Brazilian IPO market slows as coronavirus spreads

Brazilian IPO market slows as coronavirus spreads

IPO Equity Capital Markets Corporate & Sovereign Strategy Brazil Coronavirus

Predictions of a record-breaking year for initial public offerings (IPOs) in Brazil in 2020 now seem a distant memory for many investors as growing financial volatility caused by the spread of the coronavirus COVID-19 means barely a day goes by without a company either postponing or cancelling a share sale.

Federal savings bank Caixa Econômica Federal kicked off the run with an announcement on March 12 that it had cancelled an estimated BRL15 billion ($2.94 billion) IPO of its insurance division, Caixa Seguridade. That same day, the Ibovespa index on the B3 stock exchange in São Paulo plunged 14.8%. The day before, it had fallen 7.64%.

On February 21, when Caixa Seguridade filed for the IPO, the Ibovespa closed at 113,681 points. On Wednesday, as the World Health Organization (WHO) confirmed 291 cases of COVID-19 in Brazil, it closed at 66,895 points, down 10.4% on the day.

As the stock market kept falling, triggering a circuit breaker six times in one week, three other prospective issuers either postponed or called off their planned IPOs. BV, a banking joint venture between Banco do Brasil and Votorantim Finanças, scrapped plans for a BRL5 billion IPO on Monday, while logistics company JSL suspended the expected spin-off of its truck rental subsidiary Vamos on Tuesday and Hidrovias do Brasil put off a share sale on Wednesday.

All four companies cited the deteriorating market conditions as the reason for shelving their offerings.

Rather than a cause for panic, the sharp losses in the stock market could be seen more as a "readjustment" to reflect the impact of measures taken to contain the coronavirus, such as travel restrictions and self-isolation, said an analyst at an investment firm.  

With several shares priced below their fair price, even when the negative impacts of the epidemic and the quarantines are factored in, there are opportunities for investors willing to take on more risk, he said.   

Nevertheless, the current volatility is a far cry from early February, when homebuilder Mitre Realty and web services company Locaweb priced IPOs at the top of the targeted price range and raised more than BRL2.5 billion combined.

Mitre, which issued its shares for BRL19.30 in the IPO, has seen its share prices tumble to BRL9.95. Locaweb, meanwhile, made its debut at BRL17.25, but its shares have since declined to BRL12.00.

"Looking at the pipeline for IPOs, it is obvious that any IPO that hasn't been called is under discussion, not only in terms of price, but also timelines. Most of the deals will be postponed, some of the deals will be re-priced and others may be cancelled, but generally clients are re-discussing deals," said Thiago Giantomassi, a capital markets partner at the local law firm Demarest Advogados.

On Monday, Brazil's securities regulator CVM introduced rule changes to help companies mitigate the impact of coronavirus on their stock offerings by extending the maximum interruption periods that can be requested to 180 days.

"The measures are necessary since the current economic scenario, impacted by the worldwide spread of the coronavirus, may have direct consequences on public offerings of securities underway in Brazil," the CVM said in a press release.

CVM lists 18 IPOs under analysis since January 31. Potential issuers include technology companies, retailers, real estate managers and construction companies.

Earlier this month, homebuilder Alphaville Urbanismo and meatpacker Prima Foods filed IPO documents on the heels of registrations by homebuilder You Inc and construction company Cury Construtora e Incorporadora.

Filing for an IPO in a time of high market volatility could even hold a strategic advantage for some issuers depending on the company's lifecycle and the sector in which it operates, Giantomassi said.

"We are still working [with clients] to file registration requests with the regulator, not necessarily to close in June or July... but we want to expedite things and have things ready because once the sky is clear, we can enjoy a market without any competitors," he said.

There is evidence of companies factoring the coronavirus risk into their offerings. Six of the companies that registered with the CVM mention the risk of COVID-19 on the value of their offering in their preliminary prospectuses.  

Waste management company Grupo Ambipar is more explicit, referring to the role of its emergency response division in "supporting the containment of coronavirus" with the armed forces in the United Kingdom and ongoing work with the emergency services and public authorities in Brazil.

For most issuers, the decision to pursue an IPO when the full extent of the crisis is still not known will likely come to be seen as bad judgment, said Pedro Drummond, a partner at Drummond Advisors, which offers IPO planning among its services.

"It will be no surprise for me if the IPOs become defunct. I have been through the 2008 crisis and at that moment I was deeply involved in IPOs and everything collapsed... The stock market is naturally volatile and the IPOs are usually riskier securities given that there is no track record," he said.

Rather than trying to conduct an IPO during a period of high volatility, companies should instead focus on protecting their bottom line and their credit metrics because "sooner or later there will be another window to make the offering," Drummond said.

Several companies are already taking steps to ensure they have sufficient liquidity by drawing down revolving credit lines or inquiring about new lines of credit. In the last fortnight, Boeing and ABInBev were both reported to be considering drawing down credit lines to preserve cash in the fact of the flight restrictions and containment policies.

“Most of the companies are thinking how to face the storm first with a wealth of cash and figure out what to do... Cash is the key word in a crisis," Giantomassi said.