RIO DE JANEIRO, BRAZIL – Brazil’s domestic corporate debt issuance market is growing again after last year’s collapse.
It seems to be a return to the glory days of a few years ago, when credit funds were among the fastest-growing investments, as Brazilians turned away from savings and government bonds in search of yield. That market came to a halt last year when the coronavirus took hold and credit fund shareholders rushed to withdraw money.
This year, the sale of corporate debt paper is up 70% over the same period in 2020, according to Bloomberg figures, with investors spurred by expectations of higher interest rates.
The market’s revival is still in its early stages, after only 3 months of net positive funding from credit funds since the pandemic began, but it now paves the way for a boom in infrastructure project financing. After last year’s bailouts led managers to close credit funds, the industry is raising money amid signs that the economy may be emerging from its worst phase.
“There is no more selling pressure, since the largest sellers, the weakest credit funds, have simply disappeared,” said Alexandre Muller, partner and portfolio manager at JPG Asset Management in Rio de Janeiro, which has R$29 billion in assets under management. “It had a cleansing effect,” he said.
The recovery is coming after a painful 2020. While credit markets around the world suffered steep losses at the start of the pandemic, in most of the developed world they bounced back in the third and fourth quarters. This was not the case in Brazil, where local market bond issuance fell 41% last year as investors pulled money out of credit funds for 11 consecutive months.
Prices plummeted with only a few banks as buyers, impacting investors who had only recently become comfortable with the idea of buying riskier funds.
Total assets under management in credit funds had soared to a peak R$100 billion in June 2019, from R$15 billion in 2014, according to JGP, which counts only independent managers.
One reason for the growing popularity was that about half of the funds began allowing investors to withdraw their money with virtually no notice. This turned these funds into a source of immediate cash for shareholders who struggled with the aftermath of the coronavirus crisis.
Credit funds recorded record outflows of R$9.6 billion in March 2020, followed by R$4.1 billion in April, according to JGP. Withdrawals only stopped in February, when total assets under management in credit funds reached R$60 billion.
The resumption started in March, when credit funds raised R$486 million. In April, another R$2.1 billion was raised.
“Demand is returning to normal, with a focus on liquid papers and with a good yield,” said Rogerio Monori, corporate and investment banking director of BV Bank in São Paulo.
Clearly, the market has not yet returned to its peak and remains minute compared to the total government debt in the local market, which was R$5 trillion in March. There is also the risk that the pandemic that is still ravaging the country will undermine the market’s revival.
For the time being, however, Brazil’s interest rates have found an optimal point for encouraging debt issuance. Average credit risk premiums over the benchmark CDI rate have dropped to 2% after reaching 5% last year, according to an index calculated by JGP. This is an attractive rate for issuers.
Clothing retailer Lojas Renner sold 2025-dated bonds in March at a risk premium of 160 basis points, down from the 300 basis points it paid in May last year for slightly shorter-term notes. Utility company Aegea Saneamento e Participações sold notes due 2027 in April at a premium of 215 basis points, compared with a 300 basis point premium on short-term notes sold in September.
Although the credit risk premium has shrunk, the benchmark interest rate (SELIC) is expected to rise in the coming months, increasing the appeal of corporate debt relative to equities or other riskier investments. The Central Bank raised the basic interest rate by 75 basis points, to 2.75% in March, and signaled another similar increase in May. The market is expecting additional increases of 250 basis points later this year, which would push the basic rate to 6%.
“Spreads are still good for buyers in relation to companies’ credit risk,” said Laurence Mello, credit fund manager at AZ Quest Investimentos, which manages R$17 billion.
Companies are also finding it easier to sell longer-term debt, with maturities of up to 10 years for inflation-indexed bonds and 6 years for those indexed to the CDI, according to Felipe Wilberg, managing director responsible for fixed income and structured products at Itaú BBA Bank, leader in the issuance of corporate bonds in the Brazilian local market this year, according to data compiled by Bloomberg.
Most Brazilian companies issued debt last year to buy smaller rivals, Wilberg said. This year, airport, railroad and highway operators are now part of the mix, amid new concessions auctioned by the government and taking advantage of favorable taxation on infrastructure bonds.
As the market continues to normalize, more companies are expected to issue bonds in the local market. The Rio de Janeiro state water utility company CEDAE was privatized last week and will need over R$22.7 billion in investments, with potential financing in the local capital markets.
More corporate debt issuance is good news for investors who are cash-strapped and looking for opportunities to put their money to work.
“We are quite excited about the asset class,” said Artur Nehmi, fixed income manager in São Paulo at Sparta Fundos de Investimento, which manages R$3 billion. “The prices are still good.”