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Brazil getting pricey: Credits are now mostly carry trades

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

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    Tellimer Research
    18 December 2019
    Published byTellimer Research

    Over the past few weeks we have seen several credits come to the market at levels that we believe show Brazil is getting pricey, particularly the higher-quality companies. None of the new issues have broken the 5% threshold, suggesting the upside for these issues is limited in terms of price appreciation and spread compression and that credit in Brazil is becoming, for the most part, a 'carry trade play'.

    For example:

    • On 13 November, Itau Unibanco (ITAU) priced US$750mn of 4.5% bonds due 2029, issued at par for a spread of c282.2bps. These bonds were rated B1/B+ and are junior, subordinated tier 2 securities. They currently trade at cUS$102.737 (ALLQ) to yield c3.88% (g-spread 215bps; i-spread 216bps).
    • On 14 November, Gerdau (GGBRBZ) issued US$500mn in senior unsecured bonds due 2030 (BBB-/BBB-) with a coupon of 4.25% and a re-offer price of US$98.973 to yield 4.375% for an issue spread of 255.6bps to the 1.75% 2029 US Treasuries. These bonds currently trade at cUS$101.912 (ALLQ) to yield 4% (g-spread 211bps; z-spread 217bps).
    • On 3 December, Banco BTG Pactual (BTGPBZ) priced US$500mn in senior unsecured 4.5% bonds due 2025 (Ba2/BB-/NR) at an issue price of US$99.435 to yield 4.625% (Ba2/BB-) for a spread of c291bps over the 1.5% 2024 US Treasuries. These bonds currently trade at US$101.374 (ALLQ) to yield c4.19% (g-spread 246bps; z-spread 247bps).
    • On 6 December, Banco Daycoval (DAYCOV) issued US$350mn in senior unsecured 4.25% bonds due 2024 (rated BB- by Fitch) with a re-offer price of US$99.444 to yield 4.375% for a spread of 274.2bps to mid-swaps. These bonds now trade at cUS$101.342 (ALLQ) to yield c3.95% (g-spread 222bps; z-spread 223bps).

    The only outlier, probably because the issuing company is domiciled in Mexico, has been Braskem Idesa (BAKIDE), which issued US$900mn in 7.45% bonds due 2029 (BB-/BB) with a re-offer price of US$99.659 to yield 7.5%. The bonds currently trade at cUS$107.011 (ALLQ) to yield c6.3% (g-spread 445bps; z-spread 452bps).

    Every single new issue has traded up after issuance, spreads have compressed and yields for the new issues currently range from 3.88% (ITAU) to 6.30% (BAKIDE), with the caveat that the latter is essentially a Mexican credit.

    Focusing on purely Brazilian issues, we do not see much room for further improvement in terms of price, although we do see strong appetite for new issues from Brazilian corporates. We believe this will continue to fuel the primary pipeline in Q1 20.

    In sum, it is difficult to see new issues coming to the market at levels above 5% (if the quality of new issuers is similar to that we have seen come to the market in the past two months). Thus, we see Brazilian corporate credits becoming carry trades and new issues following a similar performance of slight price appreciation in the secondary market, but with yields that are likely to mirror what we have seen in recent weeks.