Last year may have been a miserable 12 months for Latin American equities, but an exceptional stock offering from Brazil’s aircraft manufacturer showed that even large and relatively complex issues can succeed as long as they have strong names and convincing stories.
In June, Morgan Stanley led a combined secondary equity offering and convertible bond issue that raised $750 million for Embraer’s shareholders and a further $300 million for the Brazilian government’s BNDES development bank. BNDES piggybacked on the Embraer deal to issue a five-year bond convertible into Embraer stock.
The transaction was a landmark deal due to its size, its success in developing a new investor base for Brazilian companies and in establishing Embraer as a significant name in the equity markets, making it LatinFinance’s equity deal of the year.
In 2000, Morgan Stanley was one of three banks to handle Embraer’s $407.7 million local and international initial public offering. In the 2001 offering, Embraer and BNDES picked Morgan Stanley as sole lead for the follow-on equity issue and the exchangeable bond.
Embraer builds regional jetliners and is the world’s fourth-largest aircraft manufacturer. Exports account for nearly all its revenues of $2.06 billion through September 2001. At its privatization in 1994, Embraer was nearly bankrupt and the government sold the company to a consortium of two state company pension funds and Bozano Simonsen, a conglomerate. BNDES also had a stake in the company. Embraer’s share price doubled following its July 2000 international debut, peaking in May 2001 at $45.50. The run-up prompted the original shareholders to sell part of their equity, although they still retain control of the company.
“The timing was just right,” says Sam Polyak, an emerging markets equity fund manager at Pioneer Investments in Boston. “The sale was rumored for a while and when it happened, they did it in a couple of weeks.” The company got $38.90 per share with no discount to the previous day’s closing price. Unfortunately, the stock lost half its value in the days following the September 11th attacks.
Embraer needed to increase the liquidity of its share when Morgan Stanley Capital International (MSCI) changed the way it calculates its international equity benchmark index. Says Polyak, “MSCI changed its index from a market capitalization base to a free-float weighting and Embraer’s [percentage] would have gone down.”
The 2001 equity offering raised $750 million for the shareholders and boosted Embraer’s liquidity since the issue represented 39.5% of its public float. Now, 59% of the company’s non-voting stock is in the hands of the public, both in Brazil and the US. A further 19% of voting stock is held by the public in Brazil.
Morgan Stanley also succeeded in broadening the company’s investor base by introducing global aerospace investors and buyers of hybrid securities, which until then had never bought a Brazilian convertible bond.
Sérgio Weguelin, capital markets superintendent at BNDESPar, the investment banking arm of BNDES, says, “We felt it was important to access the base of US investors in hybrid products, which is very big but there was no Brazilian [asset present].” Weguelin says the Embraer combined offering meant it could diversify the universe of investors. The convertible bond also meant BNDES could raise fresh capital on the international markets for less than the cost of straight debt.
This was the first Brazilian convertible bond issued in global markets and thanks to strong demand, BNDES upsized the issue to $300 million from $200 million at launch, priced at the tight end of the pre-sale coupon and premium ranges. This allowed BNDES to raise capital for approximately 5% less than the straight cost of debt. The five-year bond, with a put option in the third year, was priced to yield 6.5%, with a premium of 21% to convert into stock at $47.07. Last June, this seemed a generous price. Now, of course, these bonds are broken and are of more interest to high-yield investors than the high-grade buyers they were originally pitched to.
Embraer’s offering alone accounted for over half of Latin American equity issuance in 2001, which totaled $1.48 billion compared with $9.84 billion the previous year. High interest rates, depressed earning outlooks and the continued impact of the dot-com bust depressed valuations on the equity markets.
Petrobras last year issued $696.3 million in voting shares held by the government in a deal led by Salomon Smith Barney. Siderca, an Argentine steel company, issued $34.38 million in ADRs in a deal underwritten by JP Morgan. Bunge Ltd was notable for staging the sole Latin American IPO of the year in July. Although Bunge is now based in the US, it was once headquartered in Buenos Aires and continues to do most of its business in Latin America as a grain trader. Previously a privately held family-owned company, Bunge listed on the New York Stock Exchange in a $281.6 million IPO mainly to create sufficient liquidity for family members wishing to cash in their stakes. Morgan Stanley and Credit Suisse First Boston led the deal.