Breathing room: sound financials and a stable economy give Brazilian companies access to longer-term financing

Latin Trade, April, 2005 by Paulo Prada

Brazilian companies are enjoying a previously unheard of luxury in the global market for capital: flexibility. In a country where only a handful of alternatives once existed for businesses in need of financing--usually short-term loans with high-interest rates--capital markets are beginning to show a newfound willingness to provide funds in a range of transactions that until now were considered too risky. Banks are lending for longer, corporate bonds are easier to sell, and a flurry of privately-held companies are beginning to explore the possibility of listing on a newly revived Brazilian stock market.

"In terms of options available to companies looking for capital, they continue to grow and grow rapidly," says Michael Schoen, head of Credit Suisse First Boston's division for Latin American debt-capital markets. "There is an increased willingness of the international capital markets to look at a wider range of products and names."

Just ask executives at Odebrecht, one of the country's largest construction and engineering companies. For much of the past decade, the builder spent a hefty portion of its cash flow servicing short-term obligations on bank debt borrowed to finance projects in Brazil and elsewhere in Latin America.

But in 2004 the company noticed a shift in the winds. Investors, it seemed, were willing to lend money to healthy Brazilian companies and under surprisingly attractive conditions. In short order, Odebrecht issued US$150 million worth of five-year bonds to U.S., European and Brazilian investors. That transaction was followed by two subsequent bond sales later in the year.

The result: Odebrecht quickly paid off most of a $200 million debt, all of which was due by year's end. "We were able to replace a burden of short-term bank debt with a long-term loan from bondholders," says Guilardo Figueiredo, Odebrecht's director of investor relations. "It gave us a much more manageable debt load, and that would have been impossible a little over a year ago."

So what's behind these new and improved lending terms? The answer, in short, is investor confidence.

After years of lackluster growth, Brazil's economy last year began to soar. The country's gross domestic product, fueled by a boom in exports and a recovery in domestic demand, in 2004 grew by an estimated 5.2%, the biggest economic expansion in Brazil in a decade. Unemployment, too, began to improve, with the nation's jobless rate expected to close last year at just over 10%, the lowest level since 2002.

In a country where political uncertainty has traditionally been a barrier to many cross-border transactions, the recovery has caused investors once and for all to embrace the administration of President Luiz Inacio Lula da Silva, the former union firebrand whose ascent to Brazil's top office had long been cause for trepidation in global markets. Indeed, halfway through Lula's term, the government's hard line on economic policy--a commitment to reduced government spending, combined with anti-inflationary monetary measures--is its greatest administrative imprint.

At a time when interest rates in more mature capital markets continue to offer tiny returns for would-be lenders, political stability and brightened economic prospects have made Brazil an attractive destination for capital. "There's a lot of liquidity in global capital that is looking for promising emerging markets," says Alberto Kiraly, executive director of investment banking at Morgan Stanley in Sao Paulo. "Given the recovery so far and the commitment by the government to maintaining a sound economic policy, it's a good moment for Brazil to get better access to that capital."

What really helps lure funds toward Brazil is the fact that many of the country's companies are increasingly prosperous. Money, of course, attracts money; lenders and investors smell opportunity.

Consider the opportunity offered by Brazil's cash-rich exporters. When the government devalued Brazil's currency, the real, at the end of the 1990s, it made the country's products more attractive on the world market. That helped spark a boom in which exports more than doubled in five years, from $48 billion in 1999 to $96.5 billion last year, according to government figures. Such was the boom that export revenues in recent years helped keep the country's economy from shrinking while internal revenues flagged.

It also drew the attention of lenders eager to provide export financing. Similar opportunities are expected among companies that operate domestically. If the economic recovery continues--further boosting consumer confidence--the domestic demand for goods and services is expected to grow swiftly.

"There is a historical shift happening," says Marcelo Naigeborin, co-head of investment banking at Merrill Lynch in Sao Paulo. "There is a whole new window for the flow of capital here and an increasing supply of credit lines."

Opportunity. The flow of capital is taking many shapes. Lots of companies, especially small and medium-sized enterprises, are taking advantage of new opportunities for long-term loans. But because interest rates in Brazil remain among the highest in the world, bank debt is costly. (The benchmark rate, despite an overall trend toward reductions in recent years, remained at 18% at press time). That's why companies are eager to explore the broader spectrum of possibilities now available through bonds and through the stock market. The National Association of Investment Bankers, a Sao Paulo industry group, says bond transactions--after a lull just after Lula's election--soared in the past two years. Compared with a total of $9.26 billion in issuances in 2002, Brazilian companies sold $23.70 billion worth of bond debt in 2003.