Despite three years without IPOs in Brazil, fixed-income securities sustain market activity
08/14/2024
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Cristiano Guimarães — Foto: Gabriel Reis/Valor
With the equities market stalling and many mergers and acquisitions (M&As) operations on pause, the revenue of investment banks operating in Brazil has dipped to the lowest level in at least seven years. So far this year, revenues from typical capital market operations have totaled approximately R$2 billion ($361 million), marking a 12% decrease from the same period in 2023, when the start of the year was impacted by market paralysis due to the crisis at Americanas.
This decline also marks the third consecutive year of revenue reduction, primarily driven by the most significant dearth of initial public offerings (IPOs) in over three decades on the Brazilian stock exchange. This situation reflects the ongoing global volatility and high interest rates that have dampened enthusiasm for equities. Conversely, fixed-income operations continue to drive activity, buoyed by robust investor demand and significant capital flows into fixed-income funds.
From January through the end of July—a timeframe traditionally viewed as the first half of the year for the capital market—revenues stood at $412 million in 2023 and $666 million the preceding year. In 2021, which was a record-setting year fueled by extraordinary global liquidity during the pandemic, revenues from January to the end of July reached $1.04 billion, according to data from Dealogic, the consultancy firm compiling this information for Valor.
Regarding follow-on offerings, the Brazilian stock exchange hosted eight transactions in 2024, the largest of which was the privatization of Sabesp, which garnered R$14.8 billion. Despite being the largest public offering in the sanitation sector globally, the fees collected by the coordinating banks were modest, amounting to R$14.8 million. “Low commissions are typical in offerings of state-owned companies, and this particular offering is both a decoy and a market milestone,” noted a banker involved in the operation.
Expectations for the revival of Brazilian companies’ equity activities on the stock exchange are pinned on 2025, anticipated to coincide with lower interest rates in the United States, which could redirect investor funds back towards equities and attract foreign investors to the Brazilian market. Despite a current stagnation in equity market activities in Brazil, local and international fixed-income operations have bolstered the revenues of investment banks.
In the M&A arena, despite challenges in finalizing transactions due to the fluctuating share prices of listed companies, which complicate establishing a price benchmark, significant deals were completed. These include the mergers of Soma with Arezzo, Petz with Cobasi, and 3R Petroleum with Enauta, as well as the sale of AES to Auren and of Eletrobras’s thermal plants to Ambar.
Cristiano Guimarães, Itaú BBA’s global director of large companies and investment banking, notes the ongoing challenges in the equities segment, driven by market volatility and the withdrawal of funds from multi-market and equity funds. However, he suggests that some follow-on offerings may still occur during the latter half of the year. Conversely, he highlights that the fixed-income market remains robust, significantly contributing to the activity within investment banking. “The market has seen considerable growth this year compared to last, primarily because last year started slowly due to the Americanas event and also due to the substantial volumes entering fixed-income funds,” he remarks.
Mr. Guimarães adds that most companies looking to manage liabilities through fixed-income issues, benefitting from spread compression, have already executed their plans. Furthermore, considering the macroeconomic backdrop, companies delaying investments might also influence the operation’s tempo in the upcoming months.
Regarding M&A, the executive from Itaú BBA highlighted that due to its less volatile nature, revenues have remained stable compared to the previous year, thus bolstering overall activity. “At Itaú BBA, the investment bank has continued to strengthen its market leadership year on year by leveraging its capabilities across fixed income, equities, and M&A, recognizing that each market behaves differently in certain periods. This year has particularly favored fixed income, where we’ve even increased our market share. While all segments are vital, the balance among products shifts annually,” he explained.
Bruno Amaral, a partner at BTG Pactual, observed that despite ongoing volatility in the variable income market and interest rates dampening investor enthusiasm, the bank’s activity this year has outperformed last year’s. “We are witnessing a skewed balance between products, with fixed income and M&A experiencing substantial activity,” he noted. Mr. Amaral anticipates the latter half of the year “might be busier.”
He suggested that one catalyst for foreign investment could be the anticipated U.S. interest rate cuts starting in September, though he cautioned that the U.S. elections might make investors wary. “M&A activity continues unabated; only the execution pipeline shifts,” Mr. Amaral added, mentioning that as one market sector gains momentum, it often stimulates others. Consequently, a revival in equity offerings could reinvigorate M&A activity. With interest rates potentially declining and capital flowing back to funds, he expects a positive cycle to emerge.
The banks are actively working to retain revenue internally. To maintain revenue streams, financial institutions are strategizing to increase their market share, as articulated by Eduardo Miras, the head of Citi’s investment bank in Brazil. He acknowledged that while the stock market remains tepid and M&A activities are delayed, the debt market has bolstered revenue levels. Mr. Miras revealed that in response to increased market volatility, Citi has shifted focus towards in-demand products like derivatives and other instruments not tracked by Dealogic. “We’re combating a challenging market with the resources available to us,” he stated.
For the executive at Citi, the latter half of the year appears to be as challenging as the first, with U.S. elections looming as a significant uncertainty. He notes that the current stock prices on the exchange have led to mismatches in valuations between buyers and sellers in M&As, thereby increasing deal failures. Mr. Miras also mentions that limited foreign interest in Brazil has been a factor, though he suggests that this could rapidly change with improved confidence in the country.
Fábio Medeiros, head of Morgan Stanley’s investment banking in Brazil, acknowledges that while the mergers and acquisitions market hasn’t been as robust as hoped, it has nonetheless bolstered the revenues of investment banks. He highlights that one of the main activities this year has been consolidation deals within the local market. Additionally, U.S. banks have been leveraging the active dollar-denominated fixed-income market, encompassing both bond issuances and structured debt operations.
With the equities team at Morgan Stanley’s Brazilian office focusing on Latin America, efforts have been particularly directed at other active markets, like Mexico. Mr. Medeiros expects that the anticipated commencement of interest rate cuts in the United States will facilitate the redirection of investment flows to Brazil.
Mr. Medeiros also points out that current expectations in equity operations are centered on share sales by private equity funds, as many are approaching the time to return capital to investors. “These disposals are likely to be driven primarily by sponsors. Firms that needed to offload shares to reduce debt have mostly completed those transactions,” he explains.
Given the ongoing market volatility, he expects these exits to occur through “block trades,” which are quick transactions involving the sale of large blocks of shares at an auction on the stock exchange.
*Por Fernanda Guimarães — São Paulo
Source: Valor International