In 2002, the market for syndicated loans in Brazil was moribund. Deal sizes were pitifully low and shrinking. Last October, Companhia Vale do Rio Doce (CVRD) arranged a two-year syndicated loan to raise $14.6bn for an acquisition and other large Brazilian firms are starting to use syndicated loans as part of a strategy to cheapen debt and lengthen tenors on a massive scale.
Five years ago, syndicated deals in Brazil raised on average $30m-$80m. Deals in 2002 totalled just over $12bn. International banks were almost completely absent from the market and the few participants that had stayed in were very cautious: they would only arrange syndications on a best-efforts basis when the deal was backed, typically with exports. Almost all such transactions ended up as club deals of just two or three banks.
The CVRD deal saw 37 banks from the US, Canada, Brazil, the UK, continental Europe, Asia and Australia vying to lend money. The commodities company had the luxury of turning down close to $20bn in a deal that, partly funded at Libor plus 40 basis points, worked out cheaper than tapping bond markets. Last year saw some $36bn in deals completed.
João Roberto G Teixeira, executive vice-president at ABN AMRO, the lead bank in the CVRD deal, sees this as a historic moment. “Since the Portuguese first landed in Brazil, capital has been a scarce commodity here. This premium for the cost of capital has traditionally put Brazilian companies at a severe disadvantage, a disadvantage that is now being erased.” He sees the market continuing to grow at a fast pace.
“We are very happy with the bridge loan and with its take out and confident that we will outperform our goals in terms of average debt maturity – one of the key points of our strategy is to minimise refinancing risks – and cost of debt reduction,” CVRD said in a written statement prepared for The Banker. The cost of Libor plus 40bp for the first year and Libor plus 60bp for the second year is lower than the average cost of CVRD’s debt. “We are also confident that we will manage to reduce significantly our debt leverage over the next couple of years. Even under conservative assumptions, our free cash flow projections suggest that we will meet this goal.”
By late December, the company had paid down 84% of the syndicated loan through a diversified range of instruments including debentures and bonds.
If the door was ajar before, CVRD’s ground-breaking syndicated deal has thrown it wide open. “We’re seeing Brazilian companies leverage up, often for the first time. It’s a revolutionary move and one that is changing the face of strategic transactions in the country,” says Eduardo Centola, New York-based co-head of Latin American investment banking at Goldman Sachs. Goldman is adviser to Rio de Janeiro-based steelmaker CSN in its bid to buy Anglo-Dutch steel company Corus in a deal that has seen the firm duel with India’s Tata Steel.
“CSN is using highly leveraged non-recourse lending that would see Corus assume most of the debt. These techniques are pushing the boundaries of Brazilian deals,” says Mr Centola. In a bidding war between the two emerging-market giants, CSN trumped an original bid by Tata Steel to buy Corus only to see Tata sweeten its offer and outbid the Brazilian firm in December. Corus was expected to announce a decision on January 30.
The use of loans to make acquisitions is set to continue and grow. That said, bankers emphasise this will be relatively low compared with the number of loans being used to refinance debt, pushing out tenors and lowering rates. With a volatile background marked by hyperinflation in the 1990s, debt has remained an expensive commodity in the country. For the first time, Brazilian companies are using syndicated loans as part of a toolbox to create more stable, flexible debt profiles.
Efficiency gains
The opportunistic use of both debt and loans is helping cheapen debt and lengthen tenors. “The opening of the capital markets in Brazil has led many companies to study their balance sheet and see where they might introduce efficiencies in the ways that they fund themselves,” says Mr Centola.
Oil company Petrobras has exploited these more favourable conditions to cheapen its cost of funding. “Syndicated lending is an important market for us and we are always looking at opportunities,” says Almir Barbassa, chief financial officer at Petrobras. “We used it to finance one of our platforms, P-53, using a $600m syndicated loan with 16 banks to finance construction. The reason we took it out was that three-year funding was cheaper than 10-year bond market financing. We wanted to choose the best option and keep our costs down.”
Awaiting maturity
It makes sense to use short-term debt, he explains, as the firm expects debt to become cheaper for Brazilian companies. The firm will re-evaluate markets when the loan matures. “We will decide at the end of that period how to refinance the loan depending on market conditions.” The firm has $12bn in debt to rollover through 2011.
