issues this year by other Latin sovereigns such as Argentina raised fears that the mainly retail Samurai market base had had its fill of Latin risk. However, a banker in São Paulo noted that, “Brazil had tried to do a long-term bond. First it tried seven years, then five and finally only got two years.”

Cultural Links and Yield
Japan has the lowest nominal interest rates in the world and changes to its postal savings bank system are further increasing liquidity. Brazil offered 358 basis points over yen Libor, which is a lot given that term bank accounts pay interest rates of 0.2%. Arruda says “We expect a better year in the Samuari market this year than last with the postal savings bank redemptions.” The combination of yield and the cultural links with Brazil ensured that there were over 50,000 ready buyers for its paper. Gherzi says, “This was the largest number of tickets ever in the history of emerging markets. Japan is the last big retail bond market left in the world.”

Daniel Gleizer, international director at the central bank (see interview, page 11) says that having raised its foreign borrowing to $7 billion this year from an earlier forecast of $5 billion, the strong reception for the Samurai brings the government to within $400 million short of the new target.

Japan has become a vital source of financing for Brazil as the euro and dollar markets become more hostile. Brazil raised $3 billion in dollar debt this year, but has not issued in that currency since May, with a $1 billion, five-year bond. The government last issued in euros last April with a ¤500 bond, five-year bond, bringing its euro issuance to ¤1.5 billion for the year to date.

Itau’s Soares says he was also pleased with the reception for the bank’s issue. “We are very proud of timing. It was summer and there was all the volatility surrounding Argentina.” The Itaú deal raised $243 million-equivalent in yen and $100 million in the dollar market to fund the bank’s Grand Cayman branch. Merrill Lynch was the arranger.

Road shows that emphasized the bank’s profitability, liquidity and the $1.9 billion in assets it holds outside Brazil impressed investors. The clincher was an A3 rating from Moody’s, one notch below the bank’s domestic market rating, plus a political risk insurance policy guaranteeing pay-outs for 18 month in case of a crisis. This was also Itaú’s first 144(a) issue, a market that it had not developed extensively before.

Soares says the issue will be used to bolster the bank’s Bank for International Settlement ratios to 15% and increase its trade finance activities. The resources will be managed entirely from Cayman, not Brazil, further reducing the risk of the operation.

Future Flow
Banco do Brasil’s July $300 million securitization deal, rated BBB+ by S&P, used a future-flow transactions structure between Japan and Brazil. This deal, underwritten by Merrill Lynch, enabled the bank to raise five-year dollar financing at 7.875%. Nikkei Remittance Trust is a worker-remittance transaction based on transfers home by Brazilian workers of Japanese origin working in Japan. Banco do Brasil pioneered this structure, which has only been used before by Turkey and Mexico, which both have large populations of workers in Europe and the US.

The transaction’s structure made it possible to avoid Brazilian country risk, earning it an investment-grade rating. This is rare among Latin American deals, bearing in mind that it was not insured, and therefore had lower costs.

S&P gave the structure a rating above Banco do Brasil’s BB+ local currency issuer rating. Usually, ratings in these type of transactions are determined by the local currency rating of the bank remitting the money and making settlements in local currencies. However, this deal featured strong credit enhancements, such as over eight times over-collateralization and Banco do Brasil’s status as the country’s largest bank, which also has the most extensive retail network in Brazil with 2,900 branches. This allows the bank to deliver remittances to a much larger potential pool of beneficiaries than its competitors. The bank already handles 70% of Japanese worker remittance flows.