We have identified a short term AAA rated European Bank for Reconstruction and Development (EBRD) Brazil bond maturing 9/10/2012, and targeted a better than 8% yield for our clients.
Corporate Bond linked to Brazilian Real
The European Bank for Reconstruction and Development offering are bonds denominated in the Brazilian Real with a yield of 8.12 % for 14 months. This debt instrument compares extremely well with its higher yield and AAA ratings to our current list of available Brazil Government and Corporate Bonds. While the US dollar has strengthened in the wake of the Greek financial crisis and its impact on the euro, the longer term weakening trend of the dollar against many world currencies remains a major concern for investors seeking protection against the loss of the dollar’s buying power. This short term bond provides diversification into a country that was one of the first emerging markets to begin a recovery after recession hit in late 2008, and whose GDP growth returned to positive in 2010. Brazil’s strong growth and high interest rates continue to make it an attractive destination for foreign investors, and we are pleased to enable our clients with the ability to take advantage of a high yielding short bond of this caliber. The early maturity date fits works well with a laddering strategy to diversify our clients away from heavily weighed US dollar based assets, and it is why we have returned to Brazil and EBRD for This Week’s Best Bond.
US Debt Woes
The US market reacted negatively to Fed chief Ben Bernake’s sobering assessment of our financial situation last Wednesday (6/22/11), falling for each of the next 3 days with the S&P ending the week at +1.8% YTD. This week, the market appears to have shrugged off Treasury Secretary Timothy Geithner’s dire warnings that the US risks facing default on its debt should lawmakers not raise the $14.3 trillion national debt ceiling by the 8/02/11 deadline, in spite of the budget battle between Democrats and Republicans hitting a major snag as top Republicans walked out of talks aimed at reaching a compromise agreement. Evidently what is at stake is not the issue of whether the debt ceiling should be raised, but merely the terms surrounding the raise. With the 10 year yield content to bump along at a paltry 3%, well below the current inflation rate, any thought of pricing in Geithner’s mention of default looks “Greek to me.”
Brazil is by far the largest and most populous country in South America, undergoing more than half a century of populist and military government until 1985, when the military regime peacefully ceded power to civilian rulers. Brazil continues to pursue industrial and agricultural growth and development of its interior. Exploiting vast natural resources and a large labor pool, it has large and well-developed agricultural, mining, manufacturing, and service sectors. It is the world’s largest producer of coffee, sugar and orange juice and the second-largest exporter of iron-ore and soybeans. Brazil’s offshore oil fields have turned it into a net crude exporter, helping it expand its presence in world markets, and its economy outweighs that of all other South American countries.
Moody’s Investor Services continued the trend to upgrade Brazil’s sovereign debt, raising it by one notch to Baa2 last week (6/20/11.) Moody’s Senior Credit Officer Mauro Leos said the upgrade was due to “capable handling” of inflation and fiscal problems this year by Brazilian officials. He added that Brazil was likely to remain “a favored destination” for investors over the long term because of solid fundamentals, including a well-balanced industrial base and a large domestic market. Brazil’s President Dilma Rousseff, who took office on Jan. 1, has pledged to reduce government spending by 50.7 billion real’s ($32 billion) in a bid to cool the economy and restrain inflation. The economy will grow 4 percent this year after a 7.5 percent expansion in 2010 that was the fastest in more than two decades, according to the median estimate of 19 analysts in a Bloomberg survey.
Brazil’s real has gained 24 percent over the past two years, the best performance among Latin currencies tracked by Bloomberg, and is often referred to as a “commodity currency” because of the country’s ability to realizes higher values from it’s commodity exports. Despite concern about the impact of slower Chinese growth, Brazil, the world’s eighth-largest economy, is expected to grow more than 4 percent this year (see trade flow chart below.) This robust economic growth underscores the importance of emerging markets as the developed world struggles with a sluggish rebound from the global economic slowdown. Yesterday, Brazilian central bank’s weekly survey of analysts showed a mild decline in inflation expectations. The analysts, on average, expect the country’s IPCA inflation rate to reach 6.16% by year’s end economic analysts forecast the benchmark IPCA consumer price index would end 2011 at 6.16 percent, down from a forecast of 6.18 percent last week. Inflation expectations for 2012 also slipped to 5.15 percent,down from 5.18 percent previously.
The European Bank for Reconstruction and Development (EBRD)
Establishment in 1991, the EBRD has become the largest financial investor in their region of operations which stretches from central Europe and the Western Balkans to central Asia. Their mission is to help countries in the region to become open, market economies by investing primarily in private sector clients whose needs cannot be fully met by the market. They are owned and funded by 61 countries, the European Union and the European Investment Bank, and follow the highest standards of corporate governance and sustainable development.
EBRD’s authorized capital is EUR 21 billion (EUR 6 billion paid-in and EUR 15 billion callable). With EUR 20.79 subscribed, the EBRD has a solid capital base. The strength of the Bank’s capital and its prudent operational and financial policies are reflected in the EBRD’s credit rating of AAA from Standard & Poor’s, Aaa from Moody’s and AAA from Fitch.
The default risk is EBRD’s ability to perform. Given its underlying strength and AAA rating, as outlined above, and the short term maturity of this bond, it is our opinion that the default risk is significantly less than the currency risk of the Brazilian real.
The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Brazilian economy.
Even with the strong growth outlook, many global investors still consider emerging markets relatively risky. Despite some progress, organizing new investment and production in Brazil remains cumbersome and bureaucratic. When international growth sentiment weakens, many investors sell such assets and buy assets considered safer, such as gold, the U.S. dollar and Swiss Franc. The world growth scenario was made more difficult by European debt woes. If Greece is unable to pay its debts, banks worldwide will face losses that limit their ability to finance expansion.
Brazil continues to show no shortage of potential investors. However, much of the money flowing into its economy is of a volatile and short-term nature – “hot” money originating in the fiscal easing by which developed economies have flushed their financial systems with liquidity in the hope of restarting domestic lending. Today, Tokyo based investment bank Nomura reported that Japanese retail investors were pumping about $4bn into Brazil every month via mutual funds and have no intention of giving up what has become one of the hottest trades in the post-financial crisis era.
How can investors participate in Brazilian real denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 5,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.
The end of US quantitative easing appears unlikely to have any immediate impact on currency markets as interest rates remain low across the developed world and the strong domestic growth of Brazil lures ever more foreign investment. The Brazilian economy continues to expand as a result of robust commodity exports, and the global financial and economic turmoil’s impact has been moderate. Brazil is seen as a vigorous, young, high-growth market, where the risk lies primarily in overheating rather than national bankruptcy. As a result, it is our opinion that the combination of a short term, high yield debt in Brazilian real, offered by a highly accredited banking institution, make this issue an ideal insertion into a laddered fixed income portfolio, and it is why we are adding it to our Foreign and World Fixed Income holdings.
Disclosure: Durig Capital clients currently own these European Bank bonds.
To know more about this Reconstruction bond call our fixed income specialist at 971-327-8847
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