Analysis-Hopes for revival of Brazil's IPO market evaporate

Analysis-Hopes for revival of Brazil's IPO market evaporate

By Luciana Magalhaes

Concerns about Brazil's fiscal health and high interest rates have helped dash hopes that as many as 20 of its companies could go public this year, ending a two-year drought in the country's once-booming IPO market.

Businesses in a wide swathe of sectors, including construction, retail and infrastructure, are increasingly reconciling themselves to the likelihood that another window for initial public offerings may not open until next year or possibly until after Brazil's presidential election in late 2026.

"There is no climate for an IPO in Brazil right now," said Matheus Kuhn, chief financial officer of Kallas Incorporacoes e Construcoes, which for years has had on-again, off-again plans to sell shares through an IPO.

The Sao Paulo-based construction company is postponing its stock sale once more, possibly until 2025 or later, Kuhn told Reuters.

Kallas and other firms that have postponed plans to go public blame Brazil's persistent fiscal concerns, the country's high interest rates, which have tended to push investors from equities into fixed income, and fears of a U.S. recession.

Brazil, home to the largest economy in Latin America, has not seen an IPO in almost three years. Fertilizer producer Vittia was the last company to do so, debuting on the B3 stock exchange in September of 2021. Three months later, digital bank Nubank listed on the New York Stock Exchange while launching Brazilian Depositary Receipts (BDRs) on the local market.

Nubank raised $2.6 billion in its IPO, promptly becoming Latin America's biggest bank by market capitalization.

The IPO enthusiasm hit a wall in 2022 as a surge in inflation prompted Brazil's central bank to raise interest rates faster than in many other Western economies, sending a chill through domestic equity markets.

Hopes that a new round of IPOs might be in the offing grew last year and early in 2024 in step with a loosening of monetary policy, only to be dashed in recent months as the Brazilian central bank paused its interest rate cuts amid rising concerns about Brazil's fiscal health as well as a possible resurgence of inflation.

In July, President Luiz Inacio Lula da Silva's government widened its primary deficit forecast for this year, prompting a spending freeze to meet the fiscal target. The move stoked investor fears the leftist government would not deliver on its promise to maintain fiscal discipline.

The failure so far of the U.S. Federal Reserve to cut interest rates in 2024 despite expectations at the start of the year of a substantial reduction in borrowing costs has further bolstered the dollar and darkened the cloud over Brazilian equities.

"We were ready, just waiting for signs from the fiscal side in Brazil and from the monetary side in the U.S.," said Andre Avelar, the CFO at Emccamp, another construction company that is also likely to shelve its 2024 IPO plans.

'DRY SPELL'

Construction firms have been among the most prominent IPO candidates given the capital-intensive nature of their businesses.

Marcelo Mello, the CEO at SulAmerica Investimentos, told Reuters the asset management firm was initially expecting Brazil to emerge from the IPO drought starting in the second quarter of 2024, with about 20 primary share offers this year. The firm now predicts none of those deals are likely to happen until 2025.

Daniel Wainstein, managing partner at financial advisory firm Seneca Evercore in Sao Paulo, said he would not be surprised if Brazil did not see another primary share offering until after the next presidential election, scheduled for October of 2026.

Data compiled by the firm shows 81 companies have carried out IPOs in Brazil since 2018, mostly in 2020 and 2021. Of those, 74 are still listed, with the tech, retail and real estate sectors representing a little more than 50% of the new entrants still trading.

Most recently, even amid a pick-up in primary issuances in the U.S. and Europe, Brazil and many countries in the Asia-Pacific region have lagged, pushing local IPO candidates to look for other options, including debt issuance or private equity deals, according to Wainstein.

That's the case with Igua Saneamento, a Sao Paulo-based sanitation company, which last year issued 3.8 billion reais ($696 million) in debentures to finance its investments.

Igua CEO Roberto Barbuti said the company had been mulling an IPO for a while, but that the still-hazy climate makes a primary share offer unlikely this year.

"We had not had such a dry spell in IPOs since the market became more relevant in the early 2000s," he told Reuters, referring to a period when Brazil's stock exchange sought to boost investor confidence by creating premium listings for companies with corporate governance practices beyond those normally required.

While the debt market will continue to be an option for many local businesses, executives argue that listing shares on a stock exchange provides much more than capital.

"Listing shares is strategic to us," said Victor Bassan de Almeida, executive chairman of Pacaembu, another Sao Paulo-based construction company, explaining that listed companies tend to have higher visibility and are able to attract and retain well-qualified professionals.