Some Brazilian bankers have asked if large drawdowns would inflict psychological damage on retail equity investors. This is important, as the growth of retail had offset this year’s capital outflows from international investors.
Local banks now dominate new deal bookrunning mandates because they now control the most important sources of demand.
The online brokerage business XP Inc took advantage of this to claim the lead on the IPO for BMG bank last year – the first time a new bank had won such a role in 17 years.
Not only were there no large-scale redemptions, the leading Brazilian equity managers raised billions in hours. Dynamo, for example, attracted R$1 billion ($176 million) for its Cougar fund within a day.
If anything the falls in equity prices have spurred greater appetite – the B3 stock exchange says 400,000 individuals have opened accounts in the last two months. May’s Estapar IPO saw 20% of orders come from the retail investor base.
Negative rates
The main reason why demand for equities has proved to be so resilient is that fixed income rates are at unprecedented levels.
The national benchmark Selic rate is now 3%, and the central bank’s monetary committee hinted in the minutes of its last meeting that it will cut that by another 50 or 75 basis points. That would push real interest rates into negative territory.
Corporates are not yet taking advantage of these local rates, because as the Selic rate falls, risk premia have risen. Bankers say this is having a psychological impact on the management of the issuing companies – worsened by the way that Brazilian corporate debt is priced as a percentage of the overnight interbank loan CDI rate (compounded for the year).
With Selic falling further and faster than anyone had anticipated, the move to a post CDI world is becoming urgent
“Yields are still about the same – say 6%,” says one local DCM banker. “But instead of the pricing being 110% of CDI [with the higher benchmark], now the price is 200% of CDI, and chief financial officers just can’t bring themselves to print at those levels.”
Some bankers say they are already talking to corporates about ‘CDI plus a spread’, in line with other markets.
This makes sense, and will draw attention to the individual risk component for corporates.
Previously, when annual CDI was in double digits, the corporate risk spread was such a small component of the total price that investors paid little attention and didn’t spend time differentiating.
New benchmarks
One of the legacies of the coronavirus pandemic in Brazil will be greater credit analysis of private companies – which is no bad thing.
There will be other impacts too.
Private bankers say the CDI benchmark (which is often used in the wider industry beyond fixed income, such as to measure equity and local hedge fund performance, for example) is now not fit for purpose. New benchmarks will have to be sought.
All of these trends were filtering through the industry before the pandemic, but with Selic falling further and faster than anyone had anticipated, the move to a post CDI world is becoming urgent.
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