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Corporate Financing: Brazilian corporations increase their foreign debt
Brazilian corporations increase their foreign debt
By Alessandra Bellotto and Silvia Rosa | São Paulo
With easier conditions to raise funds abroad, publicly held Brazilian companies increased the share of foreign debt in their total liabilities, from 33.6% in 2011 to 37.6% last year. This is the finding of a study including 266 public companies, prepared by Einar Rivero, of Economática, in partnership with Valor.
Randon's Geraldo Santa Catharina
For this year, the expectation is that companies will raise less money abroad, since they’re capitalized and the cost for borrowing, including hedging, has risen. The exception is bilateral credit lines linked to exports, whose terms continue to be attractive.
In 2012, foreign-currency debt at public companies rose 35% and reached R$315.8 billion. Most of such increase comes from new debt sales and borrowings abroad, since the dollar rose 9.3% against the real in the period.
Only with bond issues, public companies raised $25 billion. Lower costs were the main motivation for companies in their transactions abroad.
Companies that were prepared, especially investment-grade issuers, took the opportunity to improve their debt profile, elongating their debt, says Mauricio Tancredi, chief of corporate finance at Bank of America Merrill Lynch.
“The most liquid market for bonds abroad is for ten-year issues, whereas in Brazil liquidity is more concentrated in transactions with up-to-seven-year maturities, with an average duration of five years,” says Alexandre Guião, chief of global banking at HSBC.
Chemical concern Braskem, said Marcela Drehmer, its finance vice president, was one company that took advantage of the capital markets to reduce its debt costs. Altogether, it raised $1.25 billion selling bonds last year, including the reopening of three issues, of 10 and 30 years, and one of perpetual notes, and a new ten-year transaction — in all of them the company paid less.
With the new transactions, the share of capital markets, basically foreign, in Braskem’s total debt rose from 40% in 2011 to 53% at the end of 2012. On the other hand, banking debt had its share in Braskem’s total debt reduced to 27% from 37% over the same period. The remaining debt is with multilateral agencies and development entities, which tends to stay stable, according to Ms. Drehmer.
Another consequence was that in Braskem’s gross debt, the share of foreign currency-denominated debt rose to 68% from 63%. This is not considered a problem. Even though 65% of the company’s revenue comes from the domestic market, prices are in dollar, giving it a natural hedge. “It makes sense for us to have exposure to the dollar, since an appreciation of the real may negatively affect the company’s cash position,” Ms. Drehmer said.
Moreover, the strategy allowed the company to reduce financial expenses with interest (excluding currency oscillation and inflation) by R$26 million from the previous year. The average debt maturity was also extended to 15 from 12 years.
Telecom company Oi was another to take advantage of liquidity in external markets to extend its debt’s average maturity, at competitive costs. Last year, says Bayard Gontijo, Oi’s director of treasury and investor relations, the company raised $1.5 billion in ten-year bonds at a rate of 5.75%. With this, its average debt maturity, which in 2008 and 2009, years of crisis, was 2.5 years, was raised to 5 years. “The international market was important for extending debt durations and diversifying financing sources,” he says. This is because the local capital market, he says, was indexed to the CDI rate, which reflects short-term interbank transactions, and maturities were not over five years.
Companies with lower ratings and thus more limited access to capital markets also resorted to bond issues, even paying less competitive rates, to extend debt maturities. This was the case of Minerva, beef processor which has been working for three years to improve its capital structure, something that includes management of liabilities, says finance chief Edson Ticle.
Growing at least 20% a year, the company demands cash for new projects and working capital, and has sought out the capital markets to reduce financial leverage and elongate debts. In 2012, Minerva raised $450 million issuing bonds abroad last year. This way, bonds accounted for 70% of its gross debt in December, compared to 30% at the end of 2011.
