By Gabrielle Coppola and Ye Xie
When bankers at Deutsche Bank AG and Barclays Plc were piecing together orders last week for Brazil’s first real-linked international bond sale in three years, they discovered a new source of demand: Latin American pension funds.
“We had never seen these investors in global local currency deals,” said Dennis Eisele, a director in New York at Deutsche Bank, the biggest underwriter this year of overseas bond sales by Latin American issuers. He said investors from the region including Colombia, Peru and Chile made up a “substantial” amount of the almost 3.5 billion reais ($2.06 billion) of orders. “That’s great demand,” he said.
Brazil sold 1.1 billion reais of bonds due in 2028 to yield 8.85 percent, at least 200 basis points, or 2 percentage points, above local-currency debt yields from the five other investment- grade countries in Latin America.
Real-denominated bonds sold overseas, typically bought by investors in the U.S., Europe and Japan looking for alternatives to near-zero benchmark rates in their countries, are beginning to lure Latin American pension funds seeking to invest assets abroad. Pension fund assets have risen more than 80 percent in Chile, Peru and Colombia since 2005, buoyed in part by surging commodity exports and quickening economic growth.
Chilean pension fund investments have risen to $138 billion from $72 billion in 2005 while those held by funds in Colombia jumped to $49.7 billion from $20.1 billion, according to regulators in those countries. Peruvian pension fund assets climbed to $28.8 billion from $11.6 billion in 2005.
Credit Growth
Assets managed by the 100 largest U.S. public pension funds, by comparison, have declined 3.7 percent since 2005 to $2.35 trillion, according to the U.S. Census Bureau.
“It’s a combination of the Brazilian credit and the growth of the pension fund system in Latin America,” Fabianna Del Canto, who works on the emerging-markets bond syndicate at Barclays in London, said in a telephone interview.
Brazil’s economic expansion, on pace to be the fastest in more than two decades, has attracted funds forced to look outside their borders for longer-dated assets, according to Barclays, which ranks 10th in Latin American bond underwriting this year, according to data compiled by Bloomberg.
In Chile, where the 2.75 percent benchmark lending rate is 800 basis points below Brazil’s 10.75 percent target rate, foreign investment accounts for 46 percent of pension fund assets, up from 29 percent in 2005. In Peru, where the key lending rate is 3 percent, foreign assets have risen to 26 percent of pension fund holdings from 9.5 percent in September 2005, according to data compiled by regulators.
‘Attractive’ Yields
“Brazil is a very good sovereign bond and the spread it has over U.S. Treasuries right now is attractive for the levels of risk,” said Gonzalo Camargo, who oversees $6.8 billion in Lima at AFP Horizonte, Peru’s third-largest pension fund. “The yield and carry the bonds pay is very attractive and we’re diversifying our portfolio.”
Camargo declined to say whether he participated in the Brazilian debt offering.
Porvenir, Colombia’s biggest pension fund, said in an e- mail response to questions that it’s considering buying emerging-market local-currency bonds. Porvenir declined to comment on whether it participated in Brazil’s bond sale. Alejandro Perez-Reyes, head of investments at Prima AFP, Peru’s largest pension fund, didn’t return a telephone call seeking comment. Chile’s pension funds aren’t allowed to comment on their holdings.
‘Testament’
The pension fund demand is “a testament to Brazil’s improved macro fundamentals and the yield dynamics offered by Brazilian asset prices at this point,” said Aryam Vazquez, an emerging-markets economist at Wells Fargo & Co. in New York.
Brazil’s economy, Latin America’s largest, will expand 7.5 percent this year, compared with 2.6 percent for the U.S., 1.7 percent in the 16-nation euro zone, and an average of 7.1 percent for developing nations, according to International Monetary Fund forecasts.
While Brazil earned investment-grade ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings in the past two years, the country’s ranking is still too low for Mexican pension funds to be allowed to invest in its bonds.
Mexican Funds
Mexican funds can only buy international bonds rated at least A-, or four levels above junk, according to government regulator Consar. Brazilian debt has the lowest investment-grade ranking, or BBB- at S&P and Fitch and Baa3 at Moody’s.
The extra yield investors demand to own Brazilian government dollar bonds instead of Treasuries fell 1 basis point to 182 at 10:07 a.m. in New York, according to JPMorgan Chase & Co. indexes.
The yield on Brazil’s interest-rate futures contract due in January 2012 rose 1 basis point to 11.37 percent.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose 3 basis points last week to 99 basis points, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Real Declines
The real strengthened 0.2 percent to 1.7021 per dollar today. It has lost 1.7 percent since the government raised a tax on foreigners’ local fixed-income purchases for the second time this month to stem the rally and shore up exports.
Brazil issued the real-linked international bonds three days after the Oct. 18 tax increase to 6 percent. Treasury Secretary Arno Augustin said in an Oct. 21 interview that the government plans to sell more bonds denominated in reais overseas this year as part of its efforts to curb gains in the currency. Buyers of the international real-linked securities, which settle in U.S. dollars and are subject to New York law, don’t pay the tax.
The real has advanced 108 percent since President Luiz Inacio Lula da Silva took office in 2003, buoyed in part by the world’s second-highest inflation-adjusted interest rates, after Croatia, according to data compiled by Bloomberg.
In February 2007, Brazil first issued the real-linked bonds due in 2028 with a coupon of 10.25 percent. The yield declined to 8.6 percent on Oct. 14, the lowest since June 2007, as record-low yields in the U.S. and Europe fueled demand for emerging-market debt.
Real-denominated bonds have returned 21 percent annually in dollar-based terms in the past four years, compared with 10 percent on Chilean peso debt, 13 percent on local Peru notes and 19 percent on Colombian securities, according to JPMorgan.
“Local pension funds are getting inflows, positive returns, they’re looking for diversification,” said Alberto Ramos, senior economist at Goldman Sachs Group Inc. in New York.
Source: www.bloomberg.com
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