(Adds investor comments; updates pricing and book size)
By Paul Kilby
NEW YORK, July 21 (IFR) - Brazil returned to US dollar bond markets on Thursday after a four-month hiatus, taking advantage of a broader EM rally and growing optimism about the country’s turnaround story.
After amassing a US$6bn book, the country launched a US$1.5bn long 30-year bond at 5.875%, coming inside the 6.125% yield it achieved on a 10-year bond in March.
While that appeared far too rich for some accounts, a good number of investors were keen to take a long-term view on what they see as an improving credit story in Brazil.
“Brazil is moving in the right direction,” said Paulo Clini, head of investments, Sao Paulo, at Western Asset Management. “Economic indicators have started to improve and the political transition will allow the country to address fiscal imbalances.”
A confluence of factors have helped lift Brazilian assets in recent months after being beaten down by a series of downgrades to junk as the country fell into its deepest recession in decades.
Investors have largely cheered efforts by acting president Michel Temer to impose austerity measures and turn around Latin America’s largest economy after appointing former central bank head Henrique Meirelles as finance minister.
Spreads on Brazil’s five-year credit default swaps have tightened around 75bp to 279bp since late May after business friendly Temer replaced his leftist predecessor Dilma Rousseff.
“You have seen a lot of flows into hard currency (EM) funds and with the new economic team, Brazil is a positive story at the moment,” said Pablo Cisilino, a portfolio manager at Stone Harbor.
Brazil also benefited from a renewed bid for EM assets among investors looking to bolster portfolios at a time when accommodative monetary policies across the developed world are pushing rates ever lower.
“A Brazil 30-year at 5.875% in an environment where global rates are negative or close to zero is cheap,” said Kevin Ritter, an EM portfolio manager at Western Asset Management.
Brazil also arguably looks attractive against the likes of Turkey, which S&P recently demoted to junk following the failed coup earlier this month.
That country’s 6.625% 2045s have been trading around 5.61%-5.55%, according to Thomson Reuters data.
Other accounts however thought the deal was too rich after leads squeezed pricing from very low 6% to 5.90% (+/-2.5bp).
At a final yield of 5.875%, Brazil managed to price the new 30-year bond with a minimal new issue concession to its curve, where the 2045 had been spotted anywhere between 5.70%-5.80%.
“We are not participating,” said Kathleen Gaffney, a portfolio manager for Eaton Vance’s Multisector Income Fund.
“We continue to see better value in local sovereign bonds and US dollar corporates in Brazil.”
Daniel Senecal, managing director of Newfleet Asset Management, takes a similar view.
“Long term there is still some value in Brazil,” he said. “We looked at it but once they brought it below 6%, it was too tight.”
The South American country last came to the US dollar bond market in March when it sold a US$1.5bn 6% 2026 issue at 99.066 to yield 6.125%, or 419.6bp over US Treasuries.
Those bonds have been trading at around 109.35-110.25, or at a mid-market yield of 4.76%, according to Thomson Reuters data.
The nearest comparable for the new bond is an existing 2045 that is trading at 5.70%.
Issuer ratings are Ba2/BB/BB with negative outlook from all three major rating agencies. Deutsche Bank, Goldman Sachs and HSBC are acting as bookrunners. Pricing on the deal is expected later on Thursday. (Reporting by Paul Kilby; Editing by Jack Doran and Shankar Ramakrishnan)