Recent Brazilian IPOs have incorporated novel support structures in an attempt to generate demand, but some ECM bankers warn that the movement away from traditional bookbuilding might damage, rather than help, the troubled primary issuance market.
In mid-April, Biosev priced a R$814 million ($407 million) IPO that incorporated put options to guarantee that investors would not lose money in the first year. The share price of R$15 had been set before the sale, eschewing the traditional bookbuilding process. Put options were sold for R$0.25. The company raised roughly R$9 million in option proceeds, indicating that about 37 million of the 53.7 million primary shares were bought with an option in place. It was the company’s second attempt to list and BTG Pactual replaced Santander and Banco Votorantim as bookrunner, alongside Banco do Brasil, Bradesco BBI, Itaú BBA and JPMorgan.
More contentiously, in mid-July CPFL Energias Renováveis priced its R$1.04 billion IPO at the bottom of its R$12.51 to R$15.01 range. BTG Pactual – which was a late addition to the list of bookrunners, alongside Bank of America Merrill Lynch and Itaú BBA – guaranteed that it would buy 56% of the shares at the bottom of the range if demand fell short. Pension fund Previ also committed itself to take R$400 million at this price.
Although the guarantee structure created initial positive news for the deal – along the lines that if BTG Pactual was supporting the trade it must be a sound investment – competitors argue that the practical implications of the structure soon weakened the investment case. The deal duly priced at the bottom of the range, and unconfirmed reports suggest that BTG Pactual ended up with a very large proportion of the shares, which it has placed into its private equity operation.
“A guarantee like this essentially makes the deal’s floor the ceiling as well,” argues one ECM banker who worked on the transactions, who says that investors soon realized that they might end up owning a stock with a huge overhang created by a large BTG Pactual-owned block of shares. “There wasn’t normal distribution on this deal. BTG Pactual ended up owning quite a bit and when we received orders they came with a tail: investors were qualifying what they wanted in terms of size and price, but adding in what they needed to see as a minimum float and liquidity to the stock. That’s a whole new dimension. No one wanted to be the only public market buyer and be faced with a big future overhang.” The banker says the guarantee became a big hindrance to the bookbuilding process as investors perceived they might end up in an IPO that had the after-market characteristics of a private placement.
For the full story visit Euromoney’s August issue