Hopes for revival of Brazil's IPO market evaporate
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[August 16, 2024] By
Luciana Magalhaes
SAO PAULO (Reuters) - Concerns about Brazil's fiscal health and high
interest rates have helped dash hopes that as many as 20 of its
companies could go public this year, ending a two-year drought in the
country's once-booming IPO market.
Businesses in a wide swathe of sectors, including construction, retail
and infrastructure, are increasingly reconciling themselves to the
likelihood that another window for initial public offerings may not open
until next year or possibly until after Brazil's presidential election
in late 2026.
"There is no climate for an IPO in Brazil right now," said Matheus Kuhn,
chief financial officer of Kallas Incorporacoes e Construcoes, which for
years has had on-again, off-again plans to sell shares through an IPO.
The Sao Paulo-based construction company is postponing its stock sale
once more, possibly until 2025 or later, Kuhn told Reuters.
Kallas and other firms that have postponed plans to go public blame
Brazil's persistent fiscal concerns, the country's high interest rates,
which have tended to push investors from equities into fixed income, and
fears of a U.S. recession.
Brazil, home to the largest economy in Latin America, has not seen an
IPO in almost three years. Fertilizer producer Vittia was the last
company to do so, debuting on the B3 stock exchange in September of
2021. Three months later, digital bank Nubank listed on the New York
Stock Exchange while launching Brazilian Depositary Receipts (BDRs) on
the local market.
Nubank raised $2.6 billion in its IPO, promptly becoming Latin America's
biggest bank by market capitalization.
The IPO enthusiasm hit a wall in 2022 as a surge in inflation prompted
Brazil's central bank to raise interest rates faster than in many other
Western economies, sending a chill through domestic equity markets.
Hopes that a new round of IPOs might be in the offing grew last year and
early in 2024 in step with a loosening of monetary policy, only to be
dashed in recent months as the Brazilian central bank paused its
interest rate cuts amid rising concerns about Brazil's fiscal health as
well as a possible resurgence of inflation.
In July, President Luiz Inacio Lula da Silva's government widened its
primary deficit forecast for this year, prompting a spending freeze to
meet the fiscal target. The move stoked investor fears the leftist
government would not deliver on its promise to maintain fiscal
discipline.
The failure so far of the U.S. Federal Reserve to cut interest rates in
2024 despite expectations at the start of the year of a substantial
reduction in borrowing costs has further bolstered the dollar and
darkened the cloud over Brazilian equities.
"We were ready, just waiting for signs from the fiscal side in Brazil
and from the monetary side in the U.S.," said Andre Avelar, the CFO at
Emccamp, another construction company that is also likely to shelve its
2024 IPO plans.
'DRY SPELL'
Construction firms have been among the most prominent IPO candidates
given the capital-intensive nature of their businesses.
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Brazilian President Luiz Inacio Lula da Silva talks to Finance
Minister Fernando Haddad during a meeting at the Planalto Palace in
Brasilia, Brazil, July 3, 2024. REUTERS/Andressa Anholete/File Photo
Marcelo Mello, the CEO at SulAmerica Investimentos, told Reuters the
asset management firm was initially expecting Brazil to emerge from
the IPO drought starting in the second quarter of 2024, with about
20 primary share offers this year. The firm now predicts none of
those deals are likely to happen until 2025.
Daniel Wainstein, managing partner at financial advisory firm Seneca
Evercore in Sao Paulo, said he would not be surprised if Brazil did
not see another primary share offering until after the next
presidential election, scheduled for October of 2026.
Data compiled by the firm shows 81 companies have carried out IPOs
in Brazil since 2018, mostly in 2020 and 2021. Of those, 74 are
still listed, with the tech, retail and real estate sectors
representing a little more than 50% of the new entrants still
trading.
Most recently, even amid a pick-up in primary issuances in the U.S.
and Europe, Brazil and many countries in the Asia-Pacific region
have lagged, pushing local IPO candidates to look for other options,
including debt issuance or private equity deals, according to
Wainstein.
That's the case with Igua Saneamento, a Sao Paulo-based sanitation
company, which last year issued 3.8 billion reais ($696 million) in
debentures to finance its investments.
Igua CEO Roberto Barbuti said the company had been mulling an IPO
for a while, but that the still-hazy climate makes a primary share
offer unlikely this year.
"We had not had such a dry spell in IPOs since the market became
more relevant in the early 2000s," he told Reuters, referring to a
period when Brazil's stock exchange sought to boost investor
confidence by creating premium listings for companies with corporate
governance practices beyond those normally required.
While the debt market will continue to be an option for many local
businesses, executives argue that listing shares on a stock exchange
provides much more than capital.
"Listing shares is strategic to us," said Victor Bassan de Almeida,
executive chairman of Pacaembu, another Sao Paulo-based construction
company, explaining that listed companies tend to have higher
visibility and are able to attract and retain well-qualified
professionals.
($1 = 5.4604 reais)
(Reporting by Luciana Magalhaes; Editing by Christian Plumb and Paul
Simao)
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