DEALTALK-Brazil share offerings fall back to earth in gloomy year

Fri Feb 14, 2014 10:05am EST

By Guillermo Parra-Bernal

SAO PAULO Feb 14 (Reuters) - Stock offerings in Brazil are off to their worst start this year in a more than a decade, the latest sign of a severe erosion of investor confidence in Latin America's largest economy.

No initial public offering or follow-on sale has been filed with Brazil's securities regulator CVM so far this year, something unheard of since at least 2004, according to Thomson Reuters data. Prospects are so gloomy that many deals suspended last year due to souring market conditions are unlikely to materialize in coming months, bankers and investors said.

A truncated capital markets calendar, rising political risks and the emergence of attractive investments elsewhere mean investment bankers, who have thrived for years with easy-to-sell IPOs in Brazil, are now struggling to push through deals.

Banks may even be forced to structure some offerings with extra guarantees to lure buyers, according to investors such as Fator Administradora de Recursos' Fabio Moser.

"Unfortunately Brazil has not been a source of good news recently, and it won't be for a while," said Fabio Nazari, head of equity capital markets at Grupo BTG Pactual SA. "There are lingering doubts about the economy and potential for some earnings downside that are leaving investors skittish."

After a benign 2013 in which the listing of insurer BB Seguridade Participações SA was the world's biggest IPO, companies are now braced for tight windows of opportunity to market their deals. A presidential election in October, reduced global liquidity and growing price scrutiny from potential buyers will add to pressure, said Fernando Iunes, global head of investment banking at Itaú BBA.

"We are going from a period of abundant capital and risk-taking to, let's say, the other extreme," Iunes said in an interview. "Investors will remain very selective and companies' fundamentals will be critical to access a much tighter market."

Stung by a string of deals in recent years that failed to deliver the promised returns, investors have become especially cautious in Brazil, said Neil Denman, who helps manage $12 billion in assets for London-based Polar Capital.

Just 37 of 117 IPOs priced since 2005 yielded returns above the benchmark CDI interbank lending rate, with the remainder losing half the amount initially invested, according to Credit Suisse Group AG's local asset management unit.

Companies seeking to tap the local equity markets face a delicate balancing act: how to offer acceptable risk and return as economic growth underperforms for a fourth straight year, said Deiwes Rubira, who manages the fortunes of 26 families at Verus Gestão de Patrimônio in São Paulo.

That may sideline foreign investors, traditionally the largest buyers of Brazilian IPOs. Foreigners snapped up 68 percent of Brazilian share offerings between 2006 and 2008, a share that fell to a decade-low average of 45 percent in 2013, Thomson Reuters data showed.

Local pension funds, which could take up some of the slack, are also growing skeptical of companies with little earnings visibility, an insufficient track record, or vulnerability to an economic downturn.

"It will be a tumultuous year for Brazilian issuers," Denman said. "In the end, if these companies want the investment community to take an extra risk to buy new issues, valuations should then reflect that."

SHIFT FROM BRAZIL

The outlook for offerings is "indeed challenging" because sentiment among investors, especially foreigners, is "really bad," financial bourse BM&FBovespa SA Chief Executive Officer Edemir Pinto said on Friday. Income from listing represents about 2 percent of annual revenue for the exchange.

For investment banks, which depend on financial advisory for half their revenue in Brazil, weak activity in equity capital markets this year may hurt earnings and lead to job cuts. While staff and capital levels are seen as adequate across the industry, lower fees prompted lenders such as Barclays Plc and Deutsche Bank AG to trim staff.

BTG Pactual, Itaú and Credit Suisse, which took turns as the top three equity underwriters in Brazil's golden age of IPOs in the past decade, are now looking for deals in Mexico, Colombia, Peru and Chile. Mexico became the region's No. 1 pool of equity underwriting fees last year, stealing the spotlight from Brazil.

A few weeks ago, BTG Pactual, controlled by Brazilian billionaire André Esteves, opened a broker-dealer in Mexico to tap growing interest in the region's No. 2 economy. This month, Itaú BBA's parent Itaú Unibanco Holding SA gained a stronger foothold in Chile and Colombia after buying a controlling stake in CorpBanca SA.

While BTG Pactual and Itaú were hired by Chile's GeoPark Ltd and Latam Airlines Group SA to handle their offerings, souring global market sentiment led some clients to pull deals this year, especially in Mexico.

BRAZIL DEALS

Brazilian firms that scrapped share sale plans include auto parts maker Fras Le SA and car rental company Unidas SA. Currently, the only deal under analysis at the CVM is fleet outsourcing provider Ouro Verde Locação e Serviço SA's IPO.

Concerns over demand for the issue led BTG Pactual, Bank of America Merrill Lynch, Credit Suisse and Espírito Santo Investment Bank to backstop Grupo Oi SA's planned 6 billion reais ($2.5 billion) share offering.

The Oi deal, which is scheduled for April, will also be backed by a BTG Pactual-run investment vehicle that will commit to buying 2 billion reais in additional shares, sources told Thomson Reuters' capital markets publication IFR.

Some other deals may take off if market conditions improve.

IPO candidates this year include Investimentos e Participações em Infra-Estrutura SA, airline Azul Linhas Aéreas SA and the local unit of France's Carrefour SA, sources with direct knowledge of the situation said.

In the case of Invepar, as Investimentos is known, a deal could take place in May or June if market conditions improve, one of the sources told Reuters. A spokesman for Invepar said an IPO remains an option.

Carrefour hired Credit Suisse to oversee the listing of its Atacadão wholesale unit, another source said. The company repeatedly declined to comment on the matter.

Despite the adverse outlook, equity investors will keep eyeing Brazil because the country's stock market is bigger, more liquid and more diverse than the rest of the region, said Ricardo Lacerda, chief executive officer of São Paulo-based investment bank BR Partners Banco do Investimento SA.

Well aware of the challenges, companies and banks are fine-tuning their IPO strategies, he said. The gap between what companies want for their shares and what investors are willing to pay will narrow as more vetted IPO candidates come up in fast-growing sectors, Lacerda added.

"The opportunities for a good investment story lie in the dichotomy of Brazil's two-speed economy, and they are not obvious," he said.