Tuesday, 6 January 2009

Colombia Bond Sale: Final Terms (Just Moved!!!)

Here are the final terms of Colombia's sale of $1 billion of ten-year debt:
  • SIZE: $1 BLN
  • MATURITY: MARCH 18, 2019
  • 1ST PAY: MARCH 18, 2009
  • COUPON: 7.375%
  • PRICE: $99.136
  • YIELD: 7.5%

Colombia to Sell Bonds Too (Update)

The Colombian government boosted its bond issuance from $500 million to $1 billion, a source told us. The securities will yield 7.5 percent (or 5 percentage points above Treasury debt of similar maturity.) Colombia, as some of you may know, risks facing funding problems by the end of this year as its exports plunge due to the U.S. recession, and the current account deficit narrows at a slower pace than expected. We will try to obtain more details on the sale later on.

Pricing is expected today. The bonds will mature in March 2019. The Colombians hired Barclays Plc. of the U.K. and New York-based bank Morgan Stanley to handle the sale. Brazil is also seeking to tap markets today with an offering of $1 billion in ten-year bonds. It is likely that both nations complete the sales -- the indication is that there is a small recovery in investor risk appetite. Dresdner Kleinwort said in a report yesterday that the recessive scenario may lure investors to currency markets in Brazil and other high-yielding emerging market countries (like Colombia.)

A bit more of background here: ING analyst David Spegel said in a report last month that he forecasts emerging market bond sales to rise more than two-thirds in 2009 because of growing current account and fiscal deficits that have to be financed and the need to have dollar funds at a moment exports are dropping fast.

S&P Expects a Deterioration in Credit Quality at U.S. Banks. Is Their Position That Worrisome?

Standard and Poor's just published the abstract of a report, in which it analyses the recent performance of the U.S. financial industry in the back of government financial support. Although government financial support has buoyed U.S. banks, S&P says, ''the industry will likely experience overall credit quality deterioration through at least 2009.´´ let's remember a note that we posted at the end of December, in which the ratings company ranked its ratings outlook for the industry as negative, mainly reflecting deteriorating economic conditions and mounting asset-quality problems.

The situation of the U.S. financial sector is, therefore, quite worrisome. Loan credit costs should increase (because the creditworthiness of both borrowers and creditors is deteriorating amid the worst recession since at least WWII) and the necessary loan-loss provisioning will further eat into profits. S&P says that the government intervention in the industry won't prevent bankruptcies or cash shortages at small- and mid-sized institutions. Some of them may let go because they don't represent systemic failure risk (I have no names unfortunately.) On the same token, bank failures may rise this year. The impact on confidence must be significant -- because it will create the perception among the public that the hundreds of billions of dollars poured into bailouts and similar programmes aren't stopping the hemorrhage.

S&P is also betting that ''asset-quality weakness will likely spread to a wider range of loan types such as commercial real estate, credit cards, and certain pockets of commercial lending, such as loans to the auto and retailing industries.´´ This is important -- because it means that banks might have to continue writing off, selling or spinning off assets that are part of their core business. Let's remember that banks around the world were forced to write down about $800 billion stemming from credit-related losses last year, according to Bloomberg.

Mr. Obama has a tough road ahead of himself.

The Moment of Truth

Recent polls have shown record approval ratings for President Luiz Inacio Lula da Silva. Last year, the economic expansion rendered outstanding numbers (at least until before the global crisis unfolded) and formal jobs and real income grew. Investment poured into Brazil in a size that was unheard of in ... five decades? Paradise!!! But now the tide is turning and Brazil, as we said this morning and a number of times in the past two weeks, is heading for a recession.

O Estado de S. Paulo newspaper is trying to check voters' preferences now that the dream is over for Lula (he won't finish his second term presiding over a booming economy.) You dear reader who live in Brazil, should take a few seconds, click on
this link and vote yes/no. You will for sure stumble across a surprising result.

Brazil Bond Sale´s Term Sheet

These are the basic terms for the sale of 10-year debt by Brazil.
  • Issuer: Federative Republic of Brazil
  • Expected ratings: Ba1 / BBB- / BBB- (Stable Outlook)
  • Type of debt: Senior Fixed Rate Global Notes -- SEC Registered
  • Size: $1 billion
  • Maturity: Jan. 15, 2019
  • Pricing: Today (reopening possible in Asia)
  • Price guidance: 3.75 points above yield for Nov. 2018 Treasury bill
  • Bookrunners: Goldman Sachs & Co.; Merrill Lynch & Co.

