Tuesday, 3 February 2009

Borrowing Costs Soar in Brazil. Check New Domestic Debt Issuances in www.debentures.com.br

Maturities have been shortened and terms have been toughened in the domestic market for debt, according to Andima. Yields for three-year debt are hovering around the equivalent of 125 percent of the CDI, the benchmark rate for interbank lending. The CDI is currently trading at around 12.63 percent.

According to Andima, a lobbying group for financial institutions in Brazil, issuers are having a hard time offering their debt to investors, who are demanding more and tougher guarantees for those bonds. The 610 million reais sold in Bradespar bonds on Jan. 22 were sold only until the holding company of Banco Bradesco SA offered to pay 125 percent of the CDI for three years -- in Brazil a year ago the benchmark maturity for a local bond was five years and maturities were as long as ten years less than two years ago. It was widely believed not long ago that local banks would take up the slack as international lenders, wounded by the impact of the credit crisis, were scaling down their credit operations in Brazil. But resources have become scarcer by the day and risk-taking has turned very restricted. Two years ago, a AAA rated company would offer eight-year bonds at less than 105 percent of the CDI; less than a year ago, yields were close to 108 percent of CDI.

Two companies have filed for permission to sell debt in coming weeks: Votorantim Finanças, which is planning a 500 million real domestic bond sale, and ETEO, which might offer up to 123 million reais in notes. One source recently told me that the role of the BNDES in this thing might be crucial. By lending failed and healthy companies, the BNDES is triggering distortions in capital markets. It is also hampering the development of debt and derivatives instruments, creating distortions in price formation, etc. The way the BNDES is pricing some issues that it buys through private placements is unclear, or even worse, far from transparent. While credit might be urgently needed by corporates, the BNDES is derailing an efficient allocation of resources by impeding a market-based debt pricing mechanism to operate normally -- one that takes into account the current scarcity of financial resources, the limited risk-taking appetite and rising government intervention (call it the likelihood that rules might be changed in favour of the government at the expense of private investors.)

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