Brazilian banks snap up new local bonds

Bloomberg

Brazilian banks are snapping up a renewed wave of local corporate bonds after a sell-off sent yields soaring and left funds reeling from record withdrawals.
As local bond spreads rise more than four-fold in secondary market, investors say companies in need of cash are opting to sell new debt directly to banks, which often charge lower yields than institutional investors.
“Banks are buying everything,” said Ulisses Nehmi, the chief executive officer at Sparta Fundos de Investimento in Sao Paulo, which manages $764 million. Banks tend to accept lower yields than other investors because of their relationship with the firms, he said.
Companies are seeking to shore up liquidity to withstand the shock of the pandemic, as markets brace for a 2% economic contraction this year. Corporate credit demand hit a peak of ten times higher than usual before going back to normal, according to Banco Bradesco SA.
Firms ranging from retailers Magazine Luiza SA and Lojas Renner SA to energy firms Transmissora Alianca de Energia Eletrica SA and Eneva SA sold local bonds this month, following a 60% drop in new issuance in March. Notes that are due from one to two years were priced with spreads between 150 to 296 basis points.
Bonds that were entirely bought by banks were priced at spreads “way below” the level seen in the secondary market, according to Laurence Mello, a portfolio manager and head of private credit at AZ Quest Investimentos Ltda in Sao Paulo, which manages 15.5 billion reais.
Brazilian banks are also the main buyers in the secondary market, taking the space left by independent funds after a sell-off that scared off retail investors. Massive withdrawals forced managers to sell their holdings to account for the redemptions, leaving them with less cash to buy into new sales.
Investors piling into cash in response to the coronavirus crisis took 9.6 billion reais out of credit funds in March, on top of 1.5 billion reais in February, according to estimates by JGP Asset Management. The withdrawals amount to about 12% of the independent credit-fund industry’s total outstanding assets.
“Retail investors are still cashing out,” said Marcia Lima, head of investors relations at Quasar Asset Management in Sao Paulo, which oversees 3 billion reais. “Banks treasury desks are the ones making the most out of this opportunity to buy high quality bonds at very high spreads.”
High-grade bonds are offering great value, Lima said, as they suffered the most in the sell-off simply because they are more liquid than high-yield notes. Companies rated AAA and AA that paid spreads of 1 to 1.5 percentage points over the reference rate, known as DI, are currently traded in the secondary market with spreads of 4 to 5 p.p., Lima said.
Eneva SA, which holds a AA+ grade on local debt by Fitch Ratings, sold 410 million reais in one-year local bonds this week paying a 250 basis points spread. A year ago the firm issued five-year bonds paying less than half of that.
Health-care provider Diagnosticos da America SA, known as Dasa, has a similar story. It issued 365 million reais in three-year bonds paying 195 bps over the DI rate this week, compared with a 120 bps spread in December for 500 million reais in five-year bonds.
Brazil’s lawmakers are expected to approve a bill that will allow the central bank to buy corporate bonds. Investors say the measure will improve liquidity in the secondary market and normalise borrowing costs for companies.
“In the US, where this is permitted, spreads compressed more than 100bps after the central bank stepped in and we expect the same to happen in our market,” said Carlos Lima, a portfolio manager at Quasar.
“This will provide liquidity for investors to exit the market, even if taking losses,” said AZ Quest’s Mello. “It shows the market is becoming more mature and converging to developed-nation standards.”