With the panic subsiding fast, Brazils equity markets have staged an astonishing turnaround allowing canny investment banks to find their feet in the country again.
A marked renewal of interest in riskier assets, due in part to relief stemming from the benign results of the stress tests on banks in the US, has brought capital markets in Brazil back into the spotlight.
Debt markets in the country are thawing fast and an anticipated jumbo initial public offering (IPO) should shortly re-open equity capital markets. The IPO of credit card processor VisaNet could raise as much as $10bn reais ($5bn). Recovery, though, is not likely to be fast enough to halt the tectonic-sized shifts already taking place in the investment banking landscape.
Just three years ago, Brazil was often thought of as lagging somewhere at the rear of the steroid-pumped BRIC pack (Brazil, Russia, India and China). Today, China and Brazil are perceived as the front-runners among emerging markets, says Jean-Marc Etlin, executive vice-president at Banco Itaú BBA. When the crisis began, though, Brazil was one of the countries best placed to deal with it, due to its high interest rates and hefty primary surplus. These gave the country some scope for some monetary loosening and government-led stimulus.
Brazil now finds itself in pole position as the rapid turnaround in investor sentiment gathers pace. In the first week of May alone, some $713m net was allocated to Latin American equity funds, according to fund-tracking firm Emerging Portfolio Fund Research. There should be more such money to come. Part of the reason for this rapid redeployment is that many investors retreated to the safety of cash during the crisis, hoarding rather than investing, says João Teixeira, executive vice-president at Banco Santander in São Paulo. This means there is plenty of liquidity locked in funds that will be available as the market recuperates, he adds.
The market clawback is not just wishful thinking from investment bankers. There has already been a revival of debt capital markets activity. Debt markets are coming back rapidly in tandem with the re-opening of the US high-yield market, says José Olympio Pereira, managing director and head of Brazilian investment banking at Credit Suisse in São Paulo. The balance between greed and fear has tilted back towards greed, he quips.
The pattern of issuance is typical for a re-opening and it began with that most blue-chip of names, Petrobras, prising open the market in February with a $1.5bn issue of 7.88% global notes with a 10-year maturity. That was the signal for other big firms in need of cash. The deal was followed by strong but less well-known names, including communications company Telemar and construction firm Odebrecht.
The most recent deal, though, proves just how fast the market is regaining its lustre. The issuance came out of speculative grade meatpacker JBS Friboi, which placed bonds in April. Originally, the issuer capped its ambitions at $400m for its proposed five-year deal, with an indicated yield of 13%. However, there was sufficient investor demand to increase the deal to $700m, due to high-yield investors. The next test will come from Eletrobras, a holding company with stakes in a number of generation and transmission firms.
Even the moribund syndicated loans market is displaying some small signs of life. Most of the banks have adopted a very cautious attitude to loan transactions, says Mr Teixeira. However, Santander is testing the market for a couple of deals put on hold at the peak of the crisis. Executives at other possible syndicate banks say they are only seeking established names with well-defined projects. They want smaller tickets and also want to leave pricing to the last minute, he says. Even so, Mr Teixeira says that the deals are progressing well.
Equity market Yo-Yos
Brazils secondary equity market has enjoyed a spectacular return to form after losing more than 60% of its value from peak to trough. The key Bovespa index had climbed by 36% this year up to May 12. The scale of the turnaround even has some bankers worried. Mr Etlin believes the market might be ahead of itself, with investors perhaps anticipating a shorter than expected recession.
Mr Olympio thinks equity investors are now ready to take the plunge on new issues, at least from a handful of issuers. He cautions that it will only be very large companies with high-quality businesses in defensive sectors and those prepared to carry out substantial deals that will be able to come to market because investors are still insisting on liquidity. Consumer stories and financial services are sparking great interest, he says.
The global crisis will also continue to stimulate a significant amount of restructuring, particularly in the key industries of sugar and ethanol. Many companies in these areas are foundering due to volatility in prices, says Mr Olympio.
