Chart of the week: Brazil corporate debt. Brazilian corporates have issued more than $93bn in foreign currency bonds since the beginning of 2007, including nearly $20bn in the first six months of this year alone.
Chart of the week: Brazil corporate debt
July 2, 2012 9:00 am
by Jonathan Wheatley
This week, Chart of the week looks at emerging market corporate debt. We’re cheating a bit because we have two charts: one showing issuance by corporates in 20 EMs since the beginning of 2007, and the other focusing on the five Brics nations.
But our real focus is on Brazil, the stand-out leader in corporate issuance.
Brazilian corporates have issued more than $93bn in foreign currency bonds since the beginning of 2007, including nearly $20bn in the first six months of this year alone.
There are several reasons for this impressive performance.
Brazil’s booming economy. Growth has been much faster in the past decade than it was over the previous two. Sectors that are well known to overseas lenders – commodity exporters such as paper and pulp, metals and mining – have been joined by new sectors riding Brazil’s consumer boom, such as airlines, agribusiness and real estate. The quality of the sovereign. The Federal Republic of Brazil became a net creditor in international markets in 2008. That supports the credit-worthiness of the corporate sector. Brazil’s domestic capital markets are underdeveloped. Mexico and Chile, for example, are further along this road; their pension funds and other institutions can invest more broadly than Brazil’s and support vibrant primary and secondary corporate debt markets. Brazilian companies are restricted largely to debentures and bank credit on the domestic market. Daniel Kastholm, managing director for Latin American corporates at Fitch, says what is really interesting about Brazil is the emergence of speculative grade companies on international debt capital markets.
“There’s been a feeding frenzy by investors to get exposure to Brazil,” he says. “Traditionally, EM investors bought the sovereigns or the blue chips and quasi-sovereigns. Now there’s a scarcity of paper and a bunch of investors chasing names.”
Fitch rates 84 Brazilian companies of which just 36 are investment grade. The speculative grade names include airlines Gol and Tam, Sifco (auto parts), Cimento Tupi (cement), Ceagro (agribusiness), BR Malls and General Shopping (shopping centres), Minerva, Marfig and JBS (meat packers) and Dasa (diagnostic healthcare).
 The steady strengthening of the Brazilian real over the past decade has been great news for companies issuing in foreign currercies: as the real gets stronger, their debts are reduced.
But it hasn’t all gone one way. In 2008, the sharp reversal of the exchange rate in the aftermath of Lehman Brothers caused serious trouble for several companies that were speculating on the real’s one-way ride.
The real’s gains over the past few months should be less damaging. Kastholm says issuers have learnt the lessons of the past and are not speculating now. But that doesn’t mean there won’t be problems.
Take Gol and Tam. At the end of last year Gol had debt of R$8.5bn ($4.2bn at today’s exchange rate), of which 70 per cent was denominated in dollars. Tam had R$12.8bn, of which 91 per cent was denominated in dollars.
Kastholm says several companies have tried to reduce their hard currency risk by issuing debt that is denominated in reals but settled in dollars, thereby transferring the foreign exchange risk (and potential reward) to investors.
Investors developed quite an appetite for EM hard currency debt over the past year. But in recent months that appetite has waned. At the same time, Brazil’s economy has come off the boil. It will be interesting to see whether Brazil retains its stand-out position in corporate issuance.
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