Business

Brazil's banks prepare for pre-Carnival IPOs parade

Despite the coronavirus crisis, this year is expected to end as the busiest in Brazil in the last 13 years for public listing

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  • There were 88 stock offers from Brazilian companies in 2007;
  • Bankers say there are signs that mergers and acquisitions may also increase with hopes of a vaccine.

Carnival celebrations in Brazil have been hit hard by the coronavirus pandemic, but investment banks are preparing a parade that promises to be no less exuberant, a parade of stock offers.

The combination of the COVID-19 vaccine and the country’s basic interest rate at a record low has attracted investors to equity and about 30 companies are preparing IPOs in the first quarter, a number that already surpasses the stock market debuts in 2020.

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The queue of stock offers means that bank executives who used to go to the beach between New Year and Carnival will now have their eyes glued to their online offices preparing for this parade.

From the mining unit of Companhia Siderúrgica Nacional to the supermarket chain BIG, controlled by the private equity firm Advent, the list reflects the desire of controlling shareholders to pocket gains from the investment made or to raise new resources for the companies’ growth.

Despite the coronavirus crisis, this year is expected to end as the busiest in Brazil in the last 13 years for public listing, with 60 initial public offerings and follow-ons moving $28.4 billion, also the highest volume since 2010. And the investment bank executives are preparing for an even bigger party in 2021 by Brazilian companies.

“The year 2021 has all the potential to surpass 2007 in number of deals,” Claudia Mesquita, head of the equity market at Bradesco BBI, told Reuters.

There were 88 stock offers from Brazilian companies in 2007. In terms of volume, Bank of America forecasts about BRL 150 billion in 2021, while Itaú Unibanco expects a little less, BRL 140 billion.

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Less shine

Despite seeing a drop of up to 45% on the Brazil’s Ibovespa index earlier this year, retail investors resisted the urge to dispose of their shares and many even joined new IPOs. The index has already grown more than 2% in the year.

“Brazilian retail investors showed maturity this year, as they did not sell their shares despite all the bumps. This is good news for companies planning IPOs,” Marcello Lo Re, head of the Brazilian stock market at Morgan Stanley, said.

This “buy and keep” mentality can clearly have its limits, as nearly half of the companies that made their debut this year are trading below their IPO prices. But investment bankers say low interest rates are likely to continue to increase risk appetite for local investors, who find few high-return alternatives.

Some companies may also anticipate IPOs for next year, fearing some potential volatility that the presidential election years may bring, said Roderick Greenlees, global director of investment banking at Itaú BBA.

In another likely boost, international investors, who mostly stayed out of this year’s IPOs, are slowly returning.

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Investors from outside Brazil bought more than half of the shares that the chain of hospitals Rede D’Or launched this month, in the largest IPO of a Brazilian company since 2013. Still, the growing concerns about the government’s fiscal side may weigh on the demand.

“Brazil’s biggest enemy is Brazil itself, as the country still has a certain fragility,” said Pedro Mesquita, an XP partner.

Even so, for large investors in Brazilian companies, stock markets have been their best exit option in recent months, since strategic or private equity buyers have been scarce due to concerns created by COVID-19.

Unlike IPOs, mergers and acquisitions turnover fell more than 40% in the year, according to Refinitiv data, while the number of transactions increased 13%.

Bankers say there are signs that mergers and acquisitions may also increase with hopes of a vaccine, even with a still hazy schedule for much of Latin America, including Brazil.

“M&A is a long-term business, so it requires more confidence in the economic outlook, which has been hit by the coronavirus, but business should return as countries return to normal,” said Hans Lin, head of investment bank at Bank of America in Brazil.

(Translated by LABS)