Market volatility forces Brazil sanitation players to hold back share offerings

The plans of two Brazilian sanitation firms to use share offerings to finance their growth have hit a roadblock in the form of strong market volatility. 

"The current capital market situation, with the combination of high interest rates, inflation and the approaching of the [October] elections, has created difficulties for such operations," Alexandre Pierantoni, head of corporate finance in Brazil for risk consulting firm Kroll, told BNamericas.

BRK Ambiental Participações has now suspended its IPO plan, only days after Rio Grande do Sul state cancelled the privatization of its water utility Corsan through a share offering, a person familiar with the matter told BNamericas, speaking on condition of anonymity.

In both cases, the selling of shares would be used to reinforce the companies’ cash positions to accelerate future investments.

In June, when BRK filed a preliminary IPO prospectus with the country's securities regulator (CVM), it said the proceeds would be used to speed up growth through acquisitions and bidding for concession contracts.

Brookfield Business Partners owns 70% of BRK, while FI-FGTS, an investment fund managed by state-run bank Caixa Econômica Federal, controls the remainder.

In the case of Corsan, the plan was for the state to keep a minority stake in the privatized company.

The state government plans to resume the privatization plan once market volatility has decreased.

Besides the global high-interest rate environment, Brazil’s upcoming elections are also causing concern for equity investors.

"For me, the main concern among investors today is linked to the elections because there is no clarity of what lies ahead after the elections, in the face of such a polarized contest," Alex Agostini, chief economist at local ratings agency Austin Rating, told BNamericas.

Brazilians go to the polls in October to vote for president, state governors and lawmakers.

With former leftist president Luiz Inácio Lula da Silva leading all the recent polls, investors are beginning to ask how much a Lula victory would change the pro-market policies of far-right President Jair Bolsonaro.

Bolsonaro on the other hand has repeatedly questioned the country’s electronic voting machines, giving rise to fears he may not respect an unfavorable result.