Latin Finance - May/June 2010 - 13

equity market turmoil

in one way or another, though – with the notable exception of OSX – they have actually traded relatively well in the aftermarket,” he adds. Some market watchers trace the problem back to Santander Brasil’s October 2009 IPO, which raised an impressive 14 billion reais but traded off 3.7% in its inaugural session. Investors participating claim that poor performance could have been avoided if Santander had been priced more generously, better supported in the aftermarket and allocated more prudently. Santander issued at 23.50 reais and has traded mostly below that ever since. Bankers are publically unwilling to trash a deal that many of them were involved in, from an issuer that could be a potential client. Privately, they are fuming. “It wasn’t helpful. You have a big high profile deal that didn’t trade particularly well,” says a banker at a major institution familiar with the trade, who asks not to be identified. “That was a break in credibility, honestly,” says another senior Brazil-based banker, who also asks not to be identified. “The general sense in the market is that this deal was priced above where it should have been. It was a very large deal that hurt many investors,” he adds.

company, whose earnings potential is untested. OSX priced 3.06 million shares plus 459,000 greenshoe units at 800 reais each to raise a total 2.82 billion reais. It had been hoping to get 7.38 billion reais by selling 5.51 million base shares plus 827,000 greenshoe units at a 1,167 reais midpoint. By mid-April it was trading close to 600 reais.

Batista’s not-so-winning smile “The price was on the high side for a story that still needs to be proven,” says a São Paulo-based banker not on the deal. “The market said “I’m happy to bet, but with a significant discount” and the discount proved to be one that was much more than Eike expected,” he adds. “This is as bad an issue as you’ll ever see,” says another banker not on the trade.

Bad as it Gets

When investors get injured, they ramp up the risk premia on subsequent deals, and very little has gone well in LatAm IPOs since Santander. Issuers continue to push for too much, while the buyside stands back to prey on aftermarket weakness. Aliansce, Multiplus and OSX failed to hit target, Renova was pulled, while Julio Simões fell short of a final range that was significantly lower than initial marketing. Only EcoRodovias and Mills Estruturas e Serviços de Engenharia got what they wanted, albeit at the low end of announced pricing. Follow-ons fared better, highlighting the fact that investors will pay for a track record. Among well received secondary issuers were Hypermarcas, Even and Gafisa. The biggest black eye for 2010 equity was Batista’s oil services and ship building unit OSX, which raised 62% less than targeted. Investors appeared unanimous in their refusal to buy into the Brazilian

Telling Clients Straight

But issuers and their underwriters seem unwilling to accept the market reality. Bankers blame a lack of ownership on large deals placed by multiple underwriters, and say too few advisors are willing to tell clients when they are wrong. Others say that the discount to comparables is being correctly judged, but bankers are not factoring in a discount for poor markets. An increase in number of banks covering Brazil equity aggravates the issue, as those bankers who advise against an issue risk losing the mandate to a more ostensibly optimistic rival.

May/June 2010

LatinFinance 13

Latin Finance - May/June 2010

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