Brazil mulls IPO for state airport agency Infraero

The Brazilian government plans to sell shares in its airport operator Infraero through an initial public offering, potentially surrendering control of the agency, Transportation Minister Maurício Quintella announced on June 06.

The IPO, the latest in a series of reforms and privatizations pursued by President Michel Temer’s administration to bolster investment in Brazil’s aging infrastructure, would come after the sale of some of Infraero’s existing airports to private companies.

Quintella said in an interview that a final decision on the process and whether it would result in handing over control of Infraero to private investors should be reached by the end of this month.

Local media reported earlier this week that the government could downsize or even eliminate Infraero, with officials at odds over whether to dispose of all its stakes in 56 airports.

The sale would provide badly needed revenue to the federal government, which has seen tax collection lag official forecasts as Latin America’s largest economy has recovered at a slower-than-expected pace.

Quintella said the government was also finalizing a plan to invest over 50 billion reais ($15.2 billion) in infrastructure projects, which could be announced as soon as next week.

The so-called “Avançar”, or “Advance” program would direct more than 20 billion reais to transportation ventures, Quintella said, as the government doubles down on efforts to bolster the fragile economic recovery.

The program would entail investments of around 16 billion reais in highways, 1 billion reais in railroads, 1.79 billion reais in ports, 820 million reais in public airports and 400 million reais in waterways.

It would replace an existing infrastructure investment plan put in place by former President Dilma Rousseff in 2007 when she was chief of staff under leftist President Luiz Inácio Lula da Silva.

Economists have said the program had little effect on growth and weighed on public finances as Brazil’s economy slipped into its deepest recession in decades. Rousseff and center-right Temer have slashed its budget repeatedly in recent years to try to curb ballooning public debt and regain investors’ trust.

 

Source: Reuters Brazil

Brazil’s turmoil to boost M&;A pipeline after a quiet quarter, bankers say

Escalating political turmoil and a widening graft scandal are driving more Brazilian companies to sell businesses, promising a strong pipeline of mergers and acquisitions after dealmaking hit its slowest pace in a year in the second quarter, bankers said.

While stricter legal scrutiny related to the corruption scandal helped slow second-quarter M&A, bankers said funds and multinational firms were still seeking Brazilian assets. Despite economic and political headwinds, merger activity could be reignited by falling borrowing costs and an increasingly stable currency.

Pressure from creditors could also speed up asset sales by companies restructuring almost 180 billion reais ($56 billion) of debt, bankers said.

“M&A is relatively resilient to the macroeconomic and political environment as strategic players seek opportunities with long-term potential,” said Patricia Moraes, head of Brazil banking for JPMorgan Chase & Co.

Uncertainty surrounding the timeframe for an economic recovery from Brazil’s worst recession on record, as well as concerns about the stability of President Michel Temer’s administration, have deterred some buyers and sellers from committing to deals.

Companies announced $7.052 billion worth of Brazil-related mergers last quarter, down 76 percent from the prior quarter, as the rankings showed. A year earlier, when tougher due diligence procedures were implemented, announced M&A deals totaled $6.861 billion.

Last quarter, the number of announced deals fell to 132 from 141 in the prior three months and 135 a year earlier.

Brazilian markets tanked in mid-May after members of the billionaire Batista family accused Temer of seeking to obstruct the massive corruption probe known as Operation Car Wash. The market turmoil compounded the impact of Brazil’s recession, keeping buyers and sellers at odds over valuations.

Temer has called a corruption charge filed against him by Brazil’s top prosecutor a “fiction” as he faces possible removal from office.

Fallout from Operation Car Wash has led to increased due diligence concerning companies ensnared in the scandal, such as building group Odebrecht SA. Usual timeframes for such proceedings have doubled over the past year, to up to six months.

More assets are on the block as companies seek to cut debt or improve their capital and tax structures, said Eduardo Miras, co-head of Brazil investment banking at Morgan Stanley & Co, Brazil’s No. 1 M&A bank this year.

