NEW YORK, March 11 (IFR) - Investors swooped on Brazil’s first sovereign bond deal since 2014 on Thursday, as the country’s deepening corruption scandal bolstered expectations of a change in government.
The country took advantage of a strong rally in global credit to print a US$1.5bn due April 2026 bond at 6.125%, the most it has paid for 10-year funding since 2009.
Investors shrugged off the fact that Brazil (Ba2/BB/BB+) is now junk-rated by all three ratings agencies following a two-notch downgrade by Moody’s last month, pouring in around US$6bn of orders.
The strength of the order book allowed leads Bank of America Merrill Lynch and JP Morgan to tighten pricing to 6.125% from initial thoughts of 6.5%.
That final yield implied a new-issue premium of anything from single digits to 25bp based on where Brazil’s January 4.25% 2025 bonds were trading on Thursday morning.
Market participants had not expected Brazil to issue this year, as it grapples with a crippling recession and a mounting deficit.
But bankers said the typically opportunistic sovereign’s timing was good, coming amid a rally in commodity prices that has helped lift Latin American bonds in recent weeks. Brazil has also benefited from a strong technical bid as investors have begun to cover their underweight positions on hopes of political change.
“The biggest risks in Brazil are political and they are tilted to the upside,” said Jan Dehn, head of research at Ashmore, referring to investors’ hopes that the ruling PT party will lose its grip on power, as investigations continue into some of the party’s leading figures.
Last month the justice minister, Jose Eduardo Cardozo, resigned amid growing discontent within the PT over a corruption investigation, which has now spread to include former president Luiz Inacio Lula da Silva on money laundering charges.
State prosecutors are seeking Lula’s arrest, a move that has bolstered investors’ expectations that president Dilma Rousseff could be forced out of office.
But even as buyers swarmed in, some investors stood back or cut orders, saying investors were ignoring longer-term political and economic risks.
“We didn’t view the pricing of new issue as attractive, in part because we don’t view the current emerging markets rally as sustainable,” said Sarah Glendon, head of sovereign research at Gramercy.
Regime change alone will not fix the country’s economic woes, she warned. “The market is not looking far enough beyond Dilma’s potential exit, and when they do, they will realise this is a sovereign that still has deep structural issues.”
The country’s GDP growth shrank 3.8% last year - the biggest annual contraction since 1990. With the central bank forecasting a 3.45% contraction this year, Brazil is on course for its deepest recession since 1901.
A banker close to the deal confirmed that the size of the book began to decline as pricing was tightened from initial price thoughts.
Sean Newman, senior emerging markets portfolio manager at Invesco, said he cut some orders.
“Given the tighter guidance, for some accounts it didn’t make sense to include it,” he said. “Some other funds where the objectives are different, we kept the order in.”
The success of the deal was partly down to the lack of Latin American supply so far this year, said Max Volkov, head of Latin American debt capital markets at Bank of America Merrill Lynch.
“There has been nothing out of Brazil for almost a year, and investors are looking for liquid, on-the-run names,” he said.
Other market players said the sovereign was likely trying to set a new benchmark that might help Brazilian corporates, hampered by the corruption scandal, to return to the debt markets.
“The market is pretty much closed to Brazilian corporates at this time, so the sovereign wants to make sure there’s a reference deal,” said Newman.
Volkov said the deal should help those issuers to escape from their “paralysis”.
“They have been waiting for a signal that there is demand in the primary market,” he said. “This deal is the very signal they have been waiting for.”
Brazil’s deal came in a buoyant week for Latin American supply, as borrowers pounced on a more stable market backdrop.
“Right now we’re in this window where at least you can get funding done,” said a syndicate banker away from Brazil’s deal, pointing to the Federal Reserve’s meeting this week.
How long this will last is unclear, though, with US rates, the dollar and commodity prices all potential causes of further volatility for emerging markets assets. (Reporting by Will Caiger-Smith; Editing by Matthew Davies and Sudip Roy)