Bankers torn over Brazilian state mandates
* Institutions covet roles in Rio deal
* Worries grow that the Treasury may disapprove
* Pass-through notes offer potentially bigger profits
By Paul Kilby
NEW YORK, Aug 16 (IFR) - Bankers are treading carefully as they weigh a request for proposal from the State of Rio de Janeiro, calling for a bilateral loan of up to 1.4 billion Brazilian reais (US$611.8 million) that could turn into a pass-through note and add momentum to Brazil's fledgling muni market.
The national Treasury may look askance at institutions winning mandates on deals that could contaminate its curve, but following a pass-through note issued by the State of Maranhao last month, it may prove hard to prevent others from doing similar transactions.
What is more, the profits on such notes, which are backed by loans to the states, may be too big for bankers to ignore.
Rio is asking banks to resubmit proposals in the hope that financial institutions will tighten pricing if allowed to assign the facility and conduct a pass-through transaction, according to a source familiar with the process.
"After the first round of proposals, Rio officials thought they could improve the terms and are now asking banks to submit under a new scenario that has consent for a transaction with an assignment," he said.
If banks are able to shed such loans more easily - not to mention book substantial profits through the sale of securities in the international capital markets - they are likely to offer better terms on any bilaterals they initially extend to the states.
It is an idea that banks like, and many appear to be willing to risk the wrath of the Treasury and sacrifice sovereign mandates in the process.
"If you do one of those deals, you'll make more money than you would from five years working with Brazil," said a banker.
"If I got a shot at doing these kinds of trades I would do it in a heartbeat. The firm may want a relationship with the sovereign but I honestly don't care."
There is certainly increased demand for quasi sovereign paper out of Brazil at a time when there is a dearth of sovereign paper.
In addition, Brazil is not a frequent issuer and, like most sovereigns, pays small fees for deals that are rotated among an ever-larger group of banks, now that locals are also vying for this business.
Brazil was last in the market in May this year when it tapped the 2.625% 2023s at 98.946 to yield 2.75% or Treasuries plus 98bp. Leads on that occasion were Barclays and Citigroup. Those bonds opened this morning at around 86.00 mid-market.
Not only are the economics on pass-through notes attractive, but the asset class has more potential for growth given a string of states seeking similar ways to refinance expensive debt owed to the federal government.
Such structures, which offer a substantial spread to the sovereign, have proved controversial in Brazil, not least because the Treasury is thought to cast a wary eye on any issue that may put pressure on its own curve.
Traders reported a sell-off in Brazilian quasi-sovereign and sovereign bonds in the wake of the US$662 million State of Maranhao issue through Bank of America Merrill Lynch in July - the second of its type to make it to international capital markets.
The federal curve also felt similar pressures when Credit Suisse and JP Morgan became the first banks to test appetite for this structure in March after the placement of a US$1.27 billion pass-through backed against a loan to the State of Minas Gerais.
As a result, some bankers are taking a more cautious approach this time and discussing it with their peers, said a Sao Paulo-based banker.
"There was a lot of negative press surrounding the first (Minas Gerais) transaction, and concern about how these transactions will impact the coverage of the Treasury," he said.
Several bankers expressed surprise that the federal government had not already put an end to such activity. "A lot of banks stepped back as they thought none of these transactions would be approved," said the Sao Paulo-based banker. "Then Maranhao came out."
It was thought that wording in the original agreement that backed the Maranhao loan lacked an explicit prohibition of securitisations such as this one, and now one has issued, it may be hard for the Treasury to step in.
"You can't treat states in a different fashion," said the source. "You can't give something to one state and not give it to others. Treasury is in very difficult situation."
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