March 1, 2012 / 11:36 AM / 6 years ago

Banco do Brasil perp flip-flops

LONDON, March 1 (IFR) - Brazilian bank Banco do Brasil tapped its BB-rated Basel III-compliant perp on Monday, adding an additional USD750m to the already outstanding USD1bn.

The new deal priced at 108.50 to yield 8.488%, which slashed 76bp off its original 9.25% yield. Overall it was a deft feat.

But the bonds are trading near, or below the tap price while they were at 110.00, or 10 points above original issuance price, before the announcement of the re-opening. The disconnect stems from investor concerns about the security’s equity-like structure, and a slew of flippers making a fast profit on the trade.

“We bought the bonds when the original issuance came out as it was cheap for the yield and then it traded up so we sold it. I would not recommend investors buy and hold it for the long run,” said a senior trader in Miami.

“If the company starts to see bad results or losses then it can simply just decide not to pay the coupon. Now all people see is the 8.5%, but this offers really bad protection to the investor. Sure, the company is a BBB, but the bond is rated BB and there is a reason for this,” he added.

Flippers, investors who buy and sell for quick profit, were a part of the equation. “There were tons of flippers,” said an investor in Sao Paulo. “They have no holding power as they get out of the bond as soon as they can, and that causes a herd mentality so when one decides to exit and the price starts going down, everyone rushes out the door.”

The Banco do Brasil bonds fell to 108.05 on Tuesday, before settling on Wednesday afternoon at 108.20-108.50, hovering around reoffer price.

“One is obligated to tap a bond that goes up 10 points within a few weeks of launch, but you’d think you could do it without having it fall out of bed,” said a senior debt capital markets banker away from the deal on Tuesday referring to the price drop.

Still, given Banco do Brasil’s quasi-sovereign status, a number of investors were willing to take the risk given the improbability that the lender will trigger its loss absorption clause.

“Investors don’t think the Central Bank of Brazil is going to allow [for any negative fall-out,]” said someone with knowledge of the transaction. “If it wasn’t a quasi-sovereign or a private bank, there would be a lot more convincing to do.”

Strong demand

The bonds were six times oversubscribed on the tap. Even a clause that allows the bank to change the terms of the bonds to keep them compliant with local regulation and allow them to be accounted for as equity did not worry accounts. The bank will be permitted to amend the terms and conditions in order to qualify the securities as Tier 1 or Tier 2 capital under local regulation without the consent of security holders.

Some traders and bankers see it as a pure bull market trade and predict it will get back to the pre-tap levels by next week. “There are so many retail investors trying to get their hands on it,” said a trader in New York, adding that he sees it as cheap at current prices.

It was “better to do at 9.25% and USD750m at 8.5% rather than USD1.75bn at what might have been even higher than 9.25% to do that size all at once,” said a senior DCM banker. “Their 2011 deals didn’t do well because they pushed the size too much for market conditions.”

Some 280 accounts participated, with 25% in the US and 15% coming from Latin America. Another 26% were European investors, and the remainder came from Asia.

Price guidance was set in the 108 area (+/- 50 cents), or equivalent to 8.57% to 8.49%, on Monday morning.

The coupon is 9.25%, with pay dates on April 15 and October 15. The first call date is April 15, 2023. The coupon will reset every 10 years after the first call date to the then prevailing 10-year US Treasury rate plus the spread fixed at pricing. The bank has the right to suspend interest payments at any time on a non-cumulative basis. The settlement date is March 5.

“There’s an old saying in the market that goes: ‘Sell bonds when you can, not when you want to,'” said a lead. “I believe borrowers are heeding that advice.”

BB Securities, Bradesco BBI, BNP Paribas, Citigroup, HSBC and Standard Chartered were the joint bookrunners. The issuance was rated BB by S&P and the Banco do Brasil is rated Baa1/BBB. (Reporting by Joan Magee (joan.magee@thomsonreuters.com); Editing by Sudip Roy)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below