In January this year, Minerva raised another $850 million in a ten-year issue, reducing the cost of bonds to 8% from 11% of those issued last year — proceeds were used to exchange securities maturing in 2017, 2019 and 2022. With these debt sales, the average duration of Minerva debt rose to seven years from five and a half in 2010. “The Brazilian capital market is not yet developed enough for ten-year issues,” Mr. Ticle says.
With falling interest rates and more liquidity on international markets, the cost of contracting financing overseas also became more attractive, especially in export-linked transactions. In some cases, financing rates of some external lines were even below those offered by the Brazilian Development Bank (BNDES).
Agricultural company SLC Agrícola found that when it got a financing line in dollar directly with John Deere for the import of machines. The effective cost of the line, linked to Libor, the London interbank rate, was at 5.74%, compared to 6.31% the company was paying in the Finame program of financing for equipment purchases from BNDES, says Ivo Marcon Brum, finance and investor-relations director at SLC.
Today, Mr. Brum says, costs offered by BNDES in the Finame program are more competitive, because of a reduction last September of the fixed interest rate for purchase of machines and equipment to 2.5% from 5.5%, as part of the Investment Support Program (PSI). “The problem is that there is no clear policy of BNDES and what this rate will be in the future, which makes it difficult for long-term investments,” he says.
Since exports account for about 60% of SLC’s production, the company opted for not hedging these transactions. Mr. Brum says that the company’s main funding source is money from farm credit and constitutional funds. “These lines, though, are not sufficient to finance farm production and we have to complement the funding with export-financing lines.”
Last year, the company contracted R$90.2 million with Export Credit Notes (NCE) to meet its short-term cash needs. “These lines continue to have attractive cost when compared to the cost of loans on the domestic market,” Mr. Brum says.
Today, about 50% of the company’s debt is linked to foreign currency debt. In 2010, this share accounted for 15% of total debts.
Lines from export-credit agencies and development banks, such as the China Development Bank, also became more attractive last year with the lower cost. But cost is not always the most important thing. Some companies seek financing abroad for the possibility of getting a longer-term loan, and of bigger volume, than it would be possible on the Brazilian market.
Randon Implementos e Participações, for example, contracted last year external long-term lines with the goal of elongating its debt profile and raising capital to fuel export growth. The company, which makes transport equipment, raised $150 million through NCEs at a cost of 2% to 5.7% a year and average duration of five years. This way, its share of debt in foreign currency rose from 12.4% in 2011 to 27.75% last year. “These transactions allowed us to extend the average total debt maturity from 1.5 to 2 years to 4-5 years,” says Geraldo Santa Catharina, finance and investor-relations chief at Randon. Exports and operations overseas account for 20% of the company’s revenues.
Even though BNDES’s line for financing production of goods and services aimed at exports has a competitive cost, of 5.5%, Randon doesn’t rule out borrowing abroad again, because it can get longer-term loans than the BNDES line, which is of three years.
Even companies without dollar revenues took advantage of attractive terms to borrow money overseas. In these cases, the loan is made under Law 4131, which includes lines that don’t demand backing by trade transactions. “These transactions may be interesting, but they depend a lot on hedging costs,” Mr. Guião, with HSBC, says.
One example is a $200 million loan extended by BofA Merrill Lynch to Coelba, a power utility owned by group Neoenergia, last December. BofA’s Mr. Tancredi says that, even though the power industry has access to the local capital market, companies seek in foreign credit a diversification of financing sources, even if the cost is equivalent.
Last year, in certain periods, the international market got much more competitive than the local one, already considering the cost of the forward rate agreement for hedging and the income tax of 15% paid on interest remittance — these loans have Libor, which is low, as reference rate.
Other advantages of foreign credit, Mr. Tancredit says, include agility in closing transactions and flexibility in amortization terms, since contracts are bilateral. In the Coelba transaction, he says, BofA adapted the loan amortization to the company’s cash flow. In the case of a bond, he compares, in addition to the cost of structuring, there’s no flexibility in payment and the transaction may take 90 days to get off the drawing board, because of legal proceedings associated to a public offering.