Brazil upgrade sparks LatAm investment-grade frenzy

Fri May 9, 2008 10:30am EDT
By Walter Brandimarte - Analysis
NEW YORK (Reuters) - The recent upgrade of Brazil's credit ratings by Standard & Poor's has stoked expectations that ratings agencies are about to hand out a handful of tickets to the coveted investment-grade club of low-cost borrowing in Latin America.
Investment-grade passes are in the pipeline for Peru, Brazil, Colombia and Panama, analysts and government officials of those countries say, feeding an investor frenzy that has helped support prices of sovereign bonds and currencies in the region.
Peru and Brazil were the latest to be promoted to investment-grade territory -- the former by Fitch in the beginning of April and the latter by S&P last week -- and investors expect both countries to get more upgrades from other rating agencies soon.
"There is talk in the market that Fitch is about to upgrade Brazil to investment-grade status," said Andrew Brenner, senior vice president at MF Global in New York.
With investment-grade classification by two ratings agencies, Brazil's bonds would be added to the benchmark Lehman Aggregate Bond index, creating an additional demand of $10 billion to $20 billion for the securities, Brenner estimates.
While Moody's has said Brazil's high public debt is the main constraint for an upgrade, Fitch advised last week that the country's ratings are currently under "active review."
Fitch still has a stable outlook on Brazil's ratings, but that would not stop it from upgrading the country right away, the same way it lifted India to "BBB-" from a stable "BB+" rating in August, 2006.
Peru is also about to get its second investment-grade credit rating, this time from S&P, Prime Minister Jorge del Castillo told congress this week, adding that he had a meeting with S&P representatives on Thursday.
Government officials in Latin America usually like to inflate their chances of getting a credit upgrade, but even S&P acknowledges that Peru's high growth rates are a good reason to review its ratings up, despite weak institutions and ethnic issues.
In a recent interview with Reuters, S&P managing director Jane Eddy said the agency wants to see Peru's economic growth, which has been "significant", but "initially very concentrated in a couple of mining areas," spilling over to other sectors of the economy before an upgrade.
Since Brazil's upgrade last Wednesday, spreads over U.S. Treasuries of Brazilian, Colombian and Peruvian debt tightened more than 10 basis points each, while the overall emerging debt market remained practically flat according to the JP Morgan EMBI+ index.
Spreads measure the additional yield over benchmark U.S. Treasuries that borrowers need to pay investors when issuing bonds abroad.
RECOUPING INVESTMENT GRADE
Colombia has also been fighting to recover the investment-grade status it lost about eight years ago, and analysts say the latest efforts to "convert" external debt into peso-denominated securities may pay off soon.
Colombia unveiled this week plans to hedge in the local market as much as $20 billion worth of foreign debt against a possible appreciation of the dollar. In doing so, the government would take advantage of the current strength of the peso, eliminating at the same time one the main sources of external vulnerability.
"Who knows, the ratings agencies may like what they see and think further about an upgrade," Lehman Brothers' analyst Gianfranco Bertozzi wrote in a recent note to clients, referring to Colombia's debt plans.
Panama is also on track to be admitted into the club. S&P and Fitch currently have the country at "BB+," one notch below investment grade.
In the beginning of the year, Fitch said Panama is poised to get an BBB-level rating within two years, as the economy speeds up.
(Additional reporting by Richard Leong; editing by Clive McKeef)