Tale of Eldorado does
little to dampen Brazilian bond allure
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[September 21, 2016]
By Claire Milhench and Ana Mano
LONDON/SAO PAULO (Reuters) - Eldorado
may offer a cautionary tale for investing in Brazilian bonds, yet a
20 percent fall in the pulpmaker's debt since it borrowed $350
million in June has not reduced appetite for the country's corporate
Investors in Eldorado's bonds were caught out by the country-wide
corruption probe which spread to the company and its parent firm
earlier this month, a setback that typifies the risks of investing
However, fund managers say Brazilian companies, even those with junk
ratings, still have a fair chance of raising money.
Once prolific issuers, Brazilian firms have been largely shut out of
bond markets for about 18 months, hurt by corruption scandals, weak
commodity prices and economic recession.
Now they are exploiting the favorable conditions created by a flood
of money into emerging market debt funds.
"Issuers are taking advantage of this to issue at attractive yields,
with little new issue premium," Charles de Quinsonas, deputy manager
of M&G Emerging Markets Bond Fund, said.
Brazilian companies had raised $14.5 billion in bond markets by the
end of August, the Brazilian Financial and Capital Markets
Association says. This compares with $7.6 billion in corporate and
sovereign issuance for the whole of 2015.
Issuers range from state oil firm Petrobras and meatpacker Marfrig
to pulp and paper firm Suzano and sugar and ethanol producer
And there is more on the way, with logistics provider JSL <JSLG3.SA>
and auto leasing firm Ouro Verde - both junk-rated - announcing
plans last week for maiden international issues.
Bond buyers may be lured by Brazil's outperformance this year
compared with other emerging markets. President Dilma Rousseff's
impeachment and signs of long-delayed reforms being undertaken have
pulled average yield spreads on Brazilian companies' bonds some 280
basis points (bps) tighter this year.
In contrast, Russia, the other top performer, has seen spreads
narrow 120 bps, while the underlying CEMBI index <.JPMCEB> has
tightened 95 bps, noted Steve Cook, co-head of emerging debt at
The fall in yield premia makes it cheaper for bond hopefuls to
issue, but also offers value to investors given Brazil's BB/Ba2
credit rating, Cook said.
"Brazil is currently trading around 600 bps, which corresponds to an
average single 'B' rating asset class so the market is still pricing
in a three- or four-notch downgrade, and arguably you could say
[to top of second column]
People look at an electronic board showing the graph of the recent
fluctuations of market indices at the floor of Brazil's BM&F Bovespa
Stock Market in downtown Sao Paulo, Brazil, May 9, 2016.
REUTERS/Paulo Whitaker/File photo
But as Eldorado's 2021 bond showed, there are risks. Issued at 99.008, it is now
trading at around 82 cents in the dollar
Investors have also been spooked by a debt restructuring from phone company Oi
which proposes a 70 percent writedown on the bonds' principal.
One U.S.-based distressed debt fund manager, echoing comments by other
investors, said shareholders in Brazil enjoyed significant advantages over
creditors, while mechanisms to protect creditors from asset stripping remained
That will keep borrowing rates high for Brazilian firms, the fund manager said.
"As more of these bankruptcy processes go sideways, rates will continue to rise.
People are waking up to the dangers of dealing with stressed Brazilian
But record inflows to emerging debt funds should support the market. Junk-rated
and crisis-mired Ghana, for instance, recently raised $750 million at 9.25
percent. And even last week's U.S. yield spike did not prevent Mexico's Pemex
from getting orders for $4.3 billion on its $1.5 billion issue.
Spencer Maclean, head of capital markets for Europe and Americas at Standard
Chartered, said that while Brazilian corporate debt might be too much for funds
that don't typically invest in emerging markets, there is enough demand.
"Even if you see just a third of the investors they would have got a few years
ago, those will be the dedicated emerging market investors. What you won't get
will be the tourists."
(Additional reporting by Sujata Rao in London and Dion Rabouin in New York;
Editing by Alexander Smith)
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