So Brazil’s year-long IPO hiatus is finally over. Sadly, the deal for São Paulo-based car hire company Companhia de Locação das Américas just squeaked through. Enthusiasm fizzled and shares were priced at R$9 per share way below the R$11-14 indicative price, raising a lowly R$273m.
That has put a shadow over a wave of Brazilian IPOs. Companies have been waiting in the wings and now need to decide whether to come onstage. Does this applause-free reception to LocarAmerica’s IPO suggest a general malaise or is it more a reflection of the company’s particular (and egregious) debt profile, low liquidity and choice of investment banks?
The deal did not flop for want of underwriters. In spite of offering only a smallish deal, LocarAmerica used investment banks’ desperation to be involved in the new wave of IPOs to its advantage. Bank of America Merrill Lynch; Itaú BBA; BTG Pactual; Banco Votorantim; and Banco do Brasil were all involved. This huge array of underwriters was too local-bank heavy though given that foreigners typically buy 65-80% of new deals. What were Banco Votorantim and Banco do Brasil (which owns a 49% stake in the former) doing on the roster? They seem particularly infelicitous choices as they have little reach outside Brazil.
The small deal size (exacerbated by the low price) also presents a conundrum. International investors tend to shy away from smaller (Brazilian) deals at the best of times. They are too fiddly for portfolios. At the moment, liquidity and volatility fears are heightened making deals like this particularly unwelcome.
Most important, is the high leverage of the company. It has close to R$615m in debt of which nearly R$200m is short-term, according to local Portuguese-language paper Monitormercantil (www.monitomercantil.com.br). The company is also involved in a series of relatively petty disputes with the state of São Paulo, Minas Gerais and at the Federal level over tax owed. Monitormercantil highlights 273 cases, high even by Brazilian standards.
That suggests this deal got blown off course because of specific, one-off factors. It should not have much bearing on the widely-anticipated BTG Pactual IPO, which will be a much better gauge of investor sentiment and is likely to do well. The Brazilian market is still picky but no longer closed.