We have identified an AAA rated European Bank for Reconstruction and Development (EBRD) Bond targeting a yield of 8.24% denominated in Brazilian Real, maturing November 2013, 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 projected yield of 8.24 % for 29 months. This Brazil (European Bank) debt compares very well with its high yield and AAA ratings to our current list of available Brazil Government and Corporate Bonds. While the US dollar has been strengthening slightly in the last few days, its longer term weakening trend against many world currencies remains a major concern for investors seeking protection against the loss of the dollar’s buying power. This bond provides diversification to 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 make it an attractive destination for foreign investors, and we are pleased to have found such a high yielding short term bond of this caliber. It is therefore our opinion that it is This Week’s Best Bond.
US Debt Woes
When the US reached its $14.3 trillion self-imposed debt ceiling last Monday (5/16/11), few economists imagined that a new wave of Treasury purchases would push the yield on the 10-year note to a 2011 low of 3.12% the very next day. The most common thought seems to be that it’s the result of foreigner’s buying Treasuries in order to escape the fallout of a Greek default. However, among the number off reasons that may be cited for this, what is noticeably lacking is much confidence in the longer term strength of the dollar and any remarkable changes or significant improvements in their outlook for the US economy. The annualized CPI in America has increased to 3.2%, which means the government yield curve out to 10 years now carries a negative real rate of interest; thus CD Investors are virtually assured of a loss in buying power or wealth – Safely. In our effort to diversify and protect our client’s assets against a further devaluation of the dollar and inflation threats, here at Durig Capital we scour the globe in search of sound investments.
Brazilian Economy
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.
Standard & Poor’s Ratings Services lifted its outlook this week on Brazil’s rating to positive from stable. The more bullish view comes as a number of South American nations–including Chile, Peru and Colombia–have been praised by ratings agencies for more than a year as they were less affected by the global economic slowdown than nations with more developed economies. Rival agency Fitch Ratings had lifted its rating on Brazil to BBB, citing strong growth, in April. Analyst Sebastian Briozzo said the outlook reflects Brazil’s strengthening prospects for steady, long-term gross domestic product growth, along with modest current account and fiscal deficits that should gradually reduce the country’s vulnerability to negative external shocks. He further states that its diverse economic structure, expanding middle class, and the potential for higher exports should sustain both GDP growth and external liquidity in the next three to five years.
Brazil’s real and other Latin American currencies are often called “commodities currencies” because of their countries’ heavy dependence on 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. Brazil’s IBGE statistics institute reported Friday mid-May IPCA consumer price index came in with a gain of 0.70%, only slightly slower than the 0.77% rise reported the previous month. The result, however, left 12-month inflation at 6.51%, still well above the country’s year-end target of 4.5%.
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.
Risks
The default risk is EBRD’s ability to perform. Given its underlying strength and AAA rating, as outlined above, it is our opinion that the default risk is 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 is by no means short 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. This trend has seen the Brazilian currency appreciate by 45 per cent against the dollar in the past two years: something that threatens to wreak havoc on the potential for growth in export-facing, high value-added industries. However, the news this month that Mubadala Development was considering a US$13 billion (Dh47.74bn) investment in the Brazilian economy reflects the growing interest among big institutional investors in the so-called Brics (Brazil, Russia, India, China and now South Africa.)
Allotments
How can people invest in Brazilian Real Bonds? With most firms it often requires an institutional sized single bond purchase. To circumvent this constraint, at Durig Capital we often combine world bond buyers into a larger institutional sized purchase. In this week’s offering, we anticipate being able to facilitate purchases as low as $ 5,000 US Dollars should that be the level best fits your desire. So the answer to the question is simple – contact your Durig professional.
Conclusion
The Brazilian economy has been expanding with the help of booming 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 higher yield in Brazilian real’s, offered by a highly accredited banking institution, for a relatively short term duration make this issue exceptionally attractive, and it is why we are adding it to our Foreign and World Fixed Income holdings.
Disclosure:
Durig Capital clients currently own these bonds.
Contact our fixed Income analyst for questions at (971) 327-8847.
Durig.com | Investment-Income.net
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