Brazilian banks and corporates are reacting to the loss of the sovereign’s investment-grade rating by assessing the viability of securitization. Bankers report a growing interest among financial institutions in diversified payment rights (DPRs) transactions, but so far there has been just one issue from Bradesco since the downgrade late last year.
“Brazilian banks might move towards DPRs in case credit markets remain tight,” says José Rudge, head of fixed income and structured products for Itaú BBA in Sao Paulo. “This was a normal funding instrument for banks in the early 2000s, and we saw some in 2008 and one late last year [a private placement for Bradesco].”
Rudge adds: “Since Brazil lost its investment-grade rating, we have been discussing structured deals with Brazilian banks and other companies as a means to use collateral to get the credit enhancement and move transactions back into investment-grade territory.”
Germana Cruz, head of financial institutions, Latin America on securitization, at Standard Chartered, says she has also been fielding more questions from the country’s banks. “Interest in securitization has picked up since the Brazilian sovereign rating started to deteriorate last year. This comes as little surprise as securitizations are known as the best rainy-day solution that helps lower funding costs.” Cruz adds that banks typically use commercial payments for securitization programmes.
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Germana Cruz, |
Cruz says that banks across Latin America are receptive to such issuances when and if the execution is fast, which favours a private-placement structure – as does the typical deal size.
“There have been some deals concluded as private placements since December 2015,” she says. “This is the best format because such deals start at $100 million, and the pricing remains undisclosed, which in turn offers more comfort to the banks concluding them.”
DPRs were commonly used in Brazil in the early 2000s to enable banks to achieve investment-grade ratings. The overcollateralization enables a two-to-three notch upgrade – but the investor universe is limited, according to rating analysts.
“These DPRs are the cheapest way for non-investment-grade banks to access dollars, so I think we will see the large Brazilian banks all issuing these deals particularly as they have a number of bonds that they need to finance and repay,” says Sergio Garibian, head of the banking team at Standard & Poor’s in Brazil. None of the large Brazilian banks would comment on their likely issuance of DPRs when asked by Euromoney. “However, I don’t see the mid-sized banks accessing the same market,” says Garibian.
Fitch agrees. In a recent report, the ratings agency says: “To help meet future funding needs, Brazil’s top-tier commercial banks are well-positioned to securitize diversified payment rights business lines.”
The agency also suggests that investor interest should be strong, given the structure’s historical performance: “Emerging market financial future flows have performed exceptionally well; all Fitch-rated programmes have paid debt service on time [and] according to schedule and several transactions did so despite severe sovereign stresses... There has never been a default related to a financial future flow transaction.”
Corporates are also looking at securitizations to enable access to international investors and secure lower costs of funding. Bankers say they are rolling over bank debt, but the local markets lack the depth to enable companies to secure longer-term financing. There has been a spike in request for Chapter 11-type bankruptcy protection, and a large part of this is linked to the 20% yields that domestic institutional investors expect – with international investors not well-disposed to fresh debt from Brazilian corporates.
“Outstanding bonds in the Brazilian space have been trading very wide and this has led to some opportunities for bond buy-backs,” says Rudge. “Having said that, the stronger credits could take advantage of window of opportunity to access the market and reduce refinancing risks, as did the sovereign earlier this month.”
First deal
On March 10, Brazil issued its first senior unsecured benchmark deal since it lost its investment grade. The issuer had been absent from the international markets since 2014 and, therefore, this was an important transaction.
Brazil sold $1.5 billion in 10-year bonds, pricing a 6% coupon at 99.066 to give a yield of 6.125%. However, bankers say the absence of corporate deals – there has been no such deal this year – is less about the lack of a recent sovereign benchmark and more to do with the volatility created by the political crisis.
The sovereign transaction, led by Bank of America Merrill Lynch and JPMorgan, offered a new issue premium of just 10 basis points with a total order book of $6 billion. A source close to the national treasury reported that the decision to issue the bond was made to take advantage of the recent fall in outstanding sovereign yields.
However, the increased chance of impeachment of president Dilma Rousseff caused that rally, so officials were uncertain whether the ministry of finance would withhold approval to tap the markets.
DCM bankers say any further steps that make impeachment a near certainty could lead to a spike in sentiment that could bring a flurry of deals.
“We are ready to work three nights straight to get some deals priced,” said one DCM banker. “We would want to issue before the dust settled and before investors began to realise that as far as the desperately bad Brazilian economy is concerned, impeachment doesn’t really change anything.”
