Brazilian companies with high levels of cash took advantage of the fall in dollar to buy back securities foreign debtanticipating a possible exchange rate deterioration.
In the first four months of the year, 10 companies — including Petrobras (PETR3) and the Embraer (EMBR3) — announced public offers to repurchase bonds denominated in dollars, known as “tender offers”.
This is the busiest start to the year for this type of operation since at least 2016, when the Bloomberg started compiling the data. The move also draws attention because bond buybacks fell in the global market this year amid rising interest rates.
These companies, whose repo operations total around $5 billion, took advantage of the dollar’s low in the first quarter to reduce their leverage, for the most part, rather than refinancing debt by issuing new bonds.
The move suggests a degree of skepticism on the part of companies regarding the long-term strength of the currency. Indeed, the real has already erased much of the rally this year and the currency is expected to remain highly volatile as the October presidential election approaches.
“’Probably the recent exchange rate below 5 reais per dollar must have motivated these buybacks,” said Gustavo Brotto, investment director at Greenbay Investimentos in São Paulo. “In addition to companies having plenty of cash available.”
The dollar fell as much as 18% – hitting a low of BRL 4.5853 on April 5 – before rebounding and reducing the year’s decline to less than 8% amid rising fears of a tighter currency. aggressive of Federal Reservewhich reduce investors’ appetite for riskier assets.
The Brazilian currency was also hit by the imminent end of Brazil’s rate hike cycle. Analysts consulted by Bloomberg see the dollar rising to R$5.20 by the end of the year.
The real’s three-month implied volatility is at its highest level since September 2020, amid concern that the elections could cause political and market turmoil. The debt buybacks themselves also had an impact on the exchange rate, as companies send dollars abroad to make the payment.
“I think that ends up putting pressure on the exchange rate,” said Sergio Zanini, partner and portfolio manager at Galapagos Capital in São Paulo. “Especially if companies don’t have a large cash reserve abroad.”
Amid a surge in buybacks, issuances of debt securities abroad by Brazilian companies halved in the first quarter from a year earlier, according to the latest report by the Anbima, the country’s capital markets association. It’s a similar trend to what’s happening in emerging markets, which in April saw bond sales fall to their lowest monthly level in a decade.
Debenture issuances, on the other hand, registered the strongest first quarter since 2012, totaling R$55.9 billion (US$10.8 billion), almost double the volume of the first three months of last year, according to The Anbima.
But more often than not, the companies that buy back their debt abroad are not the same companies that are selling deentures in the local market. Instead, companies are drawing on their cash reserves to reduce their indebtedness.
THE Petrobras cash repurchased nearly $2 billion of dollar-denominated bonds due between 2024 and 2051 last month and Embraer repurchased about US$290 million in notes due later this year and next.
One of the last companies to complete a repurchase offer was Ultrapar Participations (UGPA3), which repurchased nearly $600 million in notes due in 2026 and 2029.
Concessionaire Aegea Saneamento e Participações announced at the end of April an offer to repurchase up to US$400 million of its bonds due in 2024, in addition to announcing the offer of US$500 million in new dollar-denominated notes due in 2029 and 2.8 billion reais in local bonds.
Repurchases have slowed recently as the real gave back some of the gains from earlier this year. But operations could accelerate again if the real strengthens again, according to Brotto.
“I believe that an improvement in the real, below 5, could motivate more buybacks of companies that are well capitalized,” he said. “Because taking out new loans both here in Brazil and abroad has become increasingly expensive with the global rise in interest rates”.