* $14.5 bln of Brazilian corporate bonds issued in 2016
* Issuers from meatpackers to ethanol producers
* Bonds seen as good value, but due diligence crucial
By Claire Milhench and Ana Mano
LONDON/SAO PAULO, Sept 21 Eldorado may offer a
cautionary tale for investing in Brazilian bonds, yet a 20
percent fall in the pulpmaker's debt since it borrowed $350
million in June has not reduced appetite for the country's
Investors in Eldorado's bonds were caught out by the
country-wide corruption probe which spread to the company and
its parent firm earlier this month, a setback that typifies the
risks of investing in Brazil.
However, fund managers say Brazilian companies, even those
with junk ratings, still have a fair chance of raising money.
Once prolific issuers, Brazilian firms have been largely
shut out of bond markets for about 18 months, hurt by corruption
scandals, weak commodity prices and economic recession.
Now they are exploiting the favourable conditions created by
a flood of money into emerging market debt funds.
"Issuers are taking advantage of this to issue at attractive
yields, with little new issue premium," Charles de Quinsonas,
deputy manager of M&G Emerging Markets Bond Fund, said.
Brazilian companies had raised $14.5 billion in bond markets
by the end of August, the Brazilian Financial and Capital
Markets Association says. This compares with $7.6 billion in
corporate and sovereign issuance for the whole of 2015.
Issuers range from state oil firm Petrobras and
meatpacker Marfrig to pulp and paper firm
Suzano and sugar and ethanol producer Cosan.
And there is more on the way, with logistics provider JSL
and auto leasing firm Ouro Verde - both junk-rated -
announcing plans last week for maiden international issues.
Bond buyers may be lured by Brazil's outperformance this
year compared with other emerging markets. President Dilma
Rousseff's impeachment and signs of long-delayed reforms being
undertaken have pulled average yield spreads on Brazilian
companies' bonds some 280 basis points (bps) tighter this year.
In contrast, Russia, the other top performer, has seen
spreads narrow 120 bps, while the underlying CEMBI index
has tightened 95 bps, noted Steve Cook, co-head of
emerging debt at Pinebridge Investments.
The fall in yield premia makes it cheaper for bond hopefuls
to issue, but also offers value to investors given Brazil's
BB/Ba2 credit rating, Cook said.
"Brazil is currently trading around 600 bps, which
corresponds to an average single 'B' rating asset class so the
market is still pricing in a three- or four-notch downgrade, and
arguably you could say that's cheap."
But as Eldorado's 2021 bond showed, there are risks. Issued
at 99.008, it is now trading at around 82 cents in the dollar
Investors have also been spooked by a debt restructuring
from phone company Oi which proposes a 70 percent
writedown on the bonds' principal.
One U.S.-based distressed debt fund manager, echoing
comments by other investors, said shareholders in Brazil enjoyed
significant advantages over creditors, while mechanisms to
protect creditors from asset stripping remained weak.
That will keep borrowing rates high for Brazilian firms, the
fund manager said. "As more of these bankruptcy processes go
sideways, rates will continue to rise. People are waking up to
the dangers of dealing with stressed Brazilian situations."
But record inflows to emerging debt funds should support the
market. Junk-rated and crisis-mired Ghana, for instance,
recently raised $750 million at 9.25 percent. And even last
week's U.S. yield spike did not prevent Mexico's Pemex from
getting orders for $4.3 billion on its $1.5 billion issue.
Spencer Maclean, head of capital markets for Europe and
Americas at Standard Chartered, said that while Brazilian
corporate debt might be too much for funds that don't typically
invest in emerging markets, there is enough demand.
"Even if you see just a third of the investors they would
have got a few years ago, those will be the dedicated emerging
market investors. What you won't get will be the tourists."
(Additional reporting by Sujata Rao in London and Dion Rabouin
in New York; Editing by Alexander Smith)