In Brazil, one of the world’s worst hotspots for the coronavirus, a crowded pipeline of initial public offerings got a harsh reality check.
reports that Brazilian builder Direcional scrapped plans this Tuesday to list shares of its unit Riva 9, a real-estate developer focused on middle-income housing. The firm cited “unfavorable market conditions”.
This decision marked a disappointing start to what had promised to be a busy stretch of equity sales in Latin America’s largest economy. According to data compiled by Bloomberg
, four Brazilian companies are still due to hold IPOs over the next two weeks. Including an education firm, which is going public in the U.S. but has yet to announce a pricing date, could boost Brazil’s tally to five: the highest number for any fortnight since 2007.
“Brazilian issuers are seeking to take advantage of the dissonance that has seen equity markets soaring around the globe amid a global health catastrophe,” Bloomberg
Money managers in São Paulo said they’ve been flooded by pitches from bankers in recent weeks as companies that put off sales at the beginning of the pandemic look to capitalize on resurgent demand.
“Companies are worried that this window may be relatively short due to the disconnect between market levels and the state of the real economy,” said Pablo Riveroll, the head of Latin American equities at Schroders Plc in London.
While Brazilian stocks have bounced back 64% from their March lows, the local economy is expected to shrink almost 6% this year.
Several of the companies seeking to go public have challenging histories. Among the firms are an Advent-backed home improvement retail chain, which the private equity firm has held onto for more than a decade, a money losing high-end clothing retailer and a spin-off of a pharmaceuticals company that’s down 70% since it debuted in 2006.
Globally, the IPO picture is mixed. Sales reached $83.1 billion in the past three months, up from $68.5 billion during the same period last year, with China’s red-hot market accounting for almost half the total, according to data compiled by Bloomberg
. The number of deals, however, declined to 370 from 423.
While Brazil’s market is seeing a surge in volume, the amount being raised is modest. The four companies are targeting just 6.4 billion reais ($1.2 billion) – less than what retailer Lojas Americanas SA got in a follow-on offering two weeks ago.
A proliferation of smaller asset-management funds and strong demand from retail investors may provide demand for the sales. Foreigners, on the other hand, have bought only about 36% of local share sales in the first half of the year, down from 47% during the same period last year, according to stock exchange data.
“With more AUM in local equity funds, corporates are taking advantage of the opportunity to tap the markets and refinance debt, invest in future growth, or both,” said Malcolm Dorson, who helps manage about $950 million of emerging-market funds at Mirae Asset Global Investments in New York.