Brazil bucks bad news to print new benchmark bond

Brazil bucks bad news to print new benchmark bond

Bonds Debt Capital Markets Corporate & Sovereign Strategy Fixed Income Politics Economy & Policy Brazil

The Brazilian government sold $1.5bn in cross-border bonds on Thursday, stepping back from a tentative target of almost $2bn as the arrest of a former president sent the stock market down.

As the bookrunners Bank of America, Bradesco and JPMorgan put the initial price talk on the 10-year notes around 4.95%, the news came out that former President Michel Temer had been arrested on corruption charges.

International investors appeared to shrug off the bad news, at least during the early hours, and the bookrunners received $5.5bn in orders, said a banker who worked on the deal.

Another source on the deal said the heavy orders allowed the bookrunners to tighten the yield on the new notes by 25bp to 4.7%. The buyers received a new issue concession of 5bp, he added.

Brazil's National Treasury said the notes carried a coupon of 4.5% and priced at 98.385 for a spread of 215.8bp over US Treasury notes. 

"It was was a very successful sale with a very strong order book that filled very fast," the second source said. "But the negative news about Temer brought volatility. If we had more stable conditions we would have had a larger trade, north of $1.5bn and close to $2bn."

The B3 stock exchange in São Paulo fell 1.34% and the Brazilian real dropped 0.64% against the dollar on Thursday as some investors feared Temer's arrest could delay long-awaited pension reforms in Brazil. Others, however, did not expect it to cause much damage.

"At some marginal level there will be an impact, but you need to ask yourself whether any Brazilian politician really wasn't on the take," one bond buyer said. "Investors are still overweight on Brazil and underweight on Mexico," he added.

Wellington Moreira Franco, who ran the government's infrastructure concessions program before becoming the energy and mining minister during the Temer administration, was also arrested.

Before Thursday, Brazil's last trip to the cross-border bond market was in January last year, when it added $1.5bn to its 5.625% 2047 bonds. It last sold new 10-year notes in October 2017, pricing a $3bn deal at 235bp over US Treasury notes.

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