NEW YORK, May 10 (IFR) - Brazil may not have printed its tightest yield ever Thursday when it tapped its 2.625% 2023s below par.
But in a deal where timing was driven as much by original issue discount (OID) restrictions as it was by market tone, the sovereign leapt while it could to top up a key dollar benchmark at a concession of anywhere between 5-7 basis points.
The reopening marked the sovereign’s first dollar trade since September, when it first issued the 2023s at a size of $1.35bn, pricing it at 99.456 to yield 2.686%. At the time, the 2.686% coupon was the lowest for a Latin America sovereign.
Emerging with initial price guidance of 2.80%-2.85%, Brazil was seen offering a concession of 10bp-17bp on a yield basis after bankers had earlier spotted the bonds at around 2.68%-2.70%.
From there, leads revised talk to 2.80% (plus/ minus 5bp) and, eventually priced the US$750m transaction at 98.946 to yield 2.75% or 98bp over Treasuries on the back of a $3bn book, coming inside the 110bp it had achieved in September. The 10-year US Treasury at the time was around 1.60%, while yesterday leads spotted it at 1.769%.
Volatility in the Treasury market has weighed on prices of low-beta names like Brazil and, hence, affected timing due to OID considerations.
Indeed, it was not until recently that the 2023s were comfortably above the OID threshold, which one banker calculated to be around 97.75. If the bond is opened below the OID, it is not fungible with the outstanding issue and has different tax treatments.
The sovereign needs to take advantage of such windows as they can quickly open and close, especially due to the low coupon on the bond.
“You have to take this opportunity while you can,” said the banker. “Treasuries can move 10bp or 20bp and you no longer have the option.”
With the 2023s trading at 99.50-99.75 yesterday morning, leads had a decent enough cushion against OID risk. That said, the upper end of the talk range put the bond at a price of 98.11, placing it close to the OID threshold, noted another banker.
Brazil has been heard to be also considering a 30-year bond, but, given the few opportunities available to tap the 2023s, it was thought that starting with a 10-year first made more sense. Besides, a larger, more liquid 10-year would, arguably, help pricing dynamics on a new long bond.
Despite having to issue below par, Brazil is no doubt satisfied with a concession that came below some expectations.
“A concession of an eighth is not unreasonable in this market,” said a rival banker earlier in the day. “There has been a lot of noise around Brazil and people think it is expensive relative to other sovereigns.”
That said, the tap offered a pick-up to Mexico, which was bolstered Wednesday by Fitch’s upgrade to BBB+. Mexico’s 2022s were trading yesterday morning at 2.45% or a G-spread of 90bp versus a G -spread of around 97bp on the Brazil 2023s.
“Mexico is more liquid and its whole story is really strong at the moment,” noted another banker.
Brazil exercised its greenshoe option overnight in Asia for another $50m, bringing the total amount of the reopening to $800m and the outstanding size to $2.6bn.
The SEC-registered global bond is listed in Luxembourg and governed under New York law. Ratings are Baa2 (positive)/BBB (stable)/BBB (stable).
The borrower can also exercise a greenshoe option overnight for up to 10% during Asia hours. Bookrunners were Barclays and Citigroup.
(A version of this story will be published in the May 11 issue of International Financing Review, a Thomson Reuters publication; www.ifre.com)
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