Thursday, 22 January 2009

Poland Sells 1.5 Billion Euros in Five-Year Bonds

Poland became the latest emerging-market nation to offer bonds this month. Here are the details of the transaction:

- ISSUER: REPUBLIC OF POLAND
- RATINGS: A2/A-/A-
- BOOKRUNNERS: CITIGROUP INC. / ING BANK NV /SOCIETE GENERALE
- SIZE: 1 BILLION EUROS
- MATURITY: 3 FEB., 2014
- COUPON: 5.875% ANNUAL (LONG FIRST TO 3 FEB., 2010)

- SPREAD: MID SWAP RATE +300 BPS / DBR 1/14 +363.4 BPS

- REOFFER PRICING: 99.725%

Fitch Downgrades Brazilian Real Estate Companies Cyrela, Gafisa; Outlook on Industry Changed to Negative

Fitch Ratings cut the ratings of several Brazilian homebuilders (including those of No. 1 Cyrela and rival Gafisa) on expectations that real estate developers are bracing for a challenging operating environment and financial pressures in for the next two years. A ''slowing Brazilian economy, limited access to real estate credit, higher cost of credit, weakening of demand and consumer confidence, lower income and higher unemployment rates´´ will negatively impact the industry's fundamentals.

Ratings may be further lowered ''in the case of a prolonged downturn that includes a scarcity of long-term funding sources to finance these once-rapidly growing businesses.´´ One of the issues at question is liquidity: with the ongoing dearth of credit taking place and banks wary of lending and instead seeking to preserve capital, borrowing costs are rising. Refinancing will become more challenging to these companies -- see the examples of the many real estate developers that had to sell out to rivals as they ran out of funding to continue expansion. One of them was MB Engenharia, which was acquired by Brascan Properties in April 2008. Others are moving forward, seeking to raise cash or merge to avert going off: Trisul issued a five-year 200 million local bond last July; Even was pumped 150 million reais in capital injection last September, and; Company was taken over by Brascan Properties. Fitch said in this respect:
''Consolidation of the Brazilian homebuilding sector is a real possibility as the downturn continues. During the second semester of 2008, several ownership changes occurred including the acquisition of Tenda SA by Gafisa, in which Equity International increased its share in Gafisa to 19 percent from 14 percent. Also, the merger of Company and Brascan has already been completed. The 3 billion reais line of credit from BNDES announced in the last quarter of 2008, providing funds for the acquisition of projects of companies under difficulties, should favor market consolidation on behalf of the larger and most established Brazilian homebuilding companies, which is positive for the industry.´´
Fitch also warned of a certain fatigue registered in demand and activity in the industry. It says that ''growth of supply and the willingness to buy new homes observed in the last couple of years has recently decreased.´´ And despite fewer project launches, Ebitda and margins likely will decrease while inventory of unsold homes, offices and warehouses will rise. In the third quarter, homebuilders experienced a decline in the total future sales value of projects launched to 2.9 billion reais from 4.6 billion reais in the second quarter. The writedowns were awful.

Finally, leverage will likely remain under pressure in 2009. Total debt excluding Housing Financial System (SFH) loans compared to the industry's Ebitda (a measure of debt-servicing capacity) was 2.9 times debt in September, compared with 2.3 in June 2008. The increased use of cash to cover ''construction, advertising and operational costs´´ will affect the indicator even more, Fitch said. Liquidity position measured by cash to short term debt dropped to an average of 2.4 by September 2008, versus 3.4 in June.

Ecuador: Perenco Contract to be Terminated by Government After Talks Fail

Yesterday, Ecuador Oil Minister Derlis Palacios announced the government's intention to terminate an operating contract with France's Perenco SA ahead of schedule. The decision puts an end to ongoing negotiations in which Ecuador sought to switch the company to a fee-for-service contract instead of a profit-sharing deal. Perenco was also ordered to reduce production to meet the OPEC-mandated oil cut of almost 70,000 barrels/day.