“Some companies are being forced to sell,” Miras said. “Opportunistic buyers and strategic players with a long-term view find themselves with a flurry of good Brazilian assets.”

Car Wash-related M&A deals include J&F Investimentos SA’s planned sale of a dairy producer and the maker of the popular Havaianas flip flops, Alpargatas. Members of the Batista family, which controls J&F, admitted to bribing 1,893 politicians.

Roderick Greenlees, global head of investment banking at Itaú BBA SA, said he expected deals to pick up in the third and fourth quarters amid growing interest from multinational firms and buyout funds, which are more likely to meet buyers’ prices for attractive companies.

“Some premium assets are being sold because of the current situation, which in general keeps us excited about the dealflow ahead,” Greenlees said.

JPMorgan and Morgan Stanley topped value rankings for the second quarter and the first half, respectively. JPMorgan worked on Itaú’s $2 billion purchase of a minority stake in brokerage XP Investimentos SA.

Itaú BBA led the rankings for the number of deals after working on seven transactions last quarter and 18 this year.

In the first six months, the total of 273 Brazilian M&A-related transactions was worth $36.177 billion, more than three times the amount recorded in the same period of last year, the data showed.

For years, investment banks have derived nearly half of their annual Brazil revenues from M&A advisory. As dealmaking suffers, banks have turned to structured lending, transactional banking or, in some cases, securities trading.

 

Source: Reuters Brazil

Brazil’s Temer boosts infrastructure spending as graft scandal deepens

Brazil’s government has sharply increased spending in local infrastructure projects proposed by lawmakers, according to budget data reviewed by Reuters on the 4th of July, as a graft scandal threatens to topple President Michel Temer.

Federal spending on infrastructure works and other projects this year sponsored by congressmen for their constituencies jumped to 5.2 billion reais ($1.57 billion) in June, up from 959 million reais the month before, the data showed.

The increase in spending comes at a time when Temer is facing charges with taking bribes in connection with a graft scheme involving the world’s largest meatpacker, JBS SA. Company executives said in plea-bargain testimony that the president took bribes for resolving tax matters, freeing up loans from state-run banks and other matters. Temer also allegedly arranged to receive a total of 38 million reais from JBS in the next nine months.

The president has repeatedly denied any wrongdoing.

Brazil is grappling with record-high budget deficits and the recent splurge illustrates Temer’s efforts to keep his fragmented coalition united despite growing calls for his resignation more than one year before general elections.

Temer’s office declined to comment on the increase in spending in the past month.

Under Brazilian law, it is now up to the lower house of Congress to decide if the president will be tried by the Supreme Court. Two-thirds of the lower house must vote to approve the charge for that to happen.

SPENDING FLURRY

Brazilian legislators can earmark the federal budget for local works, but the federal government must authorize that spending.

Brazil’s budget deficit before interest payments soared to 30.736 billion reais ($9.30 billion) in May, the largest-ever for the month. The gap in the 12 months through May reached 157.7 billion reais, above the official target for a deficit of 143.1 billion reais for this year.

Prosecutor-General Rodrigo Janot last week said he would likely level new charges of racketeering and obstruction of justice against Temer in the coming weeks. Each charge would require lawmakers to vote on whether or not to defend the deeply unpopular president from being tried.

Lawmakers within Temer’s coalition are confident they have the votes to block the two-third majority required to proceed with a trial. But they also acknowledge that if forced to vote on repeated charges against the president, support for the leader could unravel as lawmakers worry about their own reelection next year.

 

Source: Reuters Brazil

Brazil posts June trade surplus $7.2 billion, higher than estimates

Brazil’s trade surplus fell less than expected and remained near an all-time high in June, government data showed on July 03, as strong sales of agricultural goods, oil and automobiles helped the economy exit a deep recession.

