New Brazil bond marks shift in funding strategy
Oct 25 (IFR) - Brazil printed its largest-ever single dollar bond offering this week, in a shift of strategy for a sovereign that typically has built liquidity through incremental taps of its outstandings.
This time, Brazil instead combined a new issue with a complex one-day liability management operation to mop up higher coupon off-the-run bonds, finally emerging with a new US$3.25bn 12-year issue.
"Brazil has refused to do this trade for at least the last three years and has to the market repurchasing program," said a market source.
"They have disliked the bigger liability management trades."
But in a market that has seen many LatAm bonds sink well below par on worries that US rates are set to rise, borrowers are no longer able to simply lean on re-taps because of OID restrictions.
Sovereign borrowers across the region have thus realized that they must create large liquid benchmarks in one fell swoop.
"With the expectation of high rates, the view is that bonds will not be easily available for reopening," said a banker. "The strategy of incrementally tapping over the course of two years will be more challenging."
Just last month, Colombia (Baa3/BBB/BBB-) was unable to retap its 2023s because of OID thresholds and instead printed a new US$1.6bn 2024, its second-largest single issue ever.
Meanwhile Mexico (Baa1/BBB/BBB+) established a new US$3.9bn 10-year benchmark bond in combination with a cash tender and exchange - its biggest-ever single dollar offering.
NEW WAY FORWARD
With its one-day tender, Brazil (Baa2/BBB/BBB) looked to create some price tension between competing investor interest, with various books that catered to existing holders and buyers of the new notes.
Three books were built: one for new-issue buyers, one for holders switching into the new bonds, and another for accounts tendering old bonds for cash.
The one-day trade mitigated the execution risk embedded in tenders that last for weeks - and helped create a strong bid for the new issue.
"The issuer was looking to create liquidity in its curve by targeting holders of illiquid bonds into one liquid point of the curve," one banker said.
Brazil will use proceeds from the offering to pay for the cash tender.
"If you have a large stock of debt, it is an efficient way to generate a liquid deal from day one," said a rival banker.
The total deal size was about US$3.25bn, including the new cash and switch components.
About US$2.2bn of that was part of the liability management exercise, including cash raised to fund the tender, with the rest in the form of new money.
At initial price thoughts of Treasuries plus 200bp area, Brazil was seen offering a generous new-issue concession of up to 35bp to the underlying curve.
That was unusually cheap for the price-sensitive sovereign, but leads were quick to follow standard practice in this market and squeezed guidance to 180bp-185bp before launching at the tight end of that range.
It tightened pricing leveraging off a whopping order book of about US$7.5bn plus on the new cash book alone.
NEW COSTS, TOO
Final pricing underscored how much the cost of funding has risen since Brazil came in September with its last US$1.35bn 10-year benchmark, which carried a 2.625% coupon, its lowest ever.
In May, it tapped those bonds for another US$750m to yield 2.75% or Treasuries plus 98bp.
It priced the latest deal with a coupon of 4.25% and yield of 4.305% or Treasuries plus 180bp.
The G-spread on the existing 2023s was being quoted on average at around 155bp, with bankers adding from 10bp to 25bp to account for the extra year or so between the two bonds.
That put the underlying interpolated curve in the 170bp-180bp range and equated to a 35bp-20bp new-issue premium at initial talk, but flat to 15bp on final pricing.
Pricing also reflected the buyside's preference for higher-rated Mexico, which had 2023s trading at a G-spread at 127bp and would likely come with a new 2025 at around 148bp after accounting for the curve and NIP, said one banker.
Still, the 22bp differential between the two credits was relatively tight compared with the 60bp gap separating the five-year CDS of the two countries.
In other parts of the high-beta sovereign universe, Brazil arguably came about 20bp wide to a theoretical 2025 from Colombia, which had 2024s trading at G-spread of 140bp.
The notes being tendered are 6% January 2017s, 5.875% January 2019s, 8.875% October 2019s, 12.75% January 2020s, 8.875% April 2024s, 8.75% February 2025s, 10.125% May 2027s and 12.25% March 2030s.
"Brazil didn't want much duration-shortening," said one banker.
"They only bond that had a longer duration than the new issue was the 2030s. Even the 2025s and 2027 have shorter duration, because they are much higher-coupon bonds."
Bradesco BBI, Deutsche Bank and HSBC were bookrunners on the new deal.
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