BofAML adds to Brazil's fledgling muni market with Maranhao deal
NEW YORK, July 26 (IFR) - Bank of America Merrill Lynch bolstered Brazil's fledgling muni market this week after selling a pass-through note issue that serves as collateral for a loan to the State of Maranhao.
The deal was the second of this type to make it to the international capital markets, and came despite reservations from the Treasury and a broader fiscal responsibility law that, in theory, prohibits states and municipalities from issuing bonds in the local markets.
Whether this is the beginning of a trend is a matter for debate. The Treasury has cast a wary eye on these transactions as they tend to contaminate the sovereign's curve and the federal government may just insist that future loans cannot be securitised in this way, said one banker.
As with the previous deal -- involving the state of Minas Gerais -- traders reported a sell-off in Brazilian quasi-sovereign and sovereign bonds in the wake of the Maranhao announcement.
"It has repriced the sovereigns and quasi sovereigns. We want to find out if this is sign of things to come with other ," said a New York based trader earlier this week. "It could be negative for this space."
A pass-through note issue, with backing from a loan with federal government guarantees, has been viewed as a way to sidestep restrictions on state issuance.
Credit Suisse and JP Morgan broke new ground in March when they offered investors a rare opportunity to gain exposure to Brazilian state risk after placing a US$1.27bn State of Minas Gerais loan using a similar structure.
However, market conditions have changed substantially between then and now, not to mention broader sentiment towards Brazil. Minas Gerais is also a larger more prosperous state than Maranhao.
"Minas Gerais was done when US Treasuries were well behaved and there was still a massive amount of money flowing into EM," said one investor, who bought the prior transaction but was declining to participate this time.
Rival bankers were certainly watching closely to see if BofA Merrill could get this particular deal over the finish line. With initial anchor interest of around US$300m, the bank was confident enough to move forward, but it barely budged on pricing and it had to wait overnight before completing the transaction.
In the end, it priced the US$662m 10-year pass-through at 103.642 with a 5.477% coupon to yield 4.80%, coming exactly in line with initial thoughts of high 4s, or 175bp over the sovereign's 2019s.
Rival bankers have been wondering why the Treasury would sign off on a deal that threatens to contaminate its own curve.
"We weren't expecting this one," said a DCM banker. "I don't think the Treasury was super-happy with Minas Gerais. It messed up its curve because it had the full guarantee of the government."
It is thought that wording in the original loan agreement that backs the deal lacks an explicit prohibition of securitizations such as this one. The Treasury may insist on clearer wording going forward, say some bankers.
"Future agreements will be more specific," said a banker away from the deal.
For investors, the federal guarantee on the loan made all the difference, and hence it was viewed as Brazil risk with a pick-up.
Maranhao itself only has a BB+ rating from Fitch, but the agency assigned a BBB to the transaction, citing the "absolute, irrevocable and unconditional" guaranty of the Brazilian government.
That kind of backing makes it an easy choice for certain accounts who may know little about the obscure state in the north of Brazil, but find comfort in the support from the federal government, not to mention the pick-up to sovereign debt.
" the time and resources needed to look at state finances I would imagine most investors wouldn't buy it unless there is a guarantee," said one investor. "There could be a lot of skeletons in the closest."
At the final pricing, the deal came tight to the 5.30% secondary yield seen on the longer-dated Minas Gerais pass-through notes due 2028 with an average life of around nine years.
The senior secured amortising note issue due July 24 2023 has an weighted average life of 6.5 years with collateral being a loan to the State of Maranhao guaranteed by the federal government.
Proceeds are being used to acquire a 100% interest in the loan, which in turn funded a refinancing of debt owed to the federal government. The deal is rated BBB/BBB by S&P and Fitch.
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