Monday, 9 March 2009

Brazil Sales of Stocks, Bonds, Notes and Asset-Backed Securities Dropped 85 Percent in February

Initial public offerings of equity and fixed-income tumbled 85 percent to 3 billion reais in February 2008 from 19.3 billion reais in the same month of 2007, according to Andima. No note or bond sales were carried out in February. No IPOs either. Sales of shares in funds of residential and commercial mortgage-backed securities (RMBS/CMBS known in Brazil as CRIs) and of shares on funds of asset-backed securities (FIDCs in Brazil) dropped 66 percent and 92 percent respectively.

Some improvement is forecast by analysts, provided that risk-taking gains momentum. Oi, the telecom giant created by the acquisition of Brasil Telecom by Telemar, requested shareholder approval for a sale of 3 billion reais in domestic debt. Petrobras was heard sounding out the local markets for a local issue. A total of 713 million reais in local issuances from Anhanguera, Banco Votorantim and ETEO are on the pipeline, according to the Tradable Securities Commission.

Derivative-Related Losses in Brazil Probably Reached $30 Billion. Investors are Wondering Who Will Come Next on the Press Release

Market participants in Brazil told us Friday that the central bank estimated that losses based on the current value of derivative contracts at listed and privately-held companies reached $30 billion last week (some of these people sent e-mails to their customers warning them about this.) According to a story by O Estado de São Paulo (click here for the link), banks are facing almost no or no risk at all -- which is remarkable.

Beware of Bloomberg News story -- it's wrong. What the reporter says makes no sense at all. It should read:

''The value of total losses in outstanding derivative contracts at listed and privately-held companies swelled to $30 billion (72 billion reais) at the end of last week.´´
No me sorprende ...

Many more companies will likely have to file for judicial recovery or bankruptcy to avert running out of cash or defaulting on their derivative-related debts. And again this will help put more pressure on the currency -- following a couple of months of relative stability. We reiterate our call on sectors that are likely to be piling up more of the losses: ethanol and sugar cane producers, food processors, meat packers, soybean crushers ...

Emerging Market Debt Trading Volumes Plunged 33 Percent in Fourth Quarter. Corporate Debt Trading Amost Halved

The Emerging Markets Traders Association (EMTA) published last week its volume survey for the full year. In the fourth quarter, volume totalled $823 billion -- or about $13 billion a day. This number contrasts with $19 billion a day in the same quarter of 2007. Behind this drop, no surprises, the credit crisis seems to be the main culprit. But other aspects should be taken into account: new sales and offerings almost came to a halt: new issuance tumbled to $2.27 billion, from $13.7 billion in the previous quarter. And the third quarter had already been a very weak one. Brazilian sovereign bonds were the most actively traded asset class among emerging market paper with $32 billion changing hands over in the quarter -- bringing the annual total to $193 billion. The Brazil 2040 bond was the single-most actively traded security in the market with a volume of $80 billion for the year, or 41 percent of full sovereign activity for the credit.

Corporates suffered tremendously.
Trading of corporate debt dropped 34.4 percent from the previous quarter. The year-on-year decline was 64.3 percent. Full-year corporate trading totalled $391 billion, compared with $663 billion in 2007.


New sales of corporate debt enjoyed a quick revival at the start of this quarter, with sales by Pemex, Petrobras (which are quasi-sovereign debt but, well, they also are within the corporate bond class) and banks in South Korea. On the contrary, sovereign activity has been quite good (Indonesia, Brazil and Colombia were among the countries that issued new debt this year.) Digicel, the wireless operator that covers part of Central America and the Caribbean, had to trim its offering by $150 million to a total $300 million, with the book expected to close tomorrow and at very disadvantageous terms (please check the posting we moved on Friday night.) The Cemex bond might be put off -- the company may fail in its attempts to refinance billions of dollars of debt (about $4 billion to $6 billion) coming due this year. Activity in this asset class will pick up, if so, slowly, say analysts such as Ann Milne of Deutsche Bank and David Spegel of ING Bank. Risk taking though has shown some signs of improving; but in the short term, more companies will be forced to rework their offerings to better reflect the market moment. Those with the means will pay much more in interest than they did five or six years ago. About $60 billion of corporate bonds and loans have to be refinanced this year in the year (I think the number comes from ING Bank.) About $27 billion have to be refinanced by Brazilian companies alone.

Fitch Says Corporate Downgrades, Defaults Surged in 2008. No Surprises But .. What Will Come Next?

Fitch Ratings downgraded 20 percent of its rated corporate finance issuers last year, up from 8.6 percent in 2007. Contrary to the expectations of the ratings company -- which in April said it didn't expect much downgrading activity despite the downturn in global economic activity, -- actions turned increasingly negative as the credit crisis unfolded and the economic environment worsened.

The trend is worsening quickly and badly.
The speed of credit deterioration was more pronounced than any previously recorded by Fitch. ''The ratio of downgrades to upgrades, which was in negative territory early in the year, moved from 2-to-1 in the first quarter to 13-to-1 in the last quarter,´´ Fitch said in a report. Investment-grade companies saw downgrades jump year-over-year to 19.2 percent from 8.7 percent in 2007. Upgrades dropped to 4.7 percent from 10.5 percent in th
e same period. Speculative-grade issuers (junk rated companies) saw downgrades increasing to 22 percent from 8.2 percent in 2007; upgrades plummeted to 12 percent from 22 percent a year earlier.

Fitch recorded a global corporate issuer default rate of 1.3 percent in 2008, up from 0.11 percent in 2007. In another sign of the times, fallen angels (or those companies that lose their investment-grade ratings) topped rising stars by a margin of nearly 2-to-1.
One thing I remember from that old Fitch study in April was that they expect global defaults to rise to 2 percent or so at some point in 2009 -- we could expect a higher ratio given the quick deterioration in cash reserves, global exports, the plunge in most currencies against the dollar and the very restricted availability of credit. Add to all these the little appetite by banks and investors to refinance existing bonds and loans.

Brazil Will Finally Curb Actions by the MST ... Finally ... Finally ...

Finally, the Workers' Party realised that it was in power -- six years after.

The government is asking the Federal Supreme Court (STF) to reinstate a decree passed in the administration of former President Fernando Henrique Cardoso that helped quell land invasions by the MST by almost 66 percent in 2002. Read this story in O Estado de S. Paulo. Why? Because it can't contain the MST -- which 25th anniversary is simply transforming into more invasions and poverty for the already-battered farming industry in Brazil.

The biggest test for the Luiz Inácio Lula da Silva administration in his first term was posed by the growing unrest of social movements that supported him. But things got out of control, partly because the president and his ruling Workers' Party were too lenient on those groups -- the most prominent of them being the Landless Peasants' Movement (MST.) Here are the consequences of such leniency. We have anticipated growing risk of unrest as the global recession cuts agribusiness revenues, sparks more rural unemployment and deprives farmers of money that would otherwise be funneled to ease demands by the MST and peers.

Will the STF support the government in this one?