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Breathing room: sound financials and a stable economy give Brazilian companies access to longer-term financing.

Brazilian companies are enjoying a previously unheard of luxury in the global market for capital: flexibility. In a country where only a handful of alternatives once existed for businesses in need of financing--usually short-term loans with high-interest rates--capital markets are beginning to show a newfound willingness to provide funds in a range of transactions that until now were considered too risky. Banks are lending for longer, corporate bonds are easier to sell, and a flurry of privately-held companies are beginning to explore the possibility of listing on a newly revived Brazilian stock market.

"In terms of options available to companies looking for capital, they continue to grow and grow rapidly," says Michael Schoen, head of Credit Suisse First Boston's division for Latin American debt-capital markets. "There is an increased willingness of the international capital markets to look at a wider range of products and names."

Just ask executives at Odebrecht, one of the country's largest construction and engineering companies. For much of the past decade, the builder spent a hefty portion of its cash flow servicing short-term obligations on bank debt borrowed to finance projects in Brazil and elsewhere in Latin America.

But in 2004 the company noticed a shift in the winds. Investors, it seemed, were willing to lend money to healthy Brazilian companies and under surprisingly attractive conditions. In short order, Odebrecht issued US$150 million worth of five-year bonds to U.S., European and Brazilian investors. That transaction was followed by two subsequent bond sales later in the year.

The result: Odebrecht quickly paid off most of a $200 million debt, all of which was due by year's end. "We were able to replace a burden of short-term bank debt with a long-term loan from bondholders," says Guilardo Figueiredo, Odebrecht's director of investor relations. "It gave us a much more manageable debt load, and that would have been impossible a little over a year ago."

So what's behind these new and improved lending terms? The answer, in short, is investor confidence.

After years of lackluster growth, Brazil's economy last year began to soar. The country's gross domestic product, fueled by a boom in exports and a recovery in domestic demand, in 2004 grew by an estimated 5.2%, the biggest economic expansion in Brazil in a decade. Unemployment, too, began to improve, with the nation's jobless rate expected to close last year at just over 10%, the lowest level since 2002.

In a country where political uncertainty has traditionally been a barrier to many cross-border transactions, the recovery has caused investors once and for all to embrace the administration of President Luiz Inacio Lula da Silva, the former union firebrand whose ascent to Brazil's top office had long been cause for trepidation in global markets. Indeed, halfway through Lula's term, the government's hard line on economic policy--a commitment to reduced government spending, combined with anti-inflationary monetary measures--is its greatest administrative imprint.

At a time when interest rates in more mature capital markets continue to offer tiny returns for would-be lenders, political stability and brightened economic prospects have made Brazil an attractive destination for capital. "There's a lot of liquidity in global capital that is looking for promising emerging markets," says Alberto Kiraly, executive director of investment banking at Morgan Stanley in Sao Paulo. "Given the recovery so far and the commitment by the government to maintaining a sound economic policy, it's a good moment for Brazil to get better access to that capital."

What really helps lure funds toward Brazil is the fact that many of the country's companies are increasingly prosperous. Money, of course, attracts money; lenders and investors smell opportunity.

Consider the opportunity offered by Brazil's cash-rich exporters. When the government devalued Brazil's currency, the real, at the end of the 1990s, it made the country's products more attractive on the world market. That helped spark a boom in which exports more than doubled in five years, from $48 billion in 1999 to $96.5 billion last year, according to government figures. Such was the boom that export revenues in recent years helped keep the country's economy from shrinking while internal revenues flagged.

It also drew the attention of lenders eager to provide export financing. Similar opportunities are expected among companies that operate domestically. If the economic recovery continues--further boosting consumer confidence--the domestic demand for goods and services is expected to grow swiftly.

"There is a historical shift happening," says Marcelo Naigeborin, co-head of investment banking at Merrill Lynch in Sao Paulo. "There is a whole new window for the flow of capital here and an increasing supply of credit lines."

Opportunity. The flow of capital is taking many shapes. Lots of companies, especially small and medium-sized enterprises, are taking advantage of new opportunities for long-term loans. But because interest rates in Brazil remain among the highest in the world, bank debt is costly. (The benchmark rate, despite an overall trend toward reductions in recent years, remained at 18% at press time). That's why companies are eager to explore the broader spectrum of possibilities now available through bonds and through the stock market. The National Association of Investment Bankers, a Sao Paulo industry group, says bond transactions--after a lull just after Lula's election--soared in the past two years. Compared with a total of $9.26 billion in issuances in 2002, Brazilian companies sold $23.70 billion worth of bond debt in 2003.