Brazil Dollar Outflows Slow in First Two Weeks of January. Deterioration Seen in the Financial Portion

Banco Central do Brasil reported net foreign exchange outflows of $2.2 billion in the January 1-16, comprised of $2.56 billion outflows on the financial side and a $369 million trade-related inflow. Outflows in December amounted to a total $6.4 billion -- about three times the mid-January numbers. Unless we witness a marked deterioration in trade or financial figures, the outflows for this month will stay below December's. The decomposition of inflows shows an improvement on the trade front, which rose from a $603 million outflow in the first week of Jan. to a $880 million inflow in the second week. The financial-related front showed, however, outflows widening to $2.2 billion in the second week from an inflow of almost $800 million in the first week of the month. On one hand, the trade numbers reflect a decrease in imports; on the other, the rising financial outflows obeyed to the worsening of international financial conditions.

Regarding the currency, at some point, harsher pressure will be exercised on the real as the capital account portion of the balance of payments deteriorates. Of utmost importance will be the evolution of recent measures announced by BCB President Meirelles to mitigate the lack of foreign currency experienced by companies trying to refinance their liabilities abroad. The refusal of international and local lenders to refinance foreign trade lines to Brazilian companies has sparked uncertainty over the payment of more than $60 billion of corporate debt payments scheduled for this year.

Brazil Markets Rally Following Rate Cut


The Bovespa stock index rose past the 38,500 points, stepping into positive territory for the year, following the yesterday's rate reduction (see graph.) The yield on the zero-coupon bond fell almost 15 basis points to 11.20 percent, signaling a trend for declining interest rates for the next six months or so. Longer tenors showed smaller reductions though. The dollar fell against the real to 2.33 and will likely be testing the 2.3 reais to the dollar along the market session of today, a trader told us. The currency situation is a bit more complicated -- although the real will stage a rally, the monetary policy trend as well as dismal growth projections will limit it. It may remain fluctuating between 2.25 reais and 2.4 reais during the first quarter, says the trader.

Goldman Sachs Believes Significant Portion of Selic Reduction Was Carried Out Last Night

Goldman Sachs Group Inc. analysts Alberto Ramos and Luiz F. Cezario wrote in a short note this morning that the BCB last night ''revealed a preference to front-loaded the rate easing cycle and it communicates so not only by delivering a cut at the top end of the analysts’ forecast but by also mentioning explicitly that the 100 basis point cut constitutes a substantial part of the envisaged policy rate cuts.´´ GS will wait until next week, when the minutes of yesterday's meeting will be unveiled, to reaffirm its stance. In their words, ''the easing cycle might turn out to be a front-loaded one, but not necessarily one that ends up delivering cumulative rate cuts beyond what the market is expecting.´´ This has happened already (Do you remember the easing cycle of 2003-2004, where rates fell less than what most analysts expected?) Unless inflation pressures continue to subside significantly, said the analysts, the Copom is unlikely to deliver similar rate reductions to yesterday's.

Colombia's Planning Deparment is Talking Non-Sense: It Hopes Infrastructure Projects Will Lure Almost $20 Billiion of Private Money

Two lies in as many days. Yesterday the government unveiled plans for infrastructure worth 55 trillion pesos (about $22 billion) for this year (click here for the link.) Where is the money going to come from? Well, the public portion of it from ... yes, more debt. Ecopetrol will invest 12 trillion pesos. The private portion from ... ??? .. can someone tell me?

Reactions to the Selic's 100 Basis Point Cut in Brazil

Estado (click here for link): The largest banks in Brazil will proceed to cut their lending rates following the reduction on the Selic to 12.75 percent. And, for the first time in five years, companies and workers lauded the Copom's decision -- which wasn't unanimous (click here for the link.)

Reuters (click here for link): This is not necessarily linked to yesterday's Selic news, but the cut will help spark a revival in stock and bond offerings in Brazil. Anbid's Alberto Kiraly told Reuters in an interveiw that bond offerings will thrive in 2009 as investors slowly ''regain their appetite for risk and companies become more willing to borrow as benchmark interest rates fall.´´ Anbid reported at the end of last year that issuance of debt and new stock plunged 31 percent last year, ´partly as the result of the global credit crisis. Factors such as a central bank decision to increase reserve requirements on money raised from the sale of bonds issued by leasing companies helped to slow activity in domestic debt capital markets (DCM.)

