What’s on International Treasurer’s radar screen this week.
Several topics came out of this week’s editorial meeting, including acquisition finance and how Brazil is attempting to stem the rise of the real.
Acquisition finance
The late March announcement that JP Morgan was offering a bridge loan to AT&T to finance its acquisition of T-Mobile prompted further discussion of acquisition finance (see related story here). Specifically, IT will explore the pros and cons of going with a single-bank bridge or multiple banks. This will also be a topic at upcoming NeuGroup Peer Group meetings. In the case of JP Morgan/AT&T, speculation was that confidentiality concerns drove the single-bank bridge. However, we also learned that other relationship banks would quickly take up a part of the acquisition once the announcement was made.
One concern about going with a single bank is the risk of that bank balking on the promised financing for an acquisition on the eve of a deal. Obviously having more than one bank can offer companies some peace of mind that they might get the other banks to pick up the piece of a bridge that falls out. Plus, competition may yield better pricing along with other terms and conditions. The downside of having more than one bank, of course, is that this multiplies the opportunities for news of the acquisition to slip out, likely raising the cost of acquiring the target company.
Brazil’s soaring real
High interest rates in Brazil and other growth markets, relative to US dollar rates depressed by quantitative easing and other Fed stimulus measures, are attracting investors from around the globe. This is boosting the real and in turn hurting exporters. To stem the flow of foreign capital, the government has implemented a number of capital controls. Nonetheless, the real continues its march higher; it has appreciated 39 percent since the beginning of 2009.
On Wednesday Brazil’s finance minister announced its latest measure: the extension of a 6 percent tax on short-term foreign-currency loans. Last week Brazil raised the tax on international bond issuance (a tax on local entities, not foreign) to 6 percent from 5.38 percent, and also lengthened the tenor of bonds subject to the tax to 360 days from 90 days previously. Brazil also increased the IOF tax on credit card payments for offshore purchases.
Brazilian Finance Minister Guido Mantega said real would most likely be trading around 1.50 (it’s currently at 1.60 per US dollar) without the FX measures taken. But according to Brown Brothers Harriman, it would likely be closer to 1.40. “So in that sense, the measures have been successful in slowing the move,” said Win Thin, Global Head of Emerging Market Currency Strategy at Brown Brothers, in a note to clients. “With all the inflows into Brazil, we feel (and we also think the Brazilian policy-makers know this) that it is virtually impossible to stem the rally.” Mr. Thin expects further control measures are on the way.