By Guillermo Parra-Bernal
SAO PAULO Feb 14 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
"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.
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.