Business as usual in Brazilian credit markets

Business as usual in Brazilian credit markets

By Jonathan Wheatley in São Paulo

Published: February 12 2008 22:34 | Last updated: February 12 2008 22:34

Brazil’s credit markets are shrugging off the effects of the US subprime mortgage debacle and maintaining business largely as usual – another sign say analysts of emerging markets “decoupling” from developed ones.

“Very little has changed in Brazil’s as a result of the crisis,” says Antonio Quintella, head of Credit Suisse’s Brazilian operation in São Paulo. “Of course conditions are somewhat more difficult, spreads are up and the pace of business is slower but, overall, credit markets are calm.”

Brazil’s capital markets as a whole have been far from immune from global instability. The São Paulo Stock Exchange (Bovespa), which since 2004 has seen a flood of companies coming to market after years of inactivity, has again ground to a halt. Last year, 64 companies floated on the main market of the Bovespa, raising R$55.5bn ($31.9bn). This year, not one has floated.

Carlos Alberto Rebello, head of listings at the CVM, Brazil’s securities commission, says 15 companies have suspended requests for share issues with a combined value of about R$7.7bn. Another 14 have failed to launch roadshows for offers worth another R$6bn. A further 14 issues worth about R$10bn are due between February and April. “I doubt very much if they will stick to their timetables,” Mr Rebello says.

Those companies that floated last year have been particularly badly hit by falls in stock prices this year, falling much further than the main Bovespa index.Some 75 per cent of their shares were sold to foreign investors, who have turned to the Bovespa’s liquid market to raise cash to cover losses elsewhere.

But Mr Quintella says companies have found it relatively easy to raise capital from other sources.

Bank lending is the biggest, and the most visible example is Vale, the Brazilian mining giant, which has reportedly had little difficulty raising a loan of $50bn for itsbid for Xstrata, its Anglo-Swiss rival. It is understood that JPMorgan offered Vale $10bn that it did not need.

In Brazil, companies have benefited from a steady expansion of available credit. Brazil’s total stock of credit, at about 35 per cent of gross domestic product, is still much smaller than in many other markets. Brazilian companies have much less debt than many foreign competitors so their situation, says Mr Quintella, “is still relatively comfortable”.

Some analysts have warned that, because Brazilian banks raise some of their capital overseas, the credit that has driven recent growth on Brazil’s domestic market is bound to dry up. But Mr Quintella disputes this, pointing out that the steady advance in savings in Brazil has been driven by investments in fixed income instruments that are, in effect, closed to foreigners by taxation. “Our sources of credit are essentially domestic,” he says.

Most economists believe Brazil is bound to be hurt by the expected slowdown in the US and global economies this year. But many companies are betting on the domestic market to make up the difference. For them, investment capital is still available.