Dec. 13 (Bloomberg) — Rio Bravo Investimentos is so convinced Brazilian corporate debt markets will take off, it’s willing to employ a dedicated trader who completed just three transactions last month.”It’s ridiculous,” said Chief Investment Officer Paulo Bilyk, who started Rio Bravo with former central bank President Gustavo Franco in 2000, during a Dec. 4 interview at the investment firm’s office in Sao Paulo. “But why do we have this? Because I’m sure it’s going to come. We want to be a major player in the private credit markets.”
In a country where local investors have traditionally held on to corporate bonds until maturity, the 25-year-old trader, Pedro Galvao, has yet to execute any trades in December. In the U.S., more than $10 billion of investment-grade company debt changes hands in a single day.
Bilyk, a former partner of Banco Pactual SA whose firm oversees $3.5 billion of Brazilian equities and fixed-income securities, says he’s confident Rio Bravo can profit from buying and selling domestic corporate bonds as the market expands.
Investors are lured by yields such as the 4.5 percent on BR Properties SA’s inflation-linked bonds, while U.S. corporate bonds yield on average 3.58 percent. Cetip SA-Mercados Organizados estimates that trading volume of corporate debt in Brazil rose 70 percent this year through Dec. 10 to 129 billion reais ($63 billion).
While average daily trading of private obligations was 828 million reais last month, it equals just 9 percent of the average local government debt that changed hands, data from Brazil’s capital markets association, Anbima, show. Trading of U.S. investment-grade corporate bonds was $10.4 billion on Dec.
10, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
One of the biggest obstacles to developing a secondary market is the lack of standardized pricing, said Rio Bravo’s Galvao. The bond prices provided by Anbima don’t capture all securities, leading to widely different quotes from investor to investor, he said.
Galvao said he participates in two conference calls a day held by local brokerages and trades e-mails with other investment shops in his quest for bonds. Because Rio Bravo has a long-term investment strategy, it isn’t looking to speculate on short-term market moves, he said.
Andre Fadul, who left Rio de Janeiro-based Mercatto Investimentos in February to start Arsa Investimentos Ltda. with Sergio Goldenstein, former director of fixed-income at BM&F Bovespa SA, said he managed to build a 12 million reais credit portfolio in two months buying almost exclusively in the secondary market.
“It’s a good sign that you can build a portfolio with a level of diversification that’s very reasonable, very acceptable, and paying modest premiums,” Fadul said in a telephone interview from Rio de Janeiro.
Fadul said he mostly relies on brokerages to buy corporate bonds, and that the large investment banks that underwrite the securities rarely act as market makers.
Brazil’s reductions in the benchmark interest rate since August 2011, the biggest of all Group of 20 nations, are creating demand for corporate bonds as investors seek assets that yield more than government debt, said Alexandre Chaia, who teaches finance at the Insper business school in Sao Paulo.
Policy makers cut the benchmark rate to a record low of 7.25 percent from 12.5 percent in July 2011. Local swap rates on contracts due in January 2014 fell two basis points today to
Yields on inflation-linked government bonds due in 2018 have plunged 262 basis points, or 2.62 percentage points, this year to 2.77 percent. Sao Paulo-based BR Properties’ inflation- linked bonds were originally sold in July at a yield of 5.85 percent.
Secondary trading of local corporate debt “has grown a lot and will keep growing,” Chaia said in a telephone interview.
“These credit funds need to buy paper to back their investments. Corporate bonds are replacing government bonds.”
Local corporate bonds outstanding increased 26 percent in the 12-month period through November to 489 billion reais, according to Anbima.
While the market is expanding, the large share of government debt in fund portfolios remains a barrier to the growth of corporate bond trading, said Leandro Miranda, the head of fixed-income at Bradesco BBI.
“The government is the most fierce competitor companies have,” he said in an interview at Bradesco’s office in Sao Paulo. “You still have a huge part of the investors and bank portfolios investing in national Treasury securities.”
Outstanding federal debt rose 7.6 percent to 1.9 trillion reais in October 2012, from 1.8 trillion reais a year ago, according to Brazil’s Treasury.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell two basis points to 145 basis points at 2:12 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global Index.
The cost of protecting Brazilian bonds against default for five years fell one basis point to 107 basis points, prices compiled by Bloomberg show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to debt accords.
The real declined 0.6 percent to 2.0844 per dollar.
The government is counting on the creation of new investment funds dedicated to buying local bonds tied to infrastructure projects to help increase trading volume and lure foreign investors, said Pablo Fonseca Pereira dos Santos, deputy secretary of economic policy at the Finance Ministry.
Infrastructure bond funds benefit from tax exemptions.
“It’s the problem of the chicken and the egg,” he said by telephone from Brasilia. “The liquidity is a reflection of low issuance. So as there are new sales, volume will increase, and liquidity ends up increasing as well.”
Fonte: Bloomberg – 13/12/2012
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