Folha (click here for link): Unions expected a bigger reduction in the Selic. Clearly, they are trying to win more clout to block plans by industry lobbies to press the government for an ease in labour prerogatives for formal workers. Union leaders wanted to be credited for having pushed the central bank to cut the Selic more than the 0.75 basis points expected by most analysts. Well ...

Short Comment on PDVSA/Petrobras Problems Over the Pernambuco, Brazil Refinery

We have been insisting on the problems facing PDVSA, the Venezuelan state-oil company, because it is not a secret that it is facing serious cash-flow problems. Tumbling prices will likely force it to trim staff (there are rumours that it already shed 5,000 workers this month), rework investment plans, speed up asset sales overseas, and borrow from the government -- because international banks are refusing to extend credit. Dow Jones recently quoted PDVSA Finance Chief Eudomario Carruyo as saying that ''revenue had plummeted by half´´ in the last quarter.

T
he announcement by Petrobras yesterday that it will complete a planned oil refinery in northeast Brazil on its own should it fails to agree on a fuel-supply contract with PDVSA, dear reader, does only ring the warning bells. Bloomberg reported that Petrobras very much wants to build the refinery with PDVSA but ''it will build it on its own if it has to,´´ citing refining director Paulo Roberto da Costa. As we said in recent posts, the major credit events facing PDVSA are 1) payment delays to suppliers, and; 2) the reworking and/or suspension of joint ventures to build refineries in Latin America and Southest Asia. In the case of Brazil's Abreu e Lima refinery, we believe that the Venezuelans were interested in stopping the project by alleging that it was too costly for them or not profitable under the current circumstances.

For Petrobras and PDVSA, the Abreu e Lima refinery is a strategic project. For Petrobras, the refinery would help increase national refining capacity a few years before the Tupi pre-salt layers begin to produce oil massively. Petrobras, also rumoured to be facing cash shortages, is thought as capable of building a refinery on its own. The problem is, with no doubt, the violent correction in prices that is making some investment plans unfeasible.

Cemex has Its Credit Ratings Removed From Investment-Grade by S&P;

Cemex SAB, the biggest cement producer in the hemisphere, yesterday had its credit ratings cut to junk status (BB+ from BBB-) by Standard & Poor's. Its Spain-, Mexico- and U.S.-based subsidiaries were also downgraded. S&P alleged that the deterioration of the economies of those three countries, which together are the source of 75 percent of Cemex's revenue, will hurt the company's debt-servicing ability. Cemex owes more than $16 billion to banks, bondholders and investors.

S&P called Cemex's cash holdings and reserves as ''weak.´´ Despite efforts by Cemex to refinance most of its $6 billion in maturing debt this year, S&P is concerned that relative to cash flow, the maturities calendar is quite heavy. Up to date, more than 60 percent of the company's 2009 obligations are covered; covenants of credit lines were changed to help Cemex stretch out payments. Cemex may be hurt by cement price declines in the U.S., a housing recession in Spain and flagging construction activity in Mexico. During the days of irrational exuberance a few months before the global credit crisis got out of control, Cemex paid more than $14 billion for rival Rinker Group, probably because the company thought it would be able to push through further price hikes. The acquisition drove debt higher. Analysts at Santander and other banks have voiced concern that debt servicing costs may exceed cash flow in the next two years.

EDF Bond Private Placement May Make it Largest Corporate Borrower in EuropeThis Year

Electricite de France SA, known as EDF, is seeking to place among investors five-, ten- and 30-year debt at 400, 400 and 388 basis points more than equivalent Treasury note yields (or bonds with similar maturities) respectively. The size of each tranche sale is yet to be defined. The company intends to use the proceeds of this offering for the repayment of existing borrowings and the partial financing of acquisitions.

Concern that things will get worse in the marketplace as the recession spreads from the Americas to Europe to emerging markets is forcing the largest borrowers to rush bond sales. Smaller companies are getting crowded out from debt capital markets in the meantime. EDF last week sold 2 billion euros of six-year bonds at a yield of 205 basis points more than the benchmark mid-swap rate. So far this year EDF raised about 4 billion euros of debt in total (without including the private placement.)