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By Guillermo Parra-Bernal
SAO PAULO, Feb 4 (Reuters) - Any revival in initial public offerings in Brazil seems to hinge on whether new Finance Minister Joaquim Levy can clean up public finances and get the country’s economy back on track.
Strengthening the market for new listings depends increasingly on how much leeway President Dilma Rousseff will give the University of Chicago-trained economist to cut Brazil’s record budget gap and reverse the interventionist policies that marred her first term.
Stung by dozens of deals that failed to deliver the promised returns in recent years, money managers have become cautious about Brazilian offerings. In 2014, only one company went public on the São Paulo Stock Exchange, the worst performance for domestic IPOs in 11 years.
Local pension funds such as Fundação Cesp and global investors like BlackRock Inc have reason to remain wary of Brazilian IPOs. Only a third of the 146 debut offerings that priced in São Paulo since 2005 have generated gains above the benchmark interbank CDI interest rate.
But while Levy’s plans for higher taxes and less public spending risk pushing Brazil back into recession this year, institutional investors believe these moves are necessary to pave the way for a sustained rebound.
Investors are waiting to see whether Rousseff, a leftist known for her active role in economic policy, can stomach a downturn while Levy takes unpopular austerity measures to get public accounts back in order.
Without a stable economic backdrop and a renewed commitment to fiscal discipline, institutional investors will remain reluctant to buy into Brazilian companies without much of a track record or earnings visibility.
“There is no room for IPOs for now,” said Jorge Simino, who manages 23 billion reais ($8.5 billion) as chief investment officer for Fundação Cesp, Brazil’s No. 4 pension fund. “The outlook determines activity, and the outlook doesn’t look good.”
Some of Brazil’s top underwriters, like Grupo BTG Pactual SA , Credit Suisse Group AG and Goldman Sachs Group Inc, expect market activity to resume in the second half of 2015. Deals could even materialize earlier if Levy can stabilize the economy and reignite confidence among foreign investors, traditionally the largest buyers of Brazilian IPOs.
“These will be tough months for sellers and buyers, who want to see if policies work and will wait to see who makes the first move,” said José Pedro Leite da Costa, Goldman’s head of Latin America equity capital markets. “If the policy program gains strength and starts to yield results, foreign investors will certainly not want to wait.”
Foreigners snapped up 69 percent of Brazilian IPOs between 2006 and 2012, but their participation has fallen to an average 38 percent since 2013, according to Thomson Reuters data.
Still, foreign investors will keep a watchful eye on new Brazil issues because the local equity market is more liquid and diverse than in most emerging economies, said Fábio Nazari, who heads equity capital markets at BTG Pactual, Brazil’s top stock underwriter for the past three years.
Four companies are lining up for IPOs in São Paulo: airline Azul SA, food processor JBS Foods SA, cellphone tower operator T4U Holding Brasil SA and logistics company Ouro Verde Locação e Serviços SA.
A banker who requested anonymity said asking prices for those companies were likely to face downside pressure as investors press for bigger-than-usual discounts. “These deals will only take off as long as everyone wins,” the banker said. “We are in a buyer’s market.”
Tough market conditions forced Azul and JBS Foods to put off their offerings in recent weeks. With the market virtually shut, other candidates have opted to tap buyout firms and the investment offices of wealthy families for fresh cash, as Carrefour SA’s Brazilian unit did in December by selling a 10 percent stake to Brazilian tycoon Abilio Diniz for $660 million.
“BREAD AND BUTTER”
Companies looking to debut in the local stock market face a delicate juggling act: how to offer manageable risk and attractive returns to investors in an environment where political, economic and financial uncertainty is escalating, said Fábio Mourão, Credit Suisse’s head of Brazil investment banking.
Since 2012, the share of IPOs in banks’ fee pools has languished. BTG Pactual’s Nazari said so-called structured deals such as private placement of stock and equity swaps had become “the bread and butter” of underwriting activity.
Antonio Pereira, Goldman’s head of Brazil investment banking, said 2015 might be a better year for equity offerings, given that markets so far have been reacting well to Levy’s policy announcements.
“The question is whether we’ve reached the bottom,” Pereira said. “We’ll only know that later on.”
$1 = 2.71 reais Editing by Todd Benson and Lisa Von Ahn