One example of how ethanol deals may involve companies tapping into a number of markets is provided by LDC, the Brazilian commodities subsidiary of French conglomerate Louis Dreyfus. LDC is poised to buy one of Brazils largest ethanol groups, Santelisa. LDC signed the deal but with a proviso that the target must restructure $2.8bn reais of debt before the deal can complete. As for LDC, it has said that it would seek to list in São Paulo after it pulled a mooted deal last year on the back of poor market conditions.
Picking up the pieces
The rapidly improving landscape and prospect of deals has investment bankers breathing a sigh of relief. It has allowed them to shift their attention to the question of what the competitive landscape will look like once the dust settles. The absence of focused competition from traditional US houses raises the possibility of a more fragmented scene in which boutiques play a bigger role than they have in the past, say bankers.
If that is the case, the bank to watch will be BTG. The start-up, headed by André Esteves, has been at the forefront of a process of absorbing parts jettisoned by well-established banks re-focusing on their core businesses. The acquisition of Lehman Brothers Brazilian business in October was the forerunner of Mr Esteves more significant acquisition of UBS Pactual. The deal will mean BTG becomes one of the most significant players on the Brazilian investment banking scene, says Ademar Couto, director of financial services at headhunter Ray & Berndston Brasil in São Paulo. Mr Couto says that investors have a high level of trust in the key names at the new institution and Mr Esteves has a phenomenal reputation.
Mr Esteves is regarded as a gifted and energetic leader who has youth, charm and a dash of good luck on his side, and rivals confess to perceiving BTG as a significant competitor. He will pull off the merger and integration, and has a very good chance of being successful, says Mr Couto.
Big questions about the scale of BTGs ambitions remain. The distribution model for a boutique bank promises to be difficult. Although it has international offices in the Americas, Europe and Asia, the heart and soul of the institution is in Brazil. It will take time and substantial capital outlay for the bank to build proprietary international distribution. Overseas distribution is particularly important for Brazil because foreign investors have proven such significant, if fickle, investors in the market. During the 2005/07 bull market, more than 90% of shares in some IPOs were sold to foreigners. If it focuses on the home market, BTG will be positioned more as a head-on competitor with the likes of Itaú BBA, the countrys most successful local franchise, says one banker.
A second difficulty for BTG lies in running proprietary and third party funds in tandem. A merchant bank together with an investment bank under one roof poses possible conflicts of interest. Clients may feel that the fox is taking care of the henhouse, says one banker. The final and most immediate difficulty is how BTG can set about resolving the thorny problem of providing an equitable share deal for its partners. The sheer size of the new organisation and the number of senior staff that will be brought in will make it difficult to please everyone.
The fluidity within the international corporate and investment banking scene that drove UBS to quit investment banking in Brazil has also led to doubts over the long-term commitment of other foreign banks to Latin America and Brazil. This is giving small and medium-sized institutions the opportunity to add whole areas of business in a relatively cheap and simple fashion.
South Africas Standard Bank has used market uncertainties to expand its operations. It shifted its Americas headquarters from New York to São Paulo at the beginning of the year and hired Goldman Sachs banker Eduardo Centola to head its team. The bank then bought parts of Lehman Brothers business from BTG in a deal that gave it control of assets totalling $4.3m and a global markets team. More recently, the firm brought on board a small team of mergers and acquisition bankers from Goldman Sachs, including Pedro Marcilio.
Other smaller institutions are also picking off individuals and teams to build up some heft. The Brazilian arm of Portuguese bank Banco Espírito Santo Investimento hired the head of global emerging markets trading from WestLB, Norberto Zaiet, and plans to bring on more staff.
That the investment banking landscape is changing is not in doubt. Boutiques will challenge large investment banks that are too busy licking wounds at home to be able to focus on Latin America. The largest ones are likely to fare well. Smaller newcomers may see their power wane rapidly unless they are able to gain a real foothold in Brazil and prove that they can offer the same level of service as their bigger brethren.