Sanitation, energy companies are likely to go public next year

12/12/2022

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After one year without any IPO in Brazil, investment banks start to make projections for 2023 and see room for 40 offerings, including follow-ons and block trades. The financial market is still concerned about the Transition PEC (proposal to amend the Constitution), which was passed by the Senate last week and is expected to be approved by the Chamber of Deputies as well in the coming days.

Companies are expected to raise R$60 billion to R$70 billion with the offerings, according to a conservative estimate from investment banks. In a more optimistic scenario, which will depend on the reversal of the interest rate hike curve in Brazil, and an improvement in the external scenario, which faces recession, inflation, and war, the capital market would have the potential to raise up to R$100 billion.

“We see a pent-up demand from both investors and issuers,” said Roderick Greenlees, head of Itaú BBA’s investment banking. In his view, IPOs are expected to start in the second quarter and will gain strength in the second half of the year. On the other hand, follow-ons may start as early as January.

For Mr. Greenlees, IPOs are expected to be larger than the ones seen in previous years, between R$2 billion and R$4 billion, and concentrated in sectors of the real economy, such as retail, oil and gas, and energy. He estimates 25 to 35 IPOs and follow-ons, totaling R$60 billion to R$70 billion.

So far this year, equity issues have totaled R$55 billion, including 18 follow-ons. Eletrobras accounted for the most part. In November, right after the elections, Casino’s Assaí raised R$2.7 billion in its follow-on stock offering. The financial market saw the offering as a good signal, since demand exceeded supply four times over.

Gustavo Miranda, head of investment banking at Santander, believes that the first IPOs in 2023 will be of companies with strong cash generation capacity and predictable costs. “These are IPOs of companies that will become liquid later on,” he said. He expects 30 to 40 offerings to take place, also considering follow-ons. “Demand is there, but it depends on the market being receptive and companies finding the prices attractive.”

In the race to make its debut on the stock exchange, the subsidiary of China’s energy giant CTG moved first and registered with the Securities and Exchange Commission of Brazil (CVM). The market is now wondering whether the offering will take place until February or if the company will wait for best market conditions, sources familiar with the matter said.

According to sources, on the list of groups that may also go public are companies that have already sounded out investors in the recent past, such as the gas and energy companies Compass, owned by Cosan, and Origem, which has Prisma Capital as the main shareholder. Sanitation companies Aegea, BRK Ambiental, and Iguá and the Brazilian drugmaker Eurofarma are on the list as well, sources say.

Fabio Nazari — Foto: Ana Paula Paiva/Valor

On the demand side, the participation of foreign investors is expected to be greater in 2023 than in recent years, said Fabio Nazari, BTG Pactual’s partner for equity capital markets. For him, the environment for Brazil is more favorable, especially compared with other emerging economies. “This year was bad for everybody, but we will no longer go through a winter like we did,” he said.

In the offerings of the last two years, most of the buyers were local funds, a group that shrunk after the wave of redemption of investments that took place in the middle of the monetary tightening cycle in Brazil. Foreigners are expected to gain relevance next year. “I believe that foreigners will participate more in the deals.” On the radar of foreign investors are large, liquid companies from more traditional sectors. “They will likely join listed companies first, then go for IPOs.”

Mr. Nazari foresees nearly 40 deals, including block trades, for next year. If the estimates are confirmed, it will be a good period for the Brazilian stock market. “What can’t happen is 10 offerings in one year and 80 in another.”

Before the elections, the financial market already estimated a resumption of the capital market in 2023, regardless of who won the elections. A few days after Luiz Inácio Lula da Silva won the presidential election, however, the market started to become more volatile.

“Foreigners started to increase the capital flow after Lula’s victory. It was as if the Amazon rainforest had stopped burning on Sunday night [October 30],” said Mr. Nazari. However, in his view, Mr. Lula’s remarks started to make the market feel insecure about whether the new administration will be fiscally responsible. “Anxiety has heightened.”

“It will be more challenging, if we take into account the external scenario,” XP CEO José Berenguer said. “Inflation is still high. Inflation rates have slowed down somewhat in the United States recently, but it is still a scenario of monetary contraction and shrinking [central bank] balance sheets after an increase during the Covid pandemic. This is very important because we had a very long period of abundance, low interest rates, and regulators buying assets. Now, in our view, it can be a very positive scenario because of the characteristics of the country. I think there will be a lot of activity in the capital markets.”

For Mr. Greenles, with Itaú BBA, however, the capital market will take a little longer to return to the levels of 2020 and 2021, when the real interest rate was negative. “This [reality] is not coming back anytime soon either in Brazil or abroad,” he said. Last year, there were 76 IPOs and follow-on offerings, totaling almost R$130 billion. In 2020, there were 51 offerings, with R$117 billion raised.

BRK Ambiental, Compass, CTG, Iguá, and Origem declined to comment.

In a note, Aegea said that the IPO is a possibility always studied by the company, which depends on factors such as market conditions and the decision together with its shareholders. “The company always seeks alternatives to improve its capital structure. Currently, Aegea is registered as a publicly traded company at CVM for the issuance of bonds and debentures.”

Eurofarma said it is attentive to market moves and opportunities. “At the moment, the company is not actively working on any share offering. However, should there be any strategic opportunity and the right conditions, access to the capital markets will always be an option considered.”

*By Mônica Scaramuzzo, Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/