Brazil’s downgrade to sub-investment grade by Standard & Poor’s on Wednesday has cast a cloud over two large initial public offerings that started investor meetings this week, LatinFinance understands.
Reinsurance company IRB Brasil Re had earmarked a mid-October date to price its $960m IPO and began an investor education process for the listing this week, but the transaction may be delayed, according to one source close to the deal. S&P’s downgrade of the country could spur potential investors in the listing to push for a cheaper share price than the company had hoped for, he said.
While the downgrade was expected, the timing was a surprise – many sources in the region predicted it would happen later this year. The downgrade was “the worst timing” for the capital markets, said a Brazil-based equities banker. The market will question whether investing in new IPOs are feasible when there are already listed companies in Brazil, with “readily available shares”, he said.
The investor education process on Caixa Seguridade Participações‘ $1bn IPO will give an indication of the success of the two transactions, a source familiar with the deal said. Both are still likely launch this year, due to the companies’ needs to raise cash “immediately”, he predicts.
The concerns over the feasibility of the equity transactions came after two cross-border bond transactions from Mexico were heard to hold off launching on Thursday, as a result of debt market volatility from the downgrade.
Levy: raising awareness
Brazilian markets are said to be awaiting a governmental restructure and “financial package”. Joaquim Levy, Brazil’s finance minister, hinted at change, when he told reporters on Thursday that the government needed “to be more forthcoming about the need to take forced measures”.
Levy sought to reassure investors, and said on the call with reporters that the downgrade would raise “awareness” in Brazil’s government about the need to meet ambitious budget targets through tax increases. He insisted that the government would aim to meet its budget target for 2016, which he deemed necessary for stemming the growth of public debt.
S&P’s downgrade came after the government reneged on its 0.7% commitment for a primary fiscal surplus, projecting a consolidated deficit of 0.34%.
Other ratings agencies, Moody’s and Fitch, still have Brazil classed as investment grade. LF