Slim Saving Money for Brazil’s Net as Bid May Boost Debt Rating
Speculation that billionaire Carlos Slim will buy Net Servicos de Comunicacao SA, Brazil’s biggest cable-TV provider, is driving down the company’s borrowing costs relative to America Movil SA from a record high.
The gap between the yield on Net’s 7.5 percent bonds due in 2020 and 5 percent notes maturing the same year sold by Slim’s America Movil shrank 50 basis points, or 0.5 percentage point, in the past two months to 200, according to data compiled by Bloomberg.
The difference will narrow further because Sao Paulo-based Net may have its credit rating upgraded should America Movil increase its current 49 percent share and take a controlling stake, according to Credit Suisse Group AG. An America Movil unit said in a May 26 regulatory filing that a law change allowing foreign companies to control Brazilian cable-TV operators would give it the right to boost its Net stake to 51 percent through a local subsidiary.
“The bond has significant potential in terms of moving up the credit curve,” said Luz Padilla, who manages developing- nation debt at DoubleLine Capital LP in Los Angeles. “The fact that it has Carlos Slim in the capital structure is obviously a plus.”
Net, which aims to offer packages of mobile, home-phone, video and Internet service to customers, is rated BB+ by Standard & Poor’s, one step below investment grade, and an equivalent Ba1 by Moody’s Investors Service. Mexico City-based America Movil, Latin America’s largest wireless carrier, is rated A-, four levels higher, by S&P and A2 by Moody’s, a difference of five grades.
‘Too Wide’
The yield on Net’s $350 million of 2020 bonds has dropped 72 basis points since the end of May to 6.55 percent, the lowest level since the company sold the securities in October. America Movil’s bonds yield 4.3 percent, down 74 basis points since May.
The so-called Z-spread between the companies’ bonds may narrow to 150 basis points from about 235 earlier this month, said Alejandro Luciano a corporate debt analyst with Credit Suisse. The gauge measures the bonds’ risk premium versus the U.S. Treasury yield curve.
The gap is “a bit too wide for a company owned by America Movil,” Luciano said. He said rating companies will probably give Net Servicos an investment-grade rating if America Movil becomes majority stakeholder. “If they get upgraded, the bond has more upside,” he said.
Eduardo Barker, a Moody’s spokesman in New York, and Sao Paulo-based S&P analyst Milena Zaniboni declined to comment.
Senate Debate
Slim, who passed Bill Gates and Warren Buffett for the top spot on Forbes magazine’s annual list of billionaires, is waiting for Brazil’s Congress to modify a law preventing foreign control of a cable-TV company. The lower house passed a bill permitting foreign ownership on May 5. The Senate will likely take up the legislation after presidential and congressional elections in October, said Senator Demostenes Torres.
America Movil’s Rio de Janeiro-based Embratel Participacoes SA unit owns 49 percent of voting shares and all the non-voting shares in the holding company that controls Net, according to the May 26 regulatory filing.
“It’s too early to price as if it’s an investment grade,” said Natalia Corfield, a corporate debt analyst at ING Groep NV in New York. A change in the foreign ownership law is “very uncertain” because of the elections, she said. “A lot of things can delay the process.”
Default Swaps
A spokeswoman with Mexico City-based America Movil declined to comment. A Sao Paulo-based spokeswoman for Net didn’t respond to a request for comment.
The average yield gap on Brazilian corporate dollar bonds over U.S. Treasuries declined 10 basis points to 323 last week, according to JPMorgan’s CEMBI index.
The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. securities fell 18 basis points to 210 last week, according to JPMorgan. The spread has dropped three straight weeks, the longest streak since November.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps dropped eight basis points to 120, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Yields on Brazil’s interest-rate futures contract due in January fell 12 basis points to 10.94 percent after a policy meeting in which central bankers raised the benchmark overnight rate a less-than-forecast 50 basis points to 10.75 percent. All but three of the 51 economists in a Bloomberg survey predicted a 75 basis-point increase.
The real rose 0.5 percent to 1.7738 per dollar.
‘Potential Upside’
Net’s bonds yield 230 basis points more than Brazilian government notes due in 2019, according to data compiled by Bloomberg. The spread narrowed from a record 285 in November.
“When you buy this bond, you are getting a very solid company in which you can obtain relatively good yields versus the sovereign, for example,” said DoubleLine’s Padilla, who has covered emerging markets for 16 years. “And you can get potential upside.”
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Tags: America Movil, America Movil SA, Carlos Slim, Credit Suisse Group AG, Credit-default swaps, Embratel Participacoes SA, ING Groep NV, interest-rate futures, Moody’s Investors Service, Net Servicos de Comunicacao SA, Standard & Poor’s