There's also new life at the country's long-stagnant stock market, as a raft of privately-held companies begin to consider going public. Four new companies--an airline, a shoemaker, a cosmetics retailer and a pharmaceuticals manufacturer--last year ended a four-year-long drought of initial public offerings at the Bolsa de Valores de Sao Paulo, or Bovespa, as the market is known. Three Bovespa veterans issued new equity as well.

In addition to the stronger economic fundamentals, the renewed interest in the Bovespa is buoyed by reforms introduced in recent years to improve the flow of information from listed companies in terms of accounting practices and corporate governance. "There's been a total change of scenery here," says Maria Helena Santana, executive officer in charge of listings and company relations at the Bovespa. "The improvements in the economy and the new standards of transparency are helping companies draw a new level of interest from investors."

Gol Linhas Aereas Inteligentes, the country's third-largest airline, last year decided to list on the stock market to raise capital that will help finance a big purchase of aircraft from U.S. plane-maker Boeing. Faced with the need to expand its current fleet of 25 airplanes, Gol agreed last year to buy 18 new Boeing 737s, with an option for 24 more. The new aircraft are needed to help the airline, which introduced the low-cost carrier concept to Brazil, to expand its route network across the country's vast geography.

Payment for the purchase--valued at $2.50 billion not counting discounts airlines receive for a bulk order--is not due until the carrier begins taking delivery of the vessels in 2006. But an improved stock-market climate and the promise of interest from investors led Gol's executives to decide it was the right time to carry out the offering, a simultaneous listing on the Bovespa and the New York Stock Exchange, in June 2004. "We really didn't need the money yet, but when the market began to improve we decided to go ahead," says Richard Lark, the airline's chief financial officer. "You cannot time the market. You have to go when it's ready."

The offering raised $280 million and put a 17% stake of the company in the hands of retail investors. Additional offerings are likely if Gol decides to exercise the option for more airplanes, the company says. "This is a capital-intensive business because our main assets are very expensive aircraft," says Lark. "And because the local debt markets, historically, are short term and expensive, we're most likely going to want to go back to the stock market for more equity."

Equities shine. While appetite for corporate bonds is being fed by the increasing flow of international capital toward Brazil, the renewal of the Bovespa is being fueled by rekindled interest in equities among investors at home. Brazilian retail investors, like their counterparts elsewhere around the globe, were burned by the collapse of the technology bubble at the end of the last decade, but they are increasingly lured to stocks as Internet banking and discount brokers successfully broadened what was among middle-class Brazilians once a tiny equity culture.

The improved outlook for Brazilian companies, coupled with the steady decrease of yields from bank savings means the trend is likely to continue. "A real transformation is happening among Brazilian investors," says Paulo Gomes, an economist at economic consultants Global Invest, in the city of Curitiba. "They are beginning to realize that investing in stocks isn't as difficult as it once was and that it's a way to take a risk and seek higher returns on their money."

Even companies that are comfortably financing their own operations are taking advantage of the tide of investor confidence. Grendene, the country's largest shoemaker, is one of a host of Brazilian companies that benefited from the recent export boom. Based in the northern state of Ceara, the company exports footwear to markets around the world.

When interest in stocks began to heat up a year ago, the company's founding family decided to list shares on the stock market--even though Grendene itself was not in need of capital. The October transaction, which sold 20% of the company's ownership to retail investors, raised $232.3 million.


The company says the listing allowed it to meet two ends: By selling part of its ownership, Grendene added liquidity to its share structure. What's more, the preparations necessary for the listing--in line with the Bovespa's updated transparency standards--enabled the company to modernize its accounting and reporting practices.

Both measures, the company says, will help it in the future when it may be more pressed to tap the capital markets for financing. "In a way, the listing was an effort to further professionalize the company," says Gelson Rostirolla, Grendene's chief financial officer. "It gave us the opportunity to be more visible to investors and show full transparency to the markets."

There are other aspects of Brazil's corporate landscape that need continued reform, although the economy got a jolt in the arm in January when the government approved a bankruptcy law which gives insolvent companies more favorable terms to work their way back into business.

But the fresh wave of capital now available to the country's companies is helping many understand the benefits of a stable corporate and economic climate. The more strictly the business community and the government adhere to the expectations of capital markets, the greater the flexibility that will be available to companies in need of financing.

"The structural improvements in the economy and at the corporate level have helped minimize the amount of risk in doing business," says Richard Rainer, co-head of investment banking at Merrill Lynch in Sao Paulo. "Brazil as a market has gotten better and investors have been willing to pay for it."

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Title Annotation:BRAZIL
Comment:Breathing room: sound financials and a stable economy give Brazilian companies access to longer-term financing.(BRAZIL)
Author:Prada, Paulo
Publication:Latin Trade
Geographic Code:3BRAZ
Date:Apr 1, 2005
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