European investors focused on risks from China to the east should also be looking west. More than half of the region’s worst-performing junk bonds in euros over the past year were sold by companies with operations in Brazil, exceeding those with even indirect exposure to China, according to data compiled by Bloomberg.
Bonds sold by French retailer Casino Guichard-Perrachon SA and Spanish engineering firm Grupo Isolux Corsan SA, both with links to Latin America’s largest economy, are among €10 billion ($11 billion) of securities with the biggest losses.
European firms piled into emerging markets as they sought to mitigate the sovereign debt crisis at home. Brazil is now heading toward its deepest two-year recession in more than a century and a widening corruption scandal involving state-run oil producer Petroleo Brasileiro SA is undermining any political effort to revive growth.
European companies with operations in Brazil accounted for about €6.5 billion of the worst-performing junk bonds in the currency in the year through Jan. 21. That compared with €4.7 billion of notes belonging to firms exposed to plunging commodities prices and, by extension, the turmoil in China.
French grocer Casino Guichard’s €750 million of hybrid bonds dropped to 71 cents on the euro last week from 104 cents a year earlier, according to data compiled by Bloomberg. Food inflation in the country has topped 10% for six straight months, slowing sales growth.
Grim Outlook
Brazil’s economy grew less than the eurozone in 2014, the first time since 2001. The International Monetary Fund forecast a contraction of 3.5% this year and stagnation next, after a 3.8% recession in 2015. It cited Brazil’s malaise as a key factor behind its downward revisions to the global economic outlook.
Companies with operations in Brazil and exposure to commodities are being squeezed on both sides.
Vallourec SA, which produces steel pipes for the energy industry, is suffering from the slowdown in oil services worldwide and the scandal at its client, Petrobras, which is set to reduce investments by $32 billion in the next five years. The company’s €400 million of unsecured bonds due August 2019 dropped to 64 cents on the euro from 107 cents a year earlier.
Isolux, which invested in electric transmission lines and toll roads in Brazil, is now canceling projects and selling assets. Spanish renewable energy firm Abengoa SA is facing insolvency after failing to raise cash to cover its Brazilian projects.
“For a few years, Brazil was very attractive,” said Christof Stegmann, fixed income portfolio manager for GAM Investment Management in Zurich, which oversees 124 billion Swiss francs ($122 billion). “The picture has changed a lot now with recession, political uncertainty and corruption scandals.”