Brazil posted a trade surplus of $7.195 billion last month, the second largest on record and the biggest ever for the month of June.

Exports totaled $19.788 billion and imports $12.593 billion.

Economists in a poll predicted a surplus of $7 billion, according to the median forecast, following a record-high surplus of $7.661 billion in May.

Brazil’s growing trade surplus has helped keep a steady flow of dollars coming into the recession-hit country, limiting currency losses amid an escalating political crisis.

Economists expect an all-time-high trade surplus of $58.75 billion this year, up from $47.7 billion in 2016, according to a survey released earlier the 3rd of July. The central bank forecasts a trade surplus of $54 billion.

Brazil had a trade surplus of $36.219 billion between January and June, also a record for the period.

 

Source: Reuters Brazil

Brazil cuts inflation target for first time in over a decade

Brazil’s government on June 29 lowered its annual inflation target for the first time in more than a decade, seeking to turn the page on recent double-digit jumps in consumer prices and bolster investors’ confidence about future economic stability.

The National Monetary Council, comprised of heads of the finance and planning ministries and the central bank, cut the inflation target to 4.25 percent in 2019 and 4.00 percent the following year, from 4.5 percent at present.

The tolerance range was maintained at 1.5 percentage point.

The reduction, predicted by a poll of economists in January, followed a plunge in annual inflation from nearly 11 percent in early 2016 to 3.6 percent in June.

A stronger commitment to low inflation could boost Brazil’s long-term growth by reducing investor uncertainty, without closing the door to further interest rate cuts by the central bank this year, economists said.

Economists forecast an inflation rate of 3.5 percent for 2017, breaking a sequence of seven straight years of Brazil overshooting its target. Under the administration of former President Dilma Rousseff, who was impeached last year, economists accused policymakers of pursuing the ceiling of the goal and not its midpoint in order to avoid rate hikes that could hurt growth.

“Economic policy has all the necessary conditions in terms of inflation, transparency and credibility to remain committed to these inflation targets,” central bank chief Ilan Goldfajn told journalists.

Yields on longer-dated interest rate futures slipped in early trading, suggesting investors saw the new targets as consistent with forecasts of interest rate cuts. Global risk aversion pushed yields up again later in the day, traders said.

Growing investor optimism about Brazil’s economic prospects contrasts with an escalating political crisis that threatens to remove President Michel Temer from office.

Goldfajn said the targets took into account the political environment, and also responded affirmatively when asked if he expected to stay in his post even if Temer is suspended from office should the Supreme Court try him on corruption charges. Temer appointed Goldfajn to lead the central bank last year.

The central bank has been expected to cut its benchmark rate to 8.5 percent by December, from 10.25 percent currently, according to a central bank survey of economists released on Monday. The bank has already lowered the benchmark rate by 400 basis points since October.

Before the decision was announced, economists had been forecasting an annual inflation rate of 4.25 percent for the years of 2019, 2020 and 2021, according to the central bank.

Brazil began targeting inflation in 1999, with the 4.5 percent target being first adopted for 2005.

Goldfajn had long said Brazil should aim for a target more in line with other emerging markets. Latin American countries such as Mexico and Chile target inflation at 3 percent.

Source: Reuters Brazil

Meirelles sees lower growth and doesn’t rule out tax hikes

In a scenario in which the economy’s recovery may be more modest than expected, raising taxes to settle the government accounts is back in the agenda. On June 28, during engagements with the financial sector in São Paulo, Finance Minister Henrique Meirelles admitted that the economic team would revise downwards the current forecast of economic growth in 2017, now at 0.5%. A little before, the minister had said the government had not taken decision on hiking the Cide tax on fuels. He stressed, however, that he had never denied the possibility of raising taxes to settle accounts.

“For now, there is no decision yet on increasing the Cide,” Mr. Meirelles said after attending a Citibank event in São Paulo. “We have always said we would raise taxes if necessary and I repeat that now in a more pertinent way.”

