Brazil’s booming credit markets fan hopes of ‘revolution’
New York listing of XP highlights transition to a new world of lower interest rates
Jonathan Wheatley in London and Bryan Harris and Andres Schipani in Brasília DECEMBER 6 2019
This weekend a group of executives from XP Investimentos, a Brazilian financial services firm, will fly to New York to oversee the company’s initial public offering on the Nasdaq stock exchange, due to be priced on Tuesday.
They hope to raise $1.7bn in a sale that would value XP, which was founded 18 years ago by a newly unemployed 24-year-old, at about $14bn.
The success story so far at XP (pronounced “sheessPEH”) reflects profound shifts in Brazilian finance since the recession of 2015-16. Savers are thirsty for racier investments now that deposit rates have plunged, and the corporate bond market is awakening. Some, however, are growing nervous of a bubble.
“The XP phenomenon is just the beginning,” said Marcelo Audi, founding partner of Cardinal Partners, a São Paulo fund manager. “This combination [of economic conditions] is unprecedented, at least since the 1950s.”
XP’s business model, which was unique when it started out, was to run classes educating ordinary Brazilians about investing in stocks and bonds and to sell them its brokerage services. It now offers brokerage, asset management, investment banking and other services, and has spawned a host of competitors. According to its listing filing to the US Securities and Exchange Commission, assets under custody in funds on its platform were R350bn ($84bn) at the end of September, having grown more than 90 per cent a year for the previous five years.
“Underlying all this, triggering this revolution, is the transition to a new world of normal interest rates,” said Gustavo Rangel, chief economist for Latin America at ING Financial Markets in New York.
For many years, Brazilian interest rates were some of the highest among the large emerging markets. Twice in the late 1990s the central bank lifted its policy rate to 45 per cent or higher to rein in capital flight. Subsequent attempts to get the rate into single figures and hold it there have been thwarted by persistently high inflation expectations.
Now, both inflation and inflation expectations look firmly anchored. Consumer price inflation has been below 4 per cent a year since the recession and is expected to fall further. The central bank’s policy rate has been 5 per cent since October. The bank is likely to cut again this month.
“This is something we never had in Brazil in the past 40 years,” Paulo Guedes, economy minister, told the Financial Times. “Brazil is now like the rest of the world — a country with very low real interest rates.”
This has brought dramatic change. For years, anyone with savings has been used to parking their money at a bank and earning generous interest — 14 per cent a year as recently as 2016. For them, 5 per cent nominal interest is not enough.
“There is huge demand among the public for spicier instruments,” said Wilber Colmerauer, a Brazilian financial consultant in London. “A big movement is happening.”
On the other side are Brazilian companies. Those not big enough to access international capital markets, or lucky enough in the past to receive taxpayer-subsidised loans, have been starved of credit for decades. Even today, bank lending to companies is prohibitively expensive, at an average of 47 per cent a year, according to Anefac, an industry association.
Since last year, however, the corporate bond market has opened up. This year, in the months up to October, companies issued almost R215bn in debt on local markets, according to Anbima, a capital market association. In 2018 they issued more than R245bn, double the average for the previous seven years.
Several big companies have begun to retire their overseas debts early and borrow instead in Brazil. Petrobras, the state-controlled oil company, bought back $2.8bn of its overseas debt in the third quarter, and issued R3bn of debt at home. Many smaller companies are tapping local markets for the first time.
XP has grabbed the opportunity. Its investment banking arm finds corporate clients to issue bonds, while its fund management arm finds retail clients to buy them.
It is not alone. The pace of market growth has raised concern among some analysts that the debt of first-time issuers is being snapped up by individuals who may not understand what they are buying. “I can tell you I am a little nervous about it,” said Mr Colmerauer. “I think some of the debt has been a bit mispriced?.?.?.?With this eagerness to buy bonds, the hunt for yield, sometimes the end is not very good.”
Others say such concerns are a normal part of Brazil’s transition.
“It is natural that in the early stages there will be excessive valuations and we are going to have trial and error,” said Mr Rangel at ING. “But I don’t think it will be destabilising.”
Mr Guedes said such developments were part of a more efficient allocation of capital and that government initiatives, such as a new credit score system for borrowers, would force greater efficiency on the financial sector, including the big banks.
“We will put big pressure on bank spreads in the coming years,” he said. “This thing will be a revolution.”
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