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Investment-Banking Fees Shrink 38% in Brazil Even as M&A Doubles
(Bloomberg) -- Investment-banking fees in Brazil shrank 38% so far this year amid global inflation, sagging economic growth and rising interest rates. Some bankers see a brighter outlook for the second half.
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“We can expect some improvement on deal activity for the remainder of 2022, but most likely the fee pool won’t surpass $1 billion, compared to more than $1.4 billion last year,” Bruno Saraiva, co-head of investment banking in Brazil for Bank of America Corp., said in an interview. Saraiva’s firm tied with Banco Itau BBA SA for the No. 1 rank by fees from Brazil this year through June 23, according to research firm Dealogic.
Rising interest rates in the US and Brazil reduced capital-markets activity, and fees from advising on mergers and acquisitions and underwriting debt and equity sales fell 38% to $443 million. That happened even as M&A revenue doubled from last year, accounting for about half of the total fee pool, Saraiva said.
“M&A activity is less volatile and will drive investment-banking volumes this year,” he said.
Much of the strength in M&A fees this year is due to deals negotiated in 2021 that are being completed now, said Cristiano Guimaraes, director of global corporate and investment banking at Itau BBA, which handled about 100 investment-banking transactions so far this year, more than any other bank.
Many private equity firms that raised funds in recent years are taking the opportunity to invest now that valuations are more attractive, said Eduardo Miras, head of investment banking at Citigroup Inc. in Brazil, which climbed to fifth from 10th on Dealogic’s fee rankings.
“M&A is quite active right now, but investors are demanding new valuations,” Miras said. “You can’t simply ignore the falling prices in public markets.”
Private transactions can survive difficult markets because tailor-made adjustments negotiated between buyer and seller are possible, said Fernando Iunes, vice chairman for banking, capital markets and advisory in Brazil for Citigroup.
One of the biggest M&A transactions was the 3.57 billion reais ($682 million) assets sale by car-rental firms Localiza Rent a Car SA and Unidas SA, including around 49,000 cars, to an investment fund managed by affiliates of Brookfield Asset Management.
“In Itau’s case, falling revenue from equity underwriting is compensated by a really strong position in the booming local debt capital markets business, where we are way ahead of competitors in the league tables, with more than double the deals,” Guimaraes said.
Itau handled 33.8 billion reais in 105 debt underwriting deals in the year through June 27, compared with 17.3 billion reais in 48 deals by second-place Banco Bradesco BBI SA, according to data compiled by Bloomberg.
Many investors looking to profit from rising interest rates have switched from equity funds to fixed-income funds, which reached an all time high of 2.8 trillion reais in assets, according to Anbima, the capital-markets association. While share sales are down 42% this year, to 45.8 billion reais, issuance of corporate bonds in Brazil’s domestic market -- mostly floating-rate or inflation-linked debt -- climbed 20%, to 117.7 billion reais, according to data compiled by Bloomberg.
Fees from underwriting equity offerings tumbled 80% even with the 33.7 billion-real share offering that privatized Brazil’s giant power utility, Eletrobras, in this year’s second-biggest such transaction globally, according to Dealogic.
Doubts over the October presidential election are also contributing to market stress, helping to explain why there hasn’t been a single initial public share offering this year. IPOs typically pay underwriters better than additional share sales from already known public firms. International bond issuance is also down, falling about 66% to $5.3 billion, according to data compiled by Bloomberg.
“The year will be weaker than 2021 for investment-banking activity, with equity capital markets concentrated mostly in follow-on offerings,” Guimaraes said, adding that local bond issuance will most likely continue to help offset lack of vigor in other markets.
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