A Cide hike, measure always recalled at the moment of increasing revenues, gained attention again because of the government’s budget difficulties, which demand extra revenues for compliance with this year’s fiscal target, of R$139 billion. Although the economic team considers raising the tax burden, Mr. Meirelles also said that tax collection should recover and “even surprise positively, especially from the second half.”

Mr. Meirelles said that at some moment tax receipts are likely to recover and “even surprise positively.” He pointed out that the government expected the passage of the bill that clears a little more than R$8 billion in court-ordered payments whose recipients have not withdrawn the money, and that there were other important measures to raise revenues. The minister expects a recovery in tax receipts particularly in the second half.

He once again said that the pension reform is a long-term measure and that the delay of a few months in its passage “will not define the long-term fiscal situation,” but that the reform can’t wait years to be done.

About the downward revision in the official growth projection for this year, the minister declined to provide a figure, but advanced that the current forecast of 0.5% will be recalculated. “It will be a little lower than that, but will certainly be positive, it will be in that range between 0% and 0.5%. We will announce it in the next few weeks,” he said.

Mr. Meirelles argued that he would prefer working with the comparison of economic growth between the last quarter of this year and the last quarter of 2016, whose projection of the Finance Ministry was around 2.7%. The minister also said that this figure would be revised downwards. “We still maintain a projection of growth above 2% in the last quarter of this year from the last quarter of 2016. We’ve come up at a certain point with 2.7%, didn’t change that projection formally, but in fact it has a certain downward bias, but it is not something that will be below 2%, it will be higher. Anything between 2% and 2.7% is what we are evaluating,” he added.

When commenting the economy’s numbers, the minister made the point of associating them with positive data, which he classified as recovery of growth. “There are crucial points for the economic stimulus: the labor market began improving, unemployment stopped rising in the sense that there has already been positive creation. Even though it is not a strong number, it shows some recovery. There is also inflation falling without prospect of reversal, allowing the monetary authority to give more stimulus to the economy. Therefore, there is a series of economic factors that support the trajectory of growth we expect, but with some adjustment.”

Despite acknowledging that the political crisis hinders the progress of economic reforms proposed by the economic team, Mr. Meirelles said he will continue in the government. “I don’t think of leaving the government, I am focused on my work. My agenda is economic, it is not a political agenda, I do exactly the part of a technical team, with economic focus and that has total freedom to work. We are proceeding with our work normally. The economy is doing well, showing results, from the point of view of economic activity,” he said.

Regarding the current political scenario, the minister argued that the market is more focused on the medium term. “Investors see a consensus situation that the reforms are crucial and that this economic program is the most adequate, but increasingly they begin looking to the electoral matter of 2018. [They wonder] How will the government be in 2019? What will be the prospects? This begins to influence market signals,” Mr. Meirelles said, once again denying he has interest in running for president next year.

Source: Valor Econômico

BNDES shares collateral with banks to boost credit for infrastructure

The Brazilian Development Bank (BNDES) has reached an agreement with the leading banks in the country establishing new rules to share collateral in the financing of infrastructure projects. BNDES will start sharing collateral it gets from companies that get loans from the bank whenever partner lenders accept providing bank guarantees equivalent to at least 40% of the loan. The other 60% of guarantees, as receivables of the project, will be secured by BNDES itself. The rules are valid for the phase of construction, when the investments are still being made and the banks’ risk is higher.

The sharing of collaterals by BNDES will already be in effect for financing of the consortia that won the auctions of the Fortaleza, Salvador, Florianópolis and Porto Alegre airports in March, and also for the concessions of São Paulo state highways also auctioned in 2017. But other infrastructure projects may also benefit from the new rules. “It is an umbrella agreement and will mark our modus operandi with other banks moving forward,” says Claudio Coutinho, credit, financial and international director at BNDES.

