Azul Float Raises Hopes for Brazil's Stalled IPO Market

04/19/2017 - 13h40

When the Azul airline this month held Brazil's first initial public offering of any size in nearly four years, the head of São Paulo's bourse, Edemir Pinto, was ecstatic.

"The capital market is the right destination for companies that want to grow and fly high like Azul," Mr Pinto, chief executive of B3, which runs the exchange, said.

Latin America's largest stock market has been anything but a favoured destination - the worst recession on record, corruption scandals and a political crisis last year scared off investors. But this year, participants believe the drought in new listings might be ending.

"The market is forecasting that, all being well, there could be up to 10 to 15 IPOs coming this year," Robert Ellison, partner at law firm Shearman & Sterling in São Paulo, said.

Brazil was until a few years ago an engine for new IPOs. The peak was in 2007 when the economy grew 7.5 per cent and 66 companies listed in São Paulo, raising $32.3bn. Volumes slowed but remained respectable by Brazil's standards until 2014-16, when just one IPO was held a year in São Paulo, each raising on average only about $200m.

So the Azul IPO, which raised $571m, excluding greenshoe options, has been greeted with optimism. It follows two smaller offerings, that of Movida Participações, a car rental group, which raised $180m, and Hermes Pardini, a medical equipment company, which sold $245m of shares. Netshoes, an online sports store, held a $149m offering, though that was in New York.

"It's a year of reawakening," one banker in New York said.

The green shoots in the IPO arena follow a robust performance in shares, with the MSCI Brazil up 57 per cent last year against a 7 per cent gain for MSCI Emerging Markets. This was boosted by the real, which in 2016 was the best-performing emerging market currency against the dollar, up 22 per cent.

The recovery has been fuelled by a change in the political outlook after Dilma Rousseff was ousted and replaced by fiscal conservative Michel Temer, whose move to cap real public spending rises for up to 20 years and pension reforms have won investor support.

It has been accompanied by a fall in inflation to near the centre of the central bank's target of 4.5 per cent plus or minus 1.5 percentage points, which is allowing policymakers to slash rates. This week the central bank's monetary policy committee cut its benchmark Selic rate by a full percentage point to 11.25 per cent, the first time it has made such a big cut since 2009.

"The [central bank] indicated that, for the moment, 100 basis points is the preferred pace of easing," Itaú Unibanco chief economist Mario Mesquito said. He expects the Selic to fall to 8.25 per cent by end-December.

But the run-up in the market is leading to greater caution among some investors, especially as the political scene remains volatile. A court decision to authorise corruption probes into eight of Mr Temer's ministers, about a third of the senate and a large number of his allies in the lower house has created fears his reforms could be disrupted.

Any watering down or scrapping of the pension changes could spark selling and hurt the market for further IPOs. "We urge caution for investors with exposure to Brazil, as asset prices appear too rich given growing risks," analysts at Brown Brothers Harriman said.

Still, participants expect more companies to dip their toes in the IPO waters, with large conglomerates conducting "carve-outs" - selling non-core assets as they seek to restructure. Consumer companies, too, might begin to start to raise capital ahead of an anticipated recovery next year.

Investors are expected to be picky. While Azul was seven to eight times subscribed and performed well on debut, Netshoes' shares dropped sharply when trade opened.

"I wouldn't overstate it . . . we don't have a clear runway," the banker in New York said. But "Brazil has an active pipeline. We are starting to see a pick-up in IPO filings by corporates."