Brazilian companies are likely to find room to raise funds abroad again in the coming months despite several risks in the international landscape. The cost of operations is up following the recent rise in the yields of U.S. Treasuries, but there are signs that global investors are once again looking at this model as an alternative for companies that need to raise higher volumes of funds with longer terms.
Samy Podlubny, head of debt capital markets and structured debt at UBS in São Paulo, believes that there is a potential for 10 to 15 companies to make external issues in the next window, which typically opens between April and May. Of these, six are discussing the operation with the bank, and two or three have already submitted documents.
“Of course, not all of them will actually raise funds, but it is a fact that, at the current level of volatility, deals are likely,” he said.
VIX, an index that measures the volatility of options on S&P stocks and is seen as a barometer of the appetite for risk in the global market, is around 20% this week after exceeding 36% earlier this month. This relief has already paved the way for some Latin American companies to tap the market. “They are companies from countries with an investment grade, which come out ahead, which shows that the market is buying again,” he said.
Bank of America’s monitoring of the secondary bond market shows that after rising strongly for months, the total cost of these securities has slowed down in recent weeks. The average rate of a basket of securities is now close to 5.6% after peaking at 5.8% in mid-March. In June last year, when the market still did not anticipate any interest rate hike by the U.S. Federal Reserve, this rate was close to 3.7%.
“There is still volatility, with good days and bad days, but the environment is constructive,” said Caio de Luca Simões, head of fixed income at Bank of America. The market is going through a peculiar moment in which assets from Latin American emerging markets are performing better than those in Eastern Europe because of the war in Ukraine.
Besides the fact that it is now clearer which countries, companies and industries will be most affected by the Russia-Ukraine war, Mr. Simões links this improvement in the environment for external funding to the fact that it has already become clearer what the Federal Reserve is expected to do regarding monetary policy. “The Fed has already signaled that it is going to raise interest rates, that it is not going to stay behind the curve,” he said. Thus, the so-called “price shift” may have already occurred.
Another factor that may help boost this market is the fact that there have been few offerings this year. According to Mr. Simões, so far Latin American issuers have issued 49% less than the volume seen in the same period of 2021. This means that funds have room and interest in absorbing primary issues.
Rodrigo Fittipaldi, head of fixed-income issues at Credit Suisse in Brazil, the dominant variable at the moment is the behavior of interest rates in the United States. The behavior of the U.S. curve, which underwent a major correction in the last few months, has caused a lot of uncertainty and impacted the global debt market, he said. At the same time, higher commodity prices ended up providing a counterpoint and bringing support to assets of emerging markets. “The level of the spread [rate paid above the 10-year U.S. interest rate] has now settled down. If the interest rate scenario in the United States stabilizes, then this spread may close even more,” he said.
Mr. Fittipaldi believes that there is room for a total volume of about $15 billion in issues this year, compared to $30 billion raised in 2021. A good part could materialize between April and May. “Some issues were shelved because the market was too volatile,” he said. “The best window is now, but I don’t rule out that the market will remain active in the second half of the year, even with elections, since the political noise seems to have subsided.”
Mr. Podlubny, with UBS, also notes that the local debt market has been a good option for many companies, as it offers price conditions that are often better than those seen abroad. On the other hand, terms here are shorter and there is no room for very high volumes of funding. “The local market is liquid but does not have the same depth as the international market, and companies do not always get the term they need,” he said. “But local money is cheaper.”
Source: Valor International