As Brazil witnesses a long-awaited drop in interest rates and slowdown of inflation, Bradesco BBI’s investment banking chief tells Danielle Myles why the country is poised for recovery.

Leandro Miranda

In the past few years, Brazil has endured one of the worst recessions in the country's history. Once a darling of the emerging markets, Latin America’s largest economy is now better known for circa-14% interest rates, high single-digits inflation and a corruption scandal that led to the impeachment of former president Dilma Rousseff.

But developments in October suggest that Brazil might be on the cusp of a rebound. Over the course of a month, the central bank reduced interest rates for the first time in four years; inflation slowed for the first time in seven years; the country’s major stock market index, Ibovespa, hit a four-and-a-half year high (though it dropped in the days following the US election); and the real continued its steady rise against the dollar.

Pro-business president Michel Temer and his new, well-regarded economics team further boost the country's credibility.  

Bradesco BBI investment banking chief Leandro Miranda is just one of the country’s leading financial figures who is convinced a reversal of fortune is imminent.

“Brazil has reached an inflection point, and as gross domestic product has shrunk so much in previous years, once it gets get back on track the recovery will occur very quickly,” he says. “We don’t need infrastructure investment for that, we just need working capital and business owners to have faith in the recovery.”

The deal-making cycle

Boardroom confidence, however, usually comes at the tail end of an economic recovery. While lower interest rates often kick-start consumption, followed by production and then employment, business owners and chief executives – who are most exposed to downturns – need solid proof that markets have improved before they increase capital expenditure and commit to deals.

Strong trading on the BM&FBovespa stock exchange shows there is plenty of liquidity in the country, and Mr Miranda notes Brazil’s business trust indices have improved each month since February 2016. But boardrooms still lack confidence in the economy as a whole. In the meantime, it is possible to speculate which asset classes will lead the way.

Bond issuance will pick up as interest rates continue to fall. At the time of writing, Bradesco BBI economists are forecasting a cut of 50 basis points (bps) at the central bank’s November 30 meeting, and another 50bps to 75bps cut in January. They expect rates to reach 10.5% by the end of 2017. Mr Miranda says the stabilising Brazilian real-US dollar exchange rate means currency swaps will become cheaper, which will further encourage international debt sales.

The most promising asset class could be equity capital markets (ECM). Most local debt is floating-rate, meaning coupons and interest expenses will drop alongside interest rates, while higher production and consumption will lead to improved profits. That is an excellent scenario for existing and prospective shareholders.

“Equity-linked products will be a must in this new environment,” says Mr Miranda. “There hasn’t yet been too much talk about this, but we expect strong issuance of hybrids, exchangeables, equity itself and preferred shares.”

IPO hunger

Investors are particularly eager for new listings and follow-on offerings, and Mr Miranda expects several initial public offerings in 2017. He believes the government will increase taxes, which will generate demand for low-tax and tax-free instruments.

This is an area in which Bradesco BBI is a pioneer. In 2015 it created two tax-exempt structures designed to appeal to retail investors: a new type of infrastructure debenture for the world’s biggest iron ore producer, Vale, and a securitisation structure for food company BRF backed by receivables from foreign subsidiaries.

Mergers and acquisitions (M&As) have remained relatively buoyant thanks to strategic investors searching for prized and underpriced assets. According to Dealogic, as of November 7, year-to-date volumes were $37.09bn – up from $27.8bn over the same period in 2015.

Mr Miranda expects deal flow to boom next year though, as more private equity firms enter the fray. Many completed fundraising rounds in 2015 and as Brazil’s interest rates decline, they will be more willing to increase the leverage of their targets.

“They will be able to pay higher prices and contend with strategic investors. So in contrast to what we have seen this year, we should have more competition between strategic buyers and private equity firms,” says Mr Miranda.

Onwards and upwards

This bodes well for Bradesco BBI, which tops league tables for Brazilian M&A. It also leads in local debt capital markets (DCM) and international DCM (ex state-owned entities). The bank is focused on increasing its share of ECM – for which it places third after BTG Pactual and Itaú BBA – particularly given the strong equity issuance expected next year.

This target has been boosted by parent Banco Bradesco’s $5.2bn acquisition of HSBC’s Brazilian operations earlier in 2016. Despite being a retail-oriented transaction, it enhances BBI’s capabilities in ECM trading, sales and research along with its other investment banking divisions.    

“The team that came from HSBC is very young, well educated, full of energy and excited to join Bradesco BBI,” says Mr Miranda. “The acquisition took 11 months and during that time we couldn’t hire anyone, but also increased our market share. So by the time they arrived, we really did need them. It’s been a perfect fit.”

As the dominant market in Latin America, BBI is more focused on Brazil than elsewhere in the region although it expects to increase its presence in Argentina, Chile, Peru, Colombia and Mexico as clients expand across borders. It has a firmer strategy for the US, though, becoming the only Latin American bank to act as bookrunner on US debt issuances.

This began with Ford’s $1.04bn asset-backed securities sale in May 2014, for which BBI was originally brought on as a co-manager. When Ford realised many investors placing orders had been referred by BBI, it made the bank a bookrunner as well. Since then, BBI has been bookrunner for $2bn of notes issued by General Motors Financial in September 2014 and Alcoa’s $500m bond offering in September this year.  

To issuers such as these, BBI has a convincing case. Most of its Brazilian clients have similar credit ratings (BB and BBB), so it has a strong international distribution network that complements the US banks’ focus on big domestic investors. BBI helps these issuers diversify their sources of funding and can be particularly useful to those with local operations.

“These companies have businesses in Brazil, and we are able to explain their strategy in the country and attract dozens of global investors that the other bookrunners did not have a relationship with,” says Mr Miranda. He adds this is a win-win situation, helping the bank’s buy-side clients and US issuers. It also helps its own balance sheet, given fees from these deals are higher than the regional standard.

Collaborate and co-operate

In its home market, a pillar of Bradesco BBI’s strategy is to harness its unrivalled understanding of Brazil’s economy and local clients’ goals, concerns and knowledge. This is reinforced by the stability at the top of its fixed-income, ECM, M&A and industry groups.

“We have had pretty much the same leadership team since 2011,” says Mr Miranda. “It has a history and good relationship with clients, which means it has significant experience as well as an ongoing dialogue.” 

He strives for BBI to be considered a trusted adviser, which means services are not provided on a deal-by-deal basis. “I’m convinced that comprehensive financial solutions – including M&A, equity and international and local debt – reduce companies’ financial risk and enhance shareholder value. So instead of discussing with clients one transaction at a time, we like to give a holistic view based on the feedback of different teams. This is unique, a type of consultancy within investment banking,” says Mr Miranda.

In practice, this means the views of research analysts, economists and bankers from coverage, markets and various product groups are sought before a single or set of transactions is recommended. To maintain confidentiality and avoid conflicts of interest, only a limited number of them are privy to the deals ultimately executed.

The process is consistent with the egalitarian culture fostered at BBI. “I believe a genius will never beat a team of very good and experienced professionals on an ongoing basis,” says Mr Miranda. “This participatory style of management is something I hope I bring to Bradesco BBI as a whole. My role is to create the best possible environment for every member of our team to be able to provide their opinion.”

Doubtless his career encouraged this open-mindedness. Before joining BBI in 2011, Mr Miranda held a range of roles in retail and wholesale banking, and was a partner in investment banks of various sizes. He sees immense value in being part of the Banco Bradesco conglomerate and in the ideas that bankers of all levels can contribute to the organisation. Under leadership such as this, Bradesco BBI seems well positioned to support Brazil on its economic recovery.

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