Mr. Coutinho says that the discussion with banks, including Banco do Brasil, Caixa Econômica Federal, Itaú, Santander and Safra, was on conditions that permit these institutions better gauge the risks they are running. Greater clarity on the risks may lead to competition among banks to offer the guarantee to the project. As a result, the costs of the guarantee may fall, Mr. Coutinho says. A guarantee may cost between 1% and 2% of the project, according to estimates.

The negotiations defined the conditions that must be met for BNDES to declare the physical and financial conclusion of the projects that will have bank guarantee of the partner banks. The project will need to be ready and producing the expected cash flow. It will also have to ensure a minimum coverage ratio of the debt service of 1.3 times the cash generation of the last two years.

These are “objective” conditions that allow the partner banks understand what must occur for them to get out of the project risk when construction is concluded, says Luciene Machado, head of sanitation and transport at BNDES. She says that these conditions may be attested by financial statements or by companies that supervise the construction work.

In the market, companies complained that BNDES didn’t accept sharing its collateral, demanding from companies, in exchange of loans, very high corporate and financial guarantees, which often hindered the loans. Since last year, when it ceased to extend bridge loans, BNDES has been studying ways of bolstering the funding of projects.

Mr. Coutinho says the BNDES difficulty to share collaterals in the past was related to the fact that banks often only accepted participating in the first stage of the financing, of the bridge loan, with the offering of a low percentage of bank guarantee.

In general, these guarantees cover the first two years of a project, and the ideal is that they be expanded to periods of four to five years, when the projects tend to present operational viability.

“The sharing of collaterals will enable the better allocation of risks of the infrastructure projects, increasing the predictability to guarantors, potentially reducing costs,” Mr. Coutinho says.

BNDES is currently the largest lender to infrastructure projects in the country, having disbursed R$988 billion, in constant values, over the last ten years. The expectation is that, with the model of sharing collaterals, the projects may attract new investors, such as large foreign financial institutions, which could help finance the Brazilian infrastructure.

Source: Valor Econômico

Brazilian companies resort once again to syndicated loans

After a weak start of the year, syndicated loans have once again become an option for well-rated Brazilian companies to raise funds abroad.

In the beginning of the year, with the bond market heated, companies preferred to issue securities, with which they could raise funds for a longer term. But as political uncertainty grew, with President Michel Temer being directly cited as involved in corruption in the testimonies of JBS executives, costs on the bond market rose a little and foreign bank loans have become attractive again.

Vale raised $2 billion in early June with a five-year credit facility. The mining company got it from a syndicate comprising 18 banks. In May, sugar and ethanol producer Biosev also rolled over a $318 million facility that was to expire in 2018 and extended it through 2020.

In the first quarter, syndicated loans to Brazilian companies amounted to $50 million, but with the new transactions the market expectation is to top the total of about $4 billion posted last year.

ING participated this year of the extension of a syndicated loan to Ascenty, an operator of data centers, in the first quarter. Last year, the company raised $155 million from a group of banks, and this year it managed to increase that facility to $190 million, maturing in five years, with two banks joining the loan. Proceeds will be raised for the construction of data centers in Brazil.

The bank also arranged in May the extension of a syndicated loan to another Brazilian company in the value of $200 million for three years. In general, terms of syndicated loans are shorter than those of bond issues and similar to those in Brazil. “The difference is that the banking market in Brazil is too concentrated. If the company needs to raise more than $1 billion, it may be cheaper to do the transaction abroad, where a higher number of banks can participate. But this access is restricted to a small universe of blue-chip companies,” says Ignacio Lorenzo, head of syndicated loans and financing for acquisitions at Santander Brasil.

When Brazil lost its investment-grade rating, traditional banks that used to participate in such type of loan reduced the credit limit to Brazil. In addition, the recession of the last two years reduced the need of Brazilian companies to raise new funds, and they are seeking only to roll over their existing debts. To have an idea of the drop in loans on this market, in 2015 syndicated loans to Brazilian companies reached $15 billion.

