By Paulo Trevisani and Jeffrey T. Lewis
Foreign investors are flocking to the relatively high yields offered by big Brazilian corporations that are issuing debt to shore up their balance sheets in the midst of the coronavirus pandemic.
The Brazilian Financial and Capital Markets Association said local corporations had seven dollar-denominated bond issues in July, totaling $3.7 billion, an increase of 48% from a year earlier. That compares with just two issues in June and none in April or May when the pandemic stalled business around the world.
Despite that lull, Brazilian corporations have raised $18.5 billion from foreign bond investors this year through July, up 27% from the same period last year. In local currency, the increase was 56%.
State-controlled oil giant Petróleo Brasileiro SA, or Petrobras, iron-mining behemoth Vale SA and petrochemical giant Braskem SA are among those that issued bonds in June and July. The companies say investors like their debt because it pays better than developed-world rivals without too much added risk.
"The world is living with interest rates that are too low," said Andrea Marques de Almeida, chief financial officer of Petrobras. "The opportunity to buy [high-yield] fixed income from a company with solid fundamentals" attracts them, she said.
In June, Petrobras sold two series of bonds totaling $3.25 billion, some maturing in 2031 with a 5.6% coupon, while bonds maturing in 2050 pay 6.75% a year.
One fund manager said a Brazilian company's debt can pay as much as 2 percentage points over an equally risky U.S. or European counterpart.
"Brazilian corporates are underpriced," said Tim Jagger, head of emerging-markets debt at Columbia Threadneedle Investments. "They are trading at excessive premiums relatively to the sovereign [debt] given their history, with a very, very similar likelihood of default."
Central banks around the world have cut their lending rates to mitigate economic damage from Covid-19. Discounting inflation, interest rates are negative in 28 of 40 major economies, including the U.S., Brazil and most European countries, according to São Paulo-based brokerage Infinity Asset.
In this low-return environment, Brazilian corporations stand out because they pay higher yields, since the country's government debt is rated as speculative. But some investors say they sense less risk of default than in other emerging markets. Brazilian leaders have for years tried to deflate ballooning sovereign-debt levels, an effort interrupted by pandemic stimulus spending that investors hope will resume eventually.
While Brazil's government debt was 85.5% of gross domestic product in June, according to central-bank data, the International Monetary Fund says the country's corporate debt is equivalent to 42% of GDP, a level similar to Russia's and India's. It is below China's at 153.6% and the U.S. at 74.5%.
Adding to the appeal, Brazilian corporate-debt issuers come from various sectors, including energy, mining, food supplies, retail and others. That allows investors to diversify without the need to consider different sovereign risks, a rarity among emerging markets, says Atul Bhatia, fixed-income portfolio strategist at RBC Wealth Management.
"When you look for yields, [Brazil] is the country that draws your eyes first," Mr. Bhatia said.
Abdelak Adjriou, a portfolio manager at American Century Investments who manages $2 billion overall, including $5 million in Brazilian corporate debt, says he likes exporters, which tend to profit from local-currency weakness and from the coronavirus recovery in countries such as China. The Brazilian real has lost about a quarter of its value against the dollar this year, making its products more competitive abroad and softening a coronavirus-driven economic recession.
"It's the first time [Brazil] heads into a crisis where rates are low, the currency devalues and there is no threat of inflation," he said.
To be sure, Covid-19 has claimed more than 100,000 lives in the South American country, a death toll second only to the U.S.
The economic impact of the pandemic was among the main reasons rating firms downgraded the debt of companies such as Braskem. A frequent debt issuer, Braskem still managed to borrow from foreigners last month.
Braskem issued $600 million in debt that matures in 2081 and pays 8.5%. Demand for the bond was five times higher than the amount offered, Chief Financial Officer Pedro Freitas said, adding that the company is considering additional debt issuance soon.
"We had just lost investment grade; it was a sensitive moment," Mr. Freitas said. "But we felt that investors are used to Braskem."
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