Behind every IPO there is an aggressive growth plan, for which trade finance is central, one Brazilian agribusiness executive tells Luis Waldmann. While there is strong potential for Brazilian agricultural companies to go public in 2008, there could be several reasons dissuading them from doing so.

Trade finance is in hot demand in Brazil, where companies loaded up on the equivalent of US$32bn in initial and secondary public offerings last year. Many of these cash-rich firms are resorting to trade financing to help fund huge investment plans.

The record amount of initial public offerings (IPOs) seen in Brazil in 2007 has not weakened interest in trade finance, says Carlos Aguiar Neto, chief financial officer at BrasilAgro, a soybean startup that raised R584mn (US$324mn) in an IPO on the So Paulo stock exchange in 2006. Sugar mills and meat exporters are those who need trade finance the most, Neto says.

Borrowers are paying on average 150 basis points more for long-term trade-related funding, compared with the levels seen in mid 2007, due to the international credit crunch, Neto says. ‘Good’ sugar mills are now charged about Libor plus 2% for three-year trade financing, from 0.5% over Libor in mid 2007, he adds.

Eight agriculture-related IPOs, which included two sugar and ethanol mills and a fertiliser distributor, fetched R5.7bn last year. Prospects for fresh stock-exchange listings in Brazil are dim because investors fear that an economic recession in the US will slow global growth.

IPOs will fetch 70% less this year than in 2007, expects Flavio Stanger, corporate director at Banco Modal in Rio de Janeiro. Banco Modal has shares in and lends to a host of Brazilian agricultural exporters.

Delayed IPOs include those of fertiliser firm Nutriplant, soybean company Caramuru Alimentos and Norse Energy. Others such as ethanol startup Companhia Nacional de Aíucar e Alcool and oil firm OGX, owned by Brazilian magnate Eike Batista, are still on track.

A short break

Agricultural companies usually resume taking trade finance lines shortly after their IPOs, says Laurence Gomes, chief financial officer at SLC Agrí­cola, a Brazilian producer of cotton, soybeans and corn. SLC Agrí­cola, whose R490mn IPO took place in 2007, will restart borrowing trade finance in 2009, Gomes anticipates.

Behind every IPO there is a very aggressive growth plan, for which trade finance is central, Gomes asserts. SLC Agrí­cola did not repay its debt right after the IPO because the resources are being used for investments such as land purchases, he says. The company sold 39.1% of its equity on Bovespa, the So Paulo stock exchange.

Moreover, SLC Agrí­cola’s credit rating improved as the company began to report quarterly to the CVM, the Brazilian Securities and Exchange Commission. Likewise, large international banks became more interested in the company, making the supply of long-term pre-export finance abundant, Gomes says.

Trading and food companies buy most of SLC Agrí­cola’s future production, while a few cotton and soybean future contracts are traded in New York and Chicago, respectively, Gomes says. SLC Agrí­cola had about R280mn in revenue in 2007, of which US$70mn was exported. SLC Alimentos, whose shares are not publicly traded, sells R300mn of rice and beans annually, and SLC Group-owned Ferramentas Gerais, a home depot-like operation that caters to factories, sells R800mn every year.

Since its May 2006 IPO, BrasilAgro has committed R261mn, of which R97mn was paid up front, to purchase 140,000 hectares (346,000 acres) of land. BrasilAgro is not an exporter and sells its soybeans to ADM, Bunge, Cargill and Dreyfus. The firm also sells soy futures on the Chicago Board of Trade.

Agriculture potential

There is strong potential for Brazilian agricultural companies to go public in 2008, says Celso Boin, chief analyst at futures broker Link Investimentos in So Paulo. But he notes that the persisting turmoil in the US could hurt investor appetite for new IPOs.

Beef producer Bertin, which employs 30,000, is ready for an IPO and is just waiting for the right time, Boin says. Bertin was approved a US$90mn loan by the IFC last year to expand and modernise its operations and ensure that it buys cattle from ranchers who do not contribute to increased deforestation of the Amazon.

The leading factor that can stymie fresh rural IPOs is volatility in commodities prices, Boin says. Sugar slumped more than 40% in 2007, he notes.

Also, Boin expects weaker investor demand for mills that churn out ethanol and sugar in the short term because Brazil lacks much needed pipelines and port terminals. Overprotected markets in the US, Europe and Japan add to concerns, he remarks.

“The world will need our ethanol. But in the short term it all depends on the price of sugar internationally and that of ethanol in the domestic market,” says Boin.

The three meat producers that went public last year, raising R3.1bn, have many challenges ahead. JBS, Minerva and Marfrig showed investors fantastic results for 2005 and 2006, mostly resulting from the outbreak of mad cow disease in the US giving Brazil a boost.

JBS announced in December 2007 the acquisition of 50% of Inalca, an Italian meat producer, for €225mn. In October JBS bought Argentine beef company Col Car for US$20.25mn. Col Car exported US$11.4mn in 2006, mostly to Germany, UK, Italy and the Netherlands. Earlier in the year, JBS purchased Swift Foods Company of the US for US$1.46bn.

Marfrig also made a host of acquisitions after last year’s IPO. Among other deals, it bought Argentina’s meat snack producer Mirab for US$36mn and purchased for US$141mn a controlling stake in Quickfood, also in Argentina.


Less interest

Privately-held Sementes Selecta decided not to take advantage of the IPO craze last year, despite the insistence of three international banks, says Hugo Braga, chief financial officer at soy trading company Sementes Selecta. Banks pitching IPOs stopped approaching the company in 2008, “maybe because we made it clear this was not the moment,” says Braga. The firm expects to sell US$300mn-worth of soybeans in 2008.

Trade finance spreads, tenors and guarantees have not changed since early 2007, Braga says. However, funding has become cheaper due to a lower six-month Libor, which fell to 4.6% in early 2008 from 5.3% in mid-2007, he says. WestLB, ING, Rabobank and other traditional trade finance banks did not change their credit terms since the start of the US subprime crisis, Braga says.

All lenders except for one demand that Selecta hire a collateral manager such as SGS and Control Union to inspect its warehouses. Selecta pays US$1,500 monthly for a collateral manager to inspect each of the company’s 15 warehouses.

Concerning record levels of liquidity seen in Brazilian equity capital markets last year, Braga has a distinct view: companies that went public in recent years have curbed their interest in trade financing.

“IPOs make all the more sense from a financial standpoint if you cut your indebtedness,” Braga contends. After going public, the first measure by the cash-rich company is to pay debts to slash financial costs, he concludes.