By Paulo Trevisani and Jeffrey T. Lewis
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 18, 2020).
Foreign investors are flocking to the relatively high yields
offered by big Brazilian corporations that are issuing debt to
shore up their balance sheets in the midst of the coronavirus
pandemic.
The Brazilian Financial and Capital Markets Association said
local corporations had seven dollar-denominated bond issues in
July, totaling $3.7 billion, an increase of 48% from a year
earlier. That compares with just two issues in June and none in
April or May when the pandemic stalled business around the
world.
Despite that lull, Brazilian corporations have raised $18.5
billion from foreign bond investors this year through July, up 27%
from the same period last year. In local currency, the increase was
56%.
State-controlled oil giant Petróleo Brasileiro SA, or Petrobras,
iron-mining behemoth Vale SA and petrochemical giant Braskem SA are
among those that issued bonds in June and July. The companies say
investors like their debt because it pays better than
developed-world rivals without too much added risk.
"The world is living with interest rates that are too low," said
Andrea Marques de Almeida, chief financial officer of Petrobras.
"The opportunity to buy [high-yield] fixed income from a company
with solid fundamentals" attracts them, she said.
In June, Petrobras sold two series of bonds totaling $3.25
billion, some maturing in 2031 with a 5.6% coupon, while bonds
maturing in 2050 pay 6.75% a year.
One fund manager said a Brazilian company's debt can pay as much
as 2 percentage points over an equally risky U.S. or European
counterpart.
"Brazilian corporates are underpriced," said Tim Jagger, head of
emerging-markets debt at Columbia Threadneedle Investments. "They
are trading at excessive premiums relatively to the sovereign
[debt] given their history, with a very, very similar likelihood of
default."
Central banks around the world have cut their lending rates to
mitigate economic damage from Covid-19. Discounting inflation,
interest rates are negative in 28 of 40 major economies, including
the U.S., Brazil and most European countries, according to São
Paulo-based brokerage Infinity Asset.
In this low-return environment, Brazilian corporations stand out
because they pay higher yields, since the country's government debt
is rated as speculative. But some investors say they sense less
risk of default than in other emerging markets. Brazilian leaders
have for years tried to deflate ballooning sovereign-debt levels,
an effort interrupted by pandemic stimulus spending that investors
hope will resume eventually.
While Brazil's government debt was 85.5% of gross domestic
product in June, according to central-bank data, the International
Monetary Fund says the country's corporate debt is equivalent to
42% of GDP, a level similar to Russia's and India's. It is below
China's at 153.6% and the U.S. at 74.5%.
Adding to the appeal, Brazilian corporate-debt issuers come from
various sectors, including energy, mining, food supplies, retail
and others. That allows investors to diversify without the need to
consider different sovereign risks, a rarity among emerging
markets, says Atul Bhatia, fixed-income portfolio strategist at RBC
Wealth Management.
"When you look for yields, [Brazil] is the country that draws
your eyes first," Mr. Bhatia said.
Abdelak Adjriou, a portfolio manager at American Century
Investments who manages $2 billion overall, including $5 million in
Brazilian corporate debt, says he likes exporters, which tend to
profit from local-currency weakness and from the coronavirus
recovery in countries such as China. The Brazilian real has lost
about a quarter of its value against the dollar this year, making
its products more competitive abroad and softening a
coronavirus-driven economic recession.
"It's the first time [Brazil] heads into a crisis where rates
are low, the currency devalues and there is no threat of
inflation," he said.
To be sure, Covid-19 has claimed more than 100,000 lives in the
South American country, a death toll second only to the U.S.
The economic impact of the pandemic was among the main reasons
rating firms downgraded the debt of companies such as Braskem. A
frequent debt issuer, Braskem still managed to borrow from
foreigners last month.
Braskem issued $600 million in debt that matures in 2081 and
pays 8.5%. Demand for the bond was five times higher than the
amount offered, Chief Financial Officer Pedro Freitas said, adding
that the company is considering additional debt issuance soon.
"We had just lost investment grade; it was a sensitive moment,"
Mr. Freitas said. "But we felt that investors are used to
Braskem."
Write to Paulo Trevisani at paulo.trevisani@wsj.com and Jeffrey
T. Lewis at jeffrey.lewis@wsj.com
(END) Dow Jones Newswires
August 18, 2020 02:47 ET (06:47 GMT)
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