* Itau, Pactual win bond mandates outside Brazil* Strategy seen paying off as expansion gains steam* Underscores strength of local shops regionallyBy Guillermo Parra-Bernal and Aluisio AlvesSAO PAULO, Feb 15 Brazilian investment banks, which in recent years gained muscle by snatching away lucrative deals from their foreign rivals, are now showing their might by clinching more mandates to handle corporate bond sales across Latin America. Itaú BBA, BTG Pactual and Bradesco BBI, all based in São Paulo, are taking advantage of the busiest start of the year for corporate bond offerings since 2007 to manage deals for Argentine and Chilean issuers. As activity picks up, they expect to land more mandates from Colombia and Peru. Private and publicly controlled companies in Latin America sold $24.2 billion in foreign currency-denominated bonds in the year through Feb. 10, up from $14.28 billion in the same period a year earlier, according to Thomson Reuters data. More deals await Brazilian shops, which are besting their foreign competitors in forging strong ties with customers, funding deals and setting distribution networks rivaled only by global banks. The retreat of traditional lenders in the United States and Europe in the aftermath of the financial crisis of 2008 is also helping."Brazilian banks are now being taken much more seriously by rivals," said Renato Ejnisman, head of debt capital markets for Bradesco BBI, the securities unit of Banco Bradesco, Brazil's second-biggest private sector lender.
Currently, Itaú BBA, the investment banking unit of Itaú Unibanco Holding, is a joint bookrunner in a sale of six-year debt for Argentina's Empresa Distribuidora de Electricidad de Salta. Pricing for the deal is expected as early as this week."We have two mandates for Chile," Nadine Cavosoglu, a senior debt capital markets banker for Itaú BBA, said in a phone interview from New York. "We will see more activity from March on, once markets digest the recent supply."Cavosoglu, a former UBS AG banker who joined the Brazilian bank's New York desk in 2009, declined to elaborate on the upcoming mandates. BTG Pactual, the three-year-old banking powerhouse created by banking wunderkind André Esteves, is helping the City of Buenos Aires sell debt in its return to bond markets after a two-year hiatus. Citigroup and Barclays Capital are also involved in the transaction.
"Our strategy is to keep attracting business from companies outside Brazil," said Alexander "Sandy" Severino, a veteran banker who is responsible for foreign bond sales advisory at BTG Pactual in New York. Bradesco BBI last month was named a co-manager for a sale of five-year bonds by the financing arm of Ford Motor Co -- a move probably aimed at luring Latin American investors to the securities. COLOMBIA, CHILE
The increase in advisory roles outside Brazil coincides with efforts by Brazilian banks to set up units in other Latin American countries. Last week, BTG Pactual agreed to buy Chilean rival Celfin Capital for about $600 million, a step in its plans to win more capital market advisory business in Chile, Colombia and Peru. BTG Pactual and Esteves himself have become a symbol of Brazil's growing economic might, competing neck-and-neck with big global investment banks in a region with bustling capital markets and booming demand for wealth management services. Itaú BBA is scheduled to start investment-banking operations in Colombia by mid-year as Brazil's most profitable bank taps a growing market for deal advisory in Latin America's third-largest economy. Itaú BBA already has offices in Argentina, Peru and Chile. Rivals such as state-controlled Banco do Brasil are also on the lookout for banking assets in Colombia. Bradesco BBI plans to open a unit in the once violence-torn Andean nation, Sergio Clemente, senior vice president in charge of investment banking and wholesale banking, told Reuters in December. Colombia is South America's second-most populous nation and, like Brazil, has a diversified economy dependent on oil, coal, agriculture and manufacturing.
and record sell-off of municipal bonds this year, most top-quality "munis" are safe to hold. If you are a conservative, buy-and-hold investor who wants to temper risk, you might want to stick to the highest-rated bonds from states and localities that do not have looming pension or other payment problems. Those quality munis offer decent yields and their prices are even more attractive in the wake of the Detroit bankruptcy. Reacting to higher interest rates and the high-profile troubles of some states and cities, investors have been pulling out of muni bonds and the mutual funds and exchange-traded funds (ETFs) that hold them. They withdrew $1.2 billion out of U.S. municipal bond mutual funds in the week ending July 24, according to Lipper, a Thomson-Reuters company; more than $20 billion has been withdrawn in the second quarter of this year. Muni-bond ETFs have taken their lumps of late because of the sell-off. The iShares S&P National AMT-Free Muni Bond ETF (MUB), which invests in an index representing the U.S. muni-bond market, for example, is down 4 percent for the year through July 26 and off more than 6 percent over the past three months. It is yielding nearly 2 percent. A similar fund - the SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI) - is down 4 percent for the year through July 26 and lost 6 percent over the past three months. It is yielding nearly 3 percent and charges 0.23 percent for annual expenses.
Both funds are good proxies for the U.S. muni bond market and worthy portfolio holdings, but that doesn't mean they are immune from interest-rate risk. Like most bond prices, muni prices drop and yields climb when interest rates rise. Investors drop lower-yielding notes to chase higher yields. "Munis often take their cues from (U.S.) Treasuries, and when the 10-year jumped so did their yields," Jeff Tjornehoj, head of Lipper Americas Research, told me. Investors may like finding the higher yields, but issuers feel the pain in terms of higher borrowing costs. States like Illinois and California, already straining under tens of billions of dollars of pension-fund debt, have to pay more to finance that debt when rates rise, further straining their budgets and ability to repay. The sluggish economy may also hamper the ability of taxing bodies to collect taxes and pay bondholders, and that - along with tighter federal budgets - could continue to pressure issuers, according to Warren Pierson, senior portfolio manager with Baird Advisors in Milwaukee. He pointed out in a July 19 research report that six municipalities are now downgraded by credit analysts for every one that is upgraded; state downgrades outnumber upgrades 4-to-1.
Although many market watchers say that the bond-market sell-off last month might have been an over-reaction to Federal Reserve statements that it will soon back off its easy-money program - a position it softened two weeks ago - it pays to be cautious when purchasing muni-bond funds. These vehicles may hold a number of bonds not only prone to potential defaults, but highly interest-rate sensitive. No one has said that interest rates won't climb again as the economy heats up or Fed changes its policy. With most bond funds, if you want to stem interest-rate risk, the best way to do that is through shorter maturities, which are less sensitive to rate increases than longer-maturity notes.
The iShares S&P Short-Term National AMT-Free Muni Bond ETF (SUB), is down less than 1 percent over the past year and over the past three months, through July 27. The trade-off for its stability is lower yield - currently it is less than 1 percent; expenses are 0.25 percent annually. You can find a slightly higher yield in the SPDR Nuveen Barclays Capital Short-Term Muni Bond ETF (SHM), which is yielding just over 1 percent. Like the iShares fund, the SPDR ETF has lost less than 1 percent in the yearly and three-month periods through July 27 and charges 0.2 percent annually in expenses - a slightly better deal than the iShares fund. ON THE SAFE SIDE For those investing in individual bonds, to stay on the safe side, choose non-callable bonds with the highest credit-quality ratings - "A" or better. With lower-rated bonds, there's a higher risk of default. My home state of Illinois, for example, has the lowest credit rating in the country - ratings agency Standard & Poor's gives it a "BBB" rank ("AAA" is the highest) - due to the state's $97 billion pension liability. A registered investment adviser, chartered financial analyst or certified financial planner can help you vet single bonds for your portfolio. If you need tax-free income and want a more diversified approach, mutual funds or ETFs are still worth holding. Just keep in mind that higher yields come with much higher risk, which doesn't seem to be going away - even in an improving economy.