Following in the footsteps of the recent $300 million Petrobras transaction, Brazil-based Comphania Vale do Rio Doce (CVRD), the largest global producer and exporter of iron ore in the steel industry, is in the market with a $300 million transaction that features similar letter-of-credit political risk coverage.
JPMorgan will lead the deal, a first of its kind for CVRD. The bonds will be backed with a letter of credit from BBVA, which guarantees coupon payments in the event of inconvertibility. Traditionally, political risk insurance signifies that an insurance company will step in to pay creditors if the government were to impose foreign-exchange controls interfering with debt payments.
"It's a continuation of these PRI deals that are done in Brazil," said a source at JPMorgan. "The Petrobras deal was the one that had the bank letter of credit as opposed to an insurer providing the convertibility risk on it."
Rumors in the market suggest that many political risk insurers have reached their limits as to the amount of insurance they can provide in Brazil, and as a result the letter of credit political risk coverage is becoming a bit trendy, sources say. In some ways, the transaction completed by Brazil-based Companhia de Bebidas das America (AmBev), sparked this trend. The $500 million deal, completed in December, featured one year of letter-of-credit political risk coverage and one year of political risk insurance.
According to the source, the CVRD deal provides many investors with a new opportunity to buy. "I think the deal has gone very well; more than the structure it's the issuer and the strength of the credit itself because it's a very infrequent name in the bond market," the source said. "They haven't done a straight bond in the market since 1996."