Investors prepare for a rush to the market

If anyone still doubted Brazil’s significance as a global equity market those doubts were surely swept away last week as VisaNet, the Brazilian arm of the credit card giant Visa, completed the biggest IPO in Brazil’s history and the world’s biggest this year. The sale raised $4.3bn, priced at the top of its target range, and the shares jumped 15 per cent as trading began last Monday. The vast majority of buyers were foreign investors.

The deal shows how ready many investors are to come back to Brazil and their appetite for a piece of its huge domestic market – in this case, a play on its still largely unserviced credit market.

VisaNet’s success will encourage other companies to come to market. The next couple of months could see one of the highest levels of issuance in the country’s history. But worriespersists about how sustainable the coming round will be.

A secular drop in interest rates to single digits and low levels of debt suggest the country will suffer a shorter recession than most of the rest of the world, says Jean-Marc Etlin, executive vice president and head of investment banking at local Banco Itaú BBA in São Paulo. Brazil implemented countercyclical policies early and while interest rates are down substantially they are still as high as 9.25 per cent, leaving the government room for further stimulus measures, adds Scott Piper, executive director and portfolio manager at Morgan Stanley Investment Management.

Signs of economic recovery are laying the groundwork for the issuance bonanza. Up to mid-August, Brazilian companies could raise as much as $8bn, according to Nicolas Aguzin, chief executive of Latin America at JPMorgan.

Cosmetics company Natura is planning to issue more shares and multibrand firm Hypermarcas has also prepared a prospectus for investors, although both have been coy about details and shares suffered on the announcements, as investors fear dilution.

This jittery reaction shows how brittle confidence remains. The rush to market comes because cash-starved Brazilian companies fear the window of opportunity in equity markets may prove fleeting. Even though bankers and investors are sounding more optimistic, the uncertain outlook globally means that the durability of this latest recovery is anything but certain.

Then there are the scars left by the last boom and bust in equity markets when “investor appetite was tremendous for anything new”, says Mr Piper. That allowed investment bankers to turn a fast buck. Not all deals were well executed and many did not perform well, he notes.

That means investors will be more discerning than before. New deals from large companies that have a demonstrably successful track record and proven management should get a good hearing. Mid-cap, small-cap and untested companies will mostly get the brush off, Mr Piper believes. This is a market that is selective and focused on confirmed stories, such as follow-ons, adds Mr Etlin.

All may not be lost for companies with a less obvious appeal. Midcap companies are increasingly showing interest in listing directly on US equity markets, according to Mr Aguzin.

The spotlight on the equity markets means corporate debt issuance, long the wallflower at Brazil’s capital markets party, still has a limited dance card. “But falling rates have stimulated two sovereign deals and one fixed income bond from the BNDES, the national development bank,” says Mr Aguzin. Furthermore, asset managers are starting to weigh up corporate issuance more seriously as yields on government debt tumble. This should provide a base for corporate fixed-income deals over the longer term. In the short term, international markets will continue to prove more fertile ground, with $10bn - $15bn in new issuance expected in the second half of the year, a big increase over the first half, if nothing spectacular by historical standards, says Mr Aguzin.

Brazilian companies are keeping their fingers crossed that the equity rally of recent months will keep its momentum. Their very haste to come to market is already making investors nervy and the irony is that the sheer volume of planned deals could overwhelm a fragile recovery.

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