The Senate's decision to put former president Dilma Rousseff on trial last week and replace her with market friendly Michel Temer has opened a bond issuance window for Brazilian borrowers seeking to take advantage of recent spread tightening. Petrobras is on the top of the list of possible issuers following local reports that the state-owned oil company, at the centre of a widening corruption scandal, could soon announce a multi-billion dollar trade designed to extend maturities.
Beef companies like Marfrig, petrochemical firm Braskem, steel firm Gerdau, BR Foods and pulp and paper names are also seen as potential issuers. "I would expect some (Brazilian) names might come over the course of the next few weeks," said a syndicate manager. "A lot of names are being pitched by banks." Brazilian corporates have not issued a bond in international markets since June last year when telco Oi came to market with a euro bond.
The absence was also driven by a lack of investor interest for Brazilian names after the sovereign was downgraded to junk and the economy went through its worst recession in decades. A better backdrop now has however made investors more comfortable with the pricing of Brazilian corporate risk. "The market has now reached a point where there is perception that the political situation has at least stabilized and that corporate risk can be priced with more certainty," said Darin Batchman, a portfolio manager at Stone Harbor Investment Partners.
Investors are still holding judgment on the interim administration's ability to push through vital fiscal reforms during Rousseff's impeachment process, but there are hopes that Temer can set the economy back on track. "Before corporates didn't want to come to market because they thought it was too expensive," said Anne Milne, head of global emerging markets corporate research at Bank of America Merrill Lynch. "But now yields are lower I think issuers will be more willing to come to market."
Yields on Brazil's new benchmark 2026s hit an all time low of 5.40% on Friday following the Senate's decision to impeach Rousseff, while Petrobras 2024s are hovering close to nine month lows at 8.36%, according to Thomson Reuters data. The real test of the changed sentiment could come in the form of a bond offering from quasi-sovereign Petrobras. The issuer may have to price bonds with a juicy premium but should get a solid market reception given recent success in management's plans to dispose of assets in an effort de-leverage, and stable crude prices, said investors.
"The credit is well supported with improvements in Brazil and it is one of the cheapest quasi sovereigns out there," said an investor. "It would make a lot of sense if they came out with a large deal and (addressed) amortizations over the next two to three years." The change of government has raised questions over the timing of any Petrobras deal, however, amid talk that the new president may well appoint a new CEO. A new chief executive that is popular with the markets could tighten spreads further, making it worth the company's while to wait. Opportunities may however be fleeting if Temer hits roadblocks in Congress as he seeks to tackle the country's economic crisis.