Brazilian companies raised only $4.2 billion abroad in the first weeks of 2022 through the issuance of debt securities. Seven operations went to market. This is the worst begining to the start of the year since 2020, when $6.9 billion were raised in ten offers. Last year, there were 13 bond offerings on the international market, resulting in a total volume of S$7.5 billion in new debt.
The first funding season of 2022 is over this week, with the end of the deadline for companies to present to investors the financial statements for the third quarter of 2021 to access the market.
This drop is a direct consequence of the rise in long-term interest rates in the United States, given the prospect that the Federal Reserve will start raising interest rates from March. The more volatile market makes investors more selective and limits their willingness to be exposed to emerging countries, such as Brazil, which also represent greater risk for political and fiscal reasons. Investment banks estimated that 15 companies planned to raise funds abroad at the beginning of the year. Less than half, therefore, completed the operation.
Now, according to Rodrigo Fittipaldi, head of the Debts Capital Market area at Credit Suisse, there are at least six operations in the pipeline for the next window, which opens at the end of March – right after the 2021 earnings season. These are well-rated companies, including some newcomers.
However, the environment should remain unstable, which means that operations will require caution and patience on the part of companies. “You can’t be anxious. We won´t go back to the dynamic of 12, 18 months. I don’t tell anyone to stop going to the market, but to adjust the strategy, since shorter-term operations have less execution risk,” she says.
Mr. Fittipaldi explains that the market’s complexity comes from the fact that there are many uncertainties about how far the interest rate hike will go in developed economies, especially in the United States, and what impact this could have. Furthermore, the world economy still faces chain supply problems, and it is not clear when this will be back to normal. There is also the worsening geopolitical risks with the Ukraine issue.
Although the local market has been going through a positive period, with the stock market rising and currency appreciation, Mr. Fittipaldi believes that the uncertainty about the direction of the election, especially with regard to the fiscal debate, also exacerbates this situation. “This improvement in the stock market was a short-term move,” he says. “There is nothing resolved on the political issue. The election will bring more concern about the fiscal issue because there will be no convergence on issues dear to the market.”
For André Cury, head of Citi’s Commercial Bank, the business environment has become, in fact, more complex and less risk-averse. However, there are companies waiting for an opportunity to access the market, following the strategy they have already implemented of diversifying sources of funds. “Increasingly, we have seen more professional companies in this sense, diversifying their pockets, that is, raising funds on several fronts,” he says.
This means that, for some companies, it is strategic to maintain operations in order to have a yield curve abroad – that is, to have issues in several maturities, forming a benchmark for rates.
The companies that raised external funds at the beginning of the year were Banco do Brasil, Globo, Açu Petróleo, Bradesco, JBS, CSN and Coruripe. With the exception of JBS, which raised $1.5 billion through two bonds offerings, one with a seven-year term and the other with a 30-year term, the other operations were between US$ 300 million and US$ 500 million and had a term of five years old.
A common point for all companies is that demand this season has been more modest than at other times. Therefore, the volume raised in all operations was close to the minimum planned by the companies, a strategy aimed at avoiding additional pressure from the yield paid for the paper. And this dynamic is likely to continue throughout this year.
“Investors didn’t jump right in, they made smaller offers and put up a price barrier,” says Mr. Fittipaldi, from Credit. He explains investors began to demand a higher rate of return in relation to the price negotiated in the secondary market, which, in market jargon, is called a concession. “During strong market moments, the concession is close to zero, or even slightly negative. Now the investor demands a bigger concession,” he explains.
Market volatility began to grow in September last year, when the idea of monetary policy normalization by the Fed and other central banks around the world gained traction. Since then, the average yield on 10-year bonds from major Brazilian issuers has risen about 100 basis points on the secondary market, according to Mr. Fittippaldi. In the same period, the interest on the 10-year T-note, the benchmark for setting prices in this market, rose from 1.30% to 1.90%. In other words, the spread over Treasury rose almost 50 points.
The instability of the markets was exacerbated at the beginning of the year by two events, according to Caio de Luca Simões, head of the DCM area at Bank of America. First, by the minutes of the Federal Open Market Committee (FOMC) of the Federal Reserve, signaling to the market that there may be five interest rate hikes this year starting from the March meeting (the market talks about seven); and the result of the payroll for January, showing the creation of 467,000 new jobs, much higher than expected. As a result, notes Mr. Simões, the interest on the 10-year T-note jumped from 1.51% at the beginning of the year to 1.92%.
The issuer therefore needs to monitor the evolution of interest rates to decide whether or not to access the market. “January was marked by the need to keep a close eye on the U.S. interest rate, we provide updates on how the market is doing every day,” says Mr. Simões. And that should be the dynamic going forward. “There will be new operations, but with a higher premium.”
A survey by Bank of America with global investors showed that, in January, rising interest rates in the U.S. came to be considered the biggest risk for Latin American countries, even above local political issues, seen as the biggest source of concern for the region in December. For Mr. Simões, throughout the year, it is likely that the issue of election will have greater weight. “I believe that we will continue in the same vein, with a careful eye on the U.S. interest rates, but the election tends to have more influence from now on.”
Source: Valor International