Mr. Canineu says banks have been seeking to reduce the so-called Brazil risk. The focus now has been on loans to subsidiaries of multinationals present in the country, Brazilian companies with operations abroad or exporters, or those in non-cyclical businesses, such as paper and pulp and food and beverages, which are less affected by the crisis.

Outside of these sectors, banks are more demanding regarding collateral. In the case of companies being investigated, but without operating problems, like meat processor JBS, banks have only been renewing the facilities and have included creditor-protection clauses that accelerate the debt, pegged to leniency agreements. “There are no new loans to these companies, at most the rollover of existing lines. But these transactions have been bilateral,” one executive says.

With high liquidity in the global financial market and interest rates that, despite rising, are still lower than in Brazil, fundraising abroad is still attractive for some Brazilian companies, even considering the cost of currency hedge.

In general, syndicated loans are contracts at a cost of Libor, the London interbank rate, which is below 2%, plus a spread, which depends on the country and company risk. “In general, if you do a three-year swap transaction of Libor to reais it still is cheaper than the [benchmark short-term rate] CDI,” says Mr. Canineu, with ING.

Source: Valor Econômico

Brazilian companies still lack compliance departments

Amid the reform of the special listing segments of exchange operator B3, most companies on Novo Mercado still don’t have specific compliance departments, which are in general subordinated or connected to other activities within their administrative structure.

A survey identified that two-thirds of the listed companies on Novo Mercado, the strictest corporate-governance segment, still don’t have departments dedicated specifically to these functions, among which is the guarantee and verification of the compliance with legal and regulatory norms, in addition to the detection and combat of irregularities and violations of internal policies.

This doesn’t mean that the companies don’t have people taking care of these matters, but that, at least in the majority of cases, there isn’t a sector that is dedicated only to this – half of the companies, for example, have some type of program for risk management. The study considered as a specific department the one in which it was possible to identify some level of independence, without being connected or within other departments or committees with several responsibilities, like personnel management or legal counsel.

It was also examined, in April and May, the reference forms of the companies and sought to answer three questions to classify the specificity of the department: what are the main internal control practices, which organizational structures are involved, and whether there is a formalized policy of risk management and compliance.

It’s possible to show with the study that companies have formalized divisions of internal audit, which are often connected to compliance. However, differently from the auditing actions, which verify through sampling if the company is booking its numbers in accordance with the accounting standards, compliance is a deeper activity, aimed at the creation of a corporate culture in which all the employees are stimulated to combat irregularities.

In the Novo Mercado reform, B3 doesn’t impose requirements of a department exclusively for compliance. According to the exchange operator’s proposal, which is in the process of a vote, companies should implement this role, and also the attributions of internal audit, internal controls and risks.

Although it is seen as an important step in relation to the current regulation of the segment, which doesn’t establish these demands, a greater advance would be to treat compliance as a more independent function and, mainly, to act in the oversight of adherence to rules, considering that the involvement of large companies in corruption scandals has cast doubts on the capacity of Novo Mercado to act against irregularities.

Meat processor JBS, investigated by the Securities and Exchange Commission of Brazil (CVM) for transactions carried out in the financial market, already had, since November 2015, a policy of relations and management of risks with government entities and public agents. On May 26, one week after the outbreak of the scandal of bribery payments to politicians by its controlling shareholders, the company said that it had created a governance committee, responsible for implementing compliance practices. On June 14, in another move to try to reinforce the department, JBS announced the nomination of attorney Marcel Proença to the position of global director of compliance and the hiring of law firm White & Case to support the project.

To avoid the repeat of cases like this one, the responsibility for verification, is primarily up to regulatory agencies and to the companies’ board of directors and fiscal councils, but the B3 itself could periodically take on the responsibility of checking whether there is sufficient evidence that the committees and responsible departments are active, and not only that the company has a set of rules.

