As corporate debt with a negative yield passes the $1 trillion threshold, the fact that a recent local CRI debenture in Brazil raised only R$538 million ($132 million) in orders for a proposed R$1 billion deal may seem like a good “problem”.
The deal, led by XP Investimentos, scraped together demand for just over half the 10-year deal that paid 20 basis points more than the NTN-B benchmark (3.2%), though it should be noted that CRIs enjoy tax incentives that boost net returns.
The deal was for private hospital operator Rede D’Or, one of the strongest local companies, hence the small spread over the sovereign benchmark. At first blush it could just be a case of overly-aggressive underwriting – the structure of these auctions sets price limits, and then bankers try to convince investors to bid lower. And certainly, demand failed to meet supply.
But it is also a graphic illustration of how the froth that bankers have reported has been growing in local credit markets. Corporate risk premia have collapsed to levels that often make little sense. And, importantly, little nominal return.