Uncertainty in Brazil as web of corruption probe expands; tax bill, Christmas in focus

By Rebecca Melvin

New York, Dec. 20 – There were plenty of news headlines originating out of Latin America on Wednesday but not enough to turn investors’ heads as the long Christmas holiday weekend came into view.

“Things were just very slow ahead of Christmas day, and all the brokers left early,” a New York-based trader said.

Emotions were running high in Brazil, however, after Marcelo Odebrecht, the former head of Latin America’s biggest construction company, was released from jail on Tuesday after serving only 2.5 years of a 19-year sentence resulting from the so-called Car Wash probe of 2015.

The far reaching scandal has hit governments and businesses across the whole region, with the latest casualty being Peruvian President Pedro Pablo Kuczynski, who is facing an impeachment vote on Thursday after documents came to light last week that he was allegedly involved in a kickback scheme with Odebrecht more than 10 years ago when he was a government official.

Under the terms of his plea agreement, Odebrecht is not allowed to reestablish himself in the company’s executive suite, but there is uncertainty regarding what his house arrest for the next 2.5 years will look like.

Odebrecht admitted to paying almost $800 million in bribes for contracts across America, and many are outraged by the abbreviated prison time.

The news was not spurring trading of Brazilian debt. If anything, “everyone is focus on the U.S. tax reform,” a trader said.

It is not clear what impact the bill will have on emerging markets. It will mainly affect rate and risk markets elsewhere, the trader said. “You can’t just say that it may boost a strong dollar and that will hurt emerging markets. Strengthening could be good for exporters.”

Nevertheless, “volumes have slowed down and there is nothing to report” on Wednesday’s session, the trader said.

“There’s no new issues. It’s just dead. Brokers left an hour ago,” the trader said.

The ICE BofAML Brazil index (EBRZ) showed an estimated total return of 12.4% for 2017. The bank thinks that there is still juice left in the rally as BBB (209 basis points) and BB (288 bps) spreads are still plus 30 to 35 bps wider than peers and most companies are on a positive trajectory.

Elsewhere, Russia’s Lukoil has sufficient liquidity to repay its upcoming maturity on its $1.5 billion bonds due April 24, 2018 but is also expected to come with a new deal in the first quarter, a London-based market source said on Wednesday.

The oil and gas company’s notes due 2023 were seen in the market on Wednesday at 103.858, leaving it at a yield of 3.76%, or spread of mid-swaps plus 147 basis points, according to the source.

The Lukoil 4¾% notes due 2026 were at 104.746 with a 4.11% yield and spread of mid-swaps plus 169 bps.

Lukoil’s z-spread on the 2026 notes has tightened substantially since issue in October 2016 and traded 15 bps above the underlying sovereigns, according to research firm Gimme Credit.

“Lukoil’s growing exposure to oil and gas fields that generate higher operating margins than its operations in West Siberia will help the firm maintain elevated EBITDA margins and support its credit profile going forward,” Gimme Credit analyst Aledandre Dray wrote in a note published Wednesday.

“With industry-low leverage ratios and annual cash flow from operations exceeding its outstanding debt pile, Lukoil has a strong credit profile and we do not expect the increase in dividend payments and capital spending after 2018 to put the credit story at risk,” Dray wrote.

© 2015 Prospect News.
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