The Novo Mercado currently has 130 listed companies.

Source: Valor Econômico

Vale shareholders prepare for decisive meeting

Vale and its investors are in a countdown to the shareholders’ special general meeting on the 27th, considered the most important since the mining company was privatized in 1997. The meeting is expected to have record attendance and there is optimism that it will be possible to get support from shareholders to approve the conversion of preferred into common shares, the change of the company’s bylaws and the merger of Valepar, holding company that controls the mining giant, into Vale.

The presence of investors in the SGM is expected to top historical marks, sources said. Credit Suisse recently released a report showing that the latest general shareholders’ meeting of Vale, in April, had attendance representing 71% of the equity, the highest of the last ten years. The SGM is expected to be as big or bigger.

Vale will need the support of 50% plus one vote of shareholders to approve the items on the agenda, which depend on each other. Valepar and BNDESPar, investment arm of the Brazilian Development Bank, will abstain from voting at the SGM, with exception of the item regarding amendment of bylaws. Altogether, Vale has 255,000 shareholders and a capital of 5.1 billion shares, excluding shares held in treasury.

If the majority is secured in the meeting, a second step of the operation will begin. There will be a 45-day period, until the week of August 11, for preferred shareholders to decide whether they swap their shares for common shares in the mining company. Valepar set a floor of 54.09% of participation of preferred shareholders. It means that if the participation is smaller, the operation will not go ahead. This percentage was defined considering math according to which the controlling shareholders, once the floor is reached, will hold less than 50% in the company.

If there is conversion of 100% of the preferred (PN) shares, the current controlling shareholders gathered at Valepar (Bradesco, BNDESPar, Mitsui and pension funds of state companies, led by Previ, in addition to Electron, an Opportunity fund) will hold 41% of Vale. They are also forced to maintain 20% of that for three years, being cleared after that period to sell everything. It is known that part of the controlling shareholders, especially the pension funds, wants to give liquidity to their shares in Vale.

In case of approval of the proposals and achievement of the minimum number of shares for conversion, the following step, still in August, is likely to be the merger of Valepar into Vale, for which the controlling shareholders will get a 10% premium, estimated by the market at about R$4.5 billion. To migrate to the Novo Mercado special listing segment of B3 (former BM&FBovespa), Vale needs to secure the participation of 100% of the preferred shareholders. But this is not likely to be obtained in the near term, and the company set a three-year period, until 2020, for a possible migration.

Despite the optimism, there are risks for the operation. One is what the participation of individual investors will be. Vale doesn’t inform how much of its equity is held by individual investors, but Credit Suisse estimated in its report that individuals in Brazil hold 15.91% of the preferred shares in the mining company. The so-called passive funds, managed by banks, will also have a relevant role in the operation. Vale will make an online institutional campaign to inform small investors of the operation’s advantage, from its viewpoint.

Another point of concern is the position that Capital Group, largest holder of preferred shares in Vale, with about 20% of those shares, will take. Since Vale announced the transaction, in February, Capital privately expressed concern about the conversion ratio of preferred and common shares, which includes a discount of about 6% to PN holders. Valor has learned that some Capital funds manifested they will vote against the first item of the agenda, the voluntary conversion of preferred shares into common ones at the ratio of 0.9342 PN to one ON. Capital participates in Vale through three big groups of funds: Capital Research, Capital International and Capital World. Capital didn’t respond to a Valor email requesting comment.

People familiar with the matter say Capital’s vote against the conversion would be to mark a position, because later, in the 45-day window that will be opened after the SGM for conversion of stock, the trend would be for these funds against the conversion ending up joining the operation because of the risk of being left holding a share with little liquidity. Even though the proposed discount in the swap of PN for ON is 6%, there are estimates that, once the conversion period ends, this difference may increase to 15% or 20%, given the little liquidity expected for preferred shares.

Source: Valor Econômico