Credit Suisse's co-head of investment banking in Brazil, José Olympio Pereira, discusses the withdrawal of Brasil Travel's anticipated initial public offering and the state of the country's equity capital market, which has not seen a deal for more than six months.

Brazil’s equity capital market has been struggling to reopen in 2012, following a disappointing end to 2011. The year closed with issuances amounting to just 22% of the total value of 2010’s and with no initial public offerings (IPOs) in the final five months of the year. It was expected that Brasil Travel's planned IPO would reopen the market in February 2012, but after much anticipation the listing had to be withdrawn. 

The Brazilian tour company is made up of a number of Brazilian travel agencies, a structure that was said to deter potential investors. Credit Suisse worked on the deal, and the bank’s co-head of investment banking in Brazil, José Olympio Pereira, says that the withdrawal of the issue was just a matter of bad timing.

“Brasil Travel was an example of how selective the market is,” he says. “In spite of a very positive initial reaction which made us launch the deal, when time came for investors to put the orders in, we found that they were more sceptical, more sensitive that we had originally seen. Brasil Travel is a more risky story: it is a company that is going to be formed by the consolidation of other companies.”

Showing caution

It might have been risky strategy to bring a deal of this kind to a sensitive market, but Mr Pereira says that Brasil Travel's structure was not dissimilar from that of other companies that the bank had worked with in the past. In 2007, the bank helped Brasil Brokers become the first company with this joint-ownership structure to launch an IPO. “It was extremely successful at the time, whoever bought it made money,” says Mr Pereira.

This deal was followed by IPOs from Brasil Insurance and Brazil Pharma. But these success stories did not help Brasil Travel. “It just shows that investors at this point are a bit more cautious about what kind of stories they are willing to invest in and that they want more established, existing companies,” says Mr Pereira.

In the past, Credit Suisse was one of the top bookrunners in the Brazilian equity capital market, according to league tables published by data provider Dealogic. But in 2008 it began losing ground to local players. In 2011 it was the fourth most active in the country, behind locally owned banks Itaú BBA, BTG Pactual and Banco Bradesco BBI. In the debt capital markets, competition has traditionally been tougher, with large corporate banks leveraging their relationship with clients and securing fixed income deals too.

Investors at this point are a bit more cautious about what kind of stories they are willing to invest in and that they want more established, existing companies

José Olympio Pereira

“What we have is that lots of banks are competing on credit,” says Mr Pereira. “Particularly the Brazilian banks, [they] have an edge as they are big creditors to corporates.”

Leveraging assets

So what is Credit Suisse’s growth strategy and how will it continue to compete? “On the basis of service,” says Mr Pereira. “We sell brains. We sell solutions, market knowledge, executions. And we do credit as well. Whenever someone needs a loan in a complex situation, with a fast decision process, they come to us. We generate between $2bn and $3bn a year of credit.

“Our biggest asset is the trust we have with Brazil’s most important corporate groups. If they need a short-term loan, they are not going to call us, [but] if they need to raise money for a project and want to find out how to best do it, if they want to explore their capital structure, they will typically call us and they will hear what we have to say.”

Most debt issuance for large clients has been placed on international capital markets, as the real-denominated market is still in its infancy and international rates are more appealing. The local market is improving, however, with the number of rapid interest rate cuts by Brazil’s central bank, which brought its overnight interest rate, Selic, down to 9.75% in March 2012. Credit Suisse believes that this rate will decrease to 9% by the end of 2012, encouraging corporates to issue in reais and investors to trade their securities, rather than hold them until maturity and benefit from the previously sky-high yields.

“The change in the level of interest rates will be a big booster for the development of the local debenture market for non-investment grade credit,” says Mr Pereira. “In parallel, this will create a big opportunity for us on the asset management side. People who are used to investing [in Brazil] and getting over 10% yield a year, they will get 8.5% or 8% if this goes on for another year or so. [Investors] will seek yield.”

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