Bond buyers are growing increasingly comfortable with debt from Brazilian issuers, now that blue chip companies like Petrobras and Vale have returned to the cross-border market, sources told LatinFinance.
After Brazil sold a $1.5bn 10-year sovereign bond in March, Petrobras printed a $6.75bn two-part deal in May, paying an 8.625% yield on a $5bn five-year note and a 9% yield on a $1.75bn 10-year note. Vale followed suit this month with a $1.25bn five-year bond with a 5.875% yield.
“The Petrobras bond had a 9% yield, but 10 years ago it was 14%. The market didn’t have the appetite it does now,” said a banker involved in the deal. “Investors are getting more comfortable with Brazil and are searching for yield,” he said, adding that the $6.75bn deal received roughly $20bn in orders.
Solid investor demand last month also allowed food processing company Marfrig to increase the size of a seven-year bond to $750m from $500m and tighten the yield by 12.5bp to 8.25%.
Corporate issuers may find themselves in a hurry to issue new cross-border bonds, before the US Federal Reserve raises interest rates, the banker said. Fed Chair Janet Yellen said a rate hike is coming but has not revealed when. The banker said there is a 20% to 30% chance the Fed could increase interest rates in July.
Pulp producer Eldorado is due to sell up to $400m in bonds this week, another banker said. Bookrunners Banco do Brasil, Bank of America-Merrill Lynch, and Credit Suisse have opened the order books for a five-year non-call three bond. Initial price talk puts the yield in the high 8% range. The company has shareholder approval to issue up to $500m in cross-border bonds.
After Eldorado, other corporate issuers, such as BRF, Fibria and Votorantim, could issue new bonds. “But not everyone is going to make it in time,” the first banker said.
Sugar and ethanol company Cosan has scheduled investor meetings, looking to raise fresh funds for a bond buyback. But both BRF and Fibria have said they do not intend to sell cross-border bonds anytime soon because the likely yield is still too high.
“We took advantage of a market window last year but we have no plans to make another issue in the short term,” BRF CFO Alexandre Borges told LatinFinance. BRF sold a €500m ($568m) seven-year note to yield 2.822% in May last year.
Borges acknowledged that another window had opened for Brazilian issuers, but added that he did not know how long it would stay open. Higher interest rates in the US could cause yields to rise on Brazilian corporate bonds but it could also reduce the spread that issuers pay on US Treasury notes, he said.
Pulp producer Fibria vies with airplane maker Embraer over who pays the lowest corporate spread in Brazil because they are both primarily exporters, Fibria CFO Guilherme Calvalcanti told LatinFinance. Fibria has fully funded its latest project – the BRL8.7bn ($2.5bn) expansion of the Horizonte 2 plant – and does not see the need to sell a cross-border bond anytime soon, he said.
Fibria has to keep its leverage ratio below 2.5x ebitda, or at least below 3.5x ebitda “in times of expansion,” Calvalcanti said. The company had $2.9bn in net debt and BRL1.25bn in ebitda in the first quarter this year, good enough to keep the leverage ratio below the limits at 1.86x.
“The big question is, in 2018, when leverage is lower, if I want to pay more aggressive dividends to shareholders,” Calvalcanti said about a possible cross-border bond issue. “I might have to think about it.”
Brazilian Finance Ministry officials said the sovereign could issue a 30-year benchmark bond in the international market later this year. They also said they could reopen the 10-year note issued in March or repurchase outstanding bonds as part of a buyback program.