Brazil to Sell Ten-Year Bonds. Why?

The Brazilian National Treasury announced a few minutes ago that it had given a mandate to banks (it doesn't mention them) to sell dollar-denominated debt maturing in 2019. The sale will be aimed at investors in the U.S. and Europe, and it might be tapped by Asian investors tomorrow when their markets open again. We will go back to you with further details on the issue.

The question left is, why a country with such abundant dollar reserves and an apparently-huge cash cushion wants to sell debt at this very moment? This decision stems from an apparent-too recovery in risk-taking (read the post we just moved below.) But, do you have to anticipate this recovery by going to the market in such a narrow window of opportunity and agree to pay high coupons to lure investors?
There is another aspect we ought to take into account. Finance Minister Guido Mantega (photo, left), whose crazy idea of creating a sovereign wealth fund for Brazil has angered congress leaders and economists around the country, may be taking a chance to sell the debt to finance the SWF. Remember that President Lula (at the behest of Mantega probably) last week circumvented a restriction imposed by Congress on the financing of it, ordering the sale of local debt to fund the SWF. Mantega might be anticipating the defeat of such initiative in Congress and rushing to obtain money for the fund. Spreading Brazil's wealth by taking in on more debt ... this is a bizarre world these days ...

Inflows Into Latin American Equities May Be Set to Improve

EFPR Global (a Boston-based company that tracks investor money flows into emerging market economies) said that emerging-market equity funds began to post modest outflows along the month of December. About $4 billion were poured into emerging market stock funds -- the best week for inflows in that category since at least 2006, according to Dresdner Kleinwort analysts. Good news!!!! The same happened to bond funds, which experienced good inflows last month. Yet, there is, according to EFPR, one interesting development taking place in Latin America: investors began in October to switch their country weights, resulting in reallocation and therefore bigger exposure to Colombia, Brazil, Mexico at the expense of Argentina, Ecuador and Venezuela.

Brazil Industrial Output Plunges: Let´s Check the Numbers

The Brazilian statistics agency today said that industrial output shrank for a second month in November. The numbers look rather worrisome: production of two in every three manufactured goods fell last month; the output drop, on a year-on-year monthly basis, of 6.2 percent was the steepest since 2001; the 5.2 percent decline in the month-on-month seasonally adjusted indicator was the worst since 1995. Terrible.

We haven't obviously seen the impact of the stimuli implemented by the Lula administration (which began late in October and mainly consists of measures to ease the allocation of credit for manufacturers.) In the same token, the industrial production numbers somehow reflect the terrifying results affecting Brazil's trade balance -- exports of manufactured goods are taking the toll of the global recession. Imports from the U.S., Brazil's second-biggest trade partner, jumped 35 percent last year, compared with an mere increase in exports of 8 percent.

Brazil’s growth downturn story probably will be worse than most observers expect. According to the agency, 22 out of the 27 sub sectors surveyed showed declines. The agency measured the intensity of the downturn in October and November, -- an 8 percent drop in manufacturing output, -- showing how brusque the scenario is changing for companies. We had published in this blog excerpts of a report by Morgan Stanley in which they were seriously considering such a scenario for Brazil, that is, a violent economic deceleration taking growth close to zero from about 7 percent in a space of two quarters. Those who still believe that Brazil will escape recession are overly optimistic.

This also goes to the nation's policymakers, who are betting on strong counter-cyclical action to prevent the economy skidding into recession. Contrary to what many specialists believe and preach, Brazil is running down of the ammo necessary to avert a profound slowdown -- it lacks of the necessary ability and space to boost fiscal spending without incurring into debt financing, and the little impact on confidence that lax monetary policy will have. The next numbers that we should pay attention to is the numbers in the labor markets. A bigger-than-expected spike in urban unemployment in the last quarter of 2008 will ring the warning bells -- and may force Lula to think of new tools that help him avoid the inevitable.

(Note: don't forget that Lula is set to announce a series of new anti-crisis measures by Jan. 20. We will try to find out what they are all about ahead of the announcement for you, dear readers.)