Long- and short-term investors are seeing new opportunities in Brazil’s capital
markets and some say they would welcome an impeachment of President Dilma
Rousseff, LatinFinance has heard.

The Brazilian Democratic Movement Party (PMDB) left Rousseff’s ruling coalition this week, calling on its six ministers in the presidential cabinet and all other party members who are federal employees to resign from their posts. The PMDB’s departure could convince other smaller parties also to leave the coalition and increase the likelihood that Rousseff will lose an impeachment vote in the Chamber of Deputies next month.

If the lower house votes to impeach Rousseff, the Senate has to decide whether to put Rousseff on trial and suspend her from government. Vice President Michel Temer, head of the PMDB, would become acting president if that happens.

The day after the PMDB decided to withdraw from the ruling coalition, the BM&FBovespa stock exchange in Sao Paulo rose 2.02% early on Wednesday and closed 0.18% higher on the day.

If the markets keep moving in the same direction, a number of Brazilian corporate issuers could tap the cross-border bond markets in the coming weeks, a debt capital markets banker said. But even with the market’s positive reaction to Brazil’s political turmoil, the banker said corporates need time to come to terms with a possible impeachment.

“It’s a good sign that people are getting to work in Brazil,” the New York-based banker said. “Relief is in the air, but it’s by no means a slam dunk.”

Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management, said the chances of Rousseff’s impeachment stood at about 90%.

Rousseff is not likely to go down without a fight, another source said. Her supporters are expected to rally behind her and, even if she is impeached, it will take several months before political tensions simmer down and a new government can work on reducing the deficit, he said.

The Lava Jato scandal remains fresh in the minds of investors, an economist said. Government officials and prominent business executives are under investigation and he said there is nothing to suggest that any leadership alternatives to Rousseff would be free from the scandal.

“There are still so many surprises in terms of who may or may not be involved,” he said. “The government is tainted by the scandal. A lack of legitimacy would require Temer to galvanize political support and unite the government, which is no easy feat in Brazil right now.”

In the capital markets, however, corporates eyeing both the cross-border bond and loan markets received the news well, bankers said.

Issuers in Brazil’s pulp and paper industry are likely candidates to sell cross-border bonds because they export most of their products to Asia and Europe. Local pulp producer Eldorado, for one, has hired Banco do Brasil, Bank of America-Merrill Lynch and Credit Suisse to coordinate its debut cross-border bond offering.

Rival pulp producers Fibria and Klabin have not outlined plans to sell debt in the cross-border bond market, but a second DCM banker said they could seek funding in the loan market, which is currently offering lower spreads than the bond market. Investors would likely be drawn more to familiar issuers like Fibria or Klabin over Eldorado, he added.

The depreciation of the Brazilian real has not only made exports cheaper in dollar terms, but the success of these companies outside of Brazil has mitigated some of the domestic risk and currency exposure, bankers said.

The spreads on Brazil’s existing 10-year notes rallied by more than 150bp in the last three weeks, as investor appetite for emerging market credits has increased.

The Brazilian government last week submitted a debt filing with the US Securities and Exchange Commission to issue up to $2.61bn in debt securities. Brazil sold a $1.5bn 2026 bond at 99.066 with a 6% coupon to yield 6.125% in March.