Embraer fits into this category too. The São José dos Campos-based jet company arranged a syndicated five-year stand-by facility in August through BNP Paribas. The two-tranche deal was oversubscribed and the company was able to up the size by $100m-$500m. Antonio Luiz Pizarro Manso, executive vice-president and chief financial officer at Embraer, explains why the company wanted the facility. “This gives us enormous flexibility. We have access to this untapped line of credit. And that credit was arranged cheaply.” The $250m revolving credit facility was arranged at Libor plus 60bp. The stand-by credit may be used to refinance maturing debt and “it has allowed us to improve our short-term and long-term debt profile”, he notes.
In November, the firm followed up the loan with a bond deal that was 10 times over-subscribed. “It was cheaper than financing available from the [government] and gives us a useful benchmark for our debt in the event that we want to return to the market,” he notes.
To some extent, companies have used loans to avoid choppy bond market conditions. The uncertain direction of US rates spooked the bond market earlier in the year, although the markets seem more settled for now, says ABN AMRO’s Mr Teixeira.
Loans often work out more cheaply than bonds as the floating rate loan market has not suffered from the volatility associated with the bond markets, he says.
The syndicated market has become so buoyant that a secondary market is starting to develop, as banks seek to allocate capital more efficiently and to increase the flow of capital.
The renewed activity has seen investment banks rush into the debt advisory business, which offers rich pickings for loans and subsequent capital markets deals. They are not the only ones. Boutiques and accountancy firms are circling too. KPMG recently set up a division to advise companies on debt restructuring. M&A and wealth management firm Arsenal Investimentos is setting up a debt restructuring business too, according to José Eduardo de Lacerda Soares, a partner at Arsenal and a former M&A head at Credit Suisse.
The new business will target medium-sized companies, which remain relatively under-banked, and is currently hiring staff to get the operation off the ground.
“Most investment banks are focused on the very lucrative initial public offering market and the very large companies. We’re exploiting the niche that’s left to serve mid-sized companies,” says Mr Lacerda.
Despite the boom, there are bottlenecks. The largest restriction is company ratings. There are only nine investment grade companies in Brazil and just when the government will gain an investment grade rating is a cause of heated debate. Bankers like to put forward 2008 or even this year as the most likely, but David Beers, managing director at Standard & Poor’s, while not ruling this out, notes that the country’s snail-like economic growth, estimated at 2.9% this year, and the long period associated with the transition to a BBB rating, more typically five years, count against that possibility.
Investment grade companies, which include Embraer, CVRD and Petrobras, emphasise the importance of the rating. “The main lesson that can be learned from the financing of the acquisition is the high value of the investment grade rating. It allowed us to have full access to global financial markets and the availability of several sources of funds at reasonable conditions,” says CVRD.
Even those companies eligible for them can be resistant to syndicated loans, says Paulo César Souza, head of client relations at Société Générale in São Paulo. The requirements include bulky documentation and even road shows for a product that is not seen as adding value through profile enhancement. That leaves some companies preferring to negotiate a bi-lateral deal or series of deals. “Companies see that this offers them more bargaining power and control as well as clean terms and conditions,” says Mr Souza. “It can also work out to be cheaper.”
Food company Sadia’s failed attempt to wrest rival Perdigão was slated to be funded through a $1.28bn bridge loan with ABN AMRO. The firm avoided looking for a syndication. And companies such as CVRD and CSN used syndications sparingly before their recent deals, says Mr Souza.
Looming volatility
Finally, as international banks pour in to the syndicated market with large balance sheets and the ability to capitalise on syndicated loan deals with other capital market transactions, the resultant squeeze on pricing has made other banks, especially local ones, wary of exposure to a market with thin margins. And above all the excitement lies that perennial difficulty of judging this economic cycle, particularly in a country with such a history of volatility.
Brazil is currently blessed with three supports: huge global liquidity chasing yield, a strong and long commodity cycle and a period of economic and political stability. But how long can this scenario last? Many see the peak of the commodity cycle in sight. With commodities accounting for more than 90% of last year’s syndicated loan volume by dollar value that would spell a very different climate for Brazilian markets.
