Brazil: The Brazilian Way To Comply With The Fiscal Goal Of The Year

Last Updated: 7 January 2013
Article by Walter Stuber

The local newspapers reported an interesting engineering financing transaction structured by the Brazilian Government aiming to increase revenues in last December and ensure compliance with the fiscal goal of the 2012.

This transaction involves three important players:

  • the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social - BNDES) - the main financing agent to the economic and social development of the country;
  • the Federal Savings Bank (Caixa Econômico Federal - CEF) - the second biggest Brazilian government-owned bank; and
  • the Brazilian Sovereign Wealth Fund (Fundo Soberano do Brasil - FSB) - whose main objective comprise promoting investments in Brazil and abroad, generating public savings, mitigating the effects of economic cycles, and fostering strategic projects at home and abroad. FSB is the exclusive investor and sole unit holder of the Fiscal Fund for Investment and Stabilization (Fundo Fiscal de Investimento e Estabilizacao - FFIE), which is a mutual fund duly registered at the Brazilian Securities and Exchange Commission (Comissao de Valores Mobiliários - CVM) and managed by Banco do Brasil.

The rules that have been issued to base this transaction are outlined herein.

1. Federal Decree No. 7,881, of December 28, 2012 (Decree 7,881/2012), authorizes the transfer of common shares of Petróleo Brasileiro S.A. - PETROBRAS (Petrobras) acquired directly by FFIE.

Decree 7,881/2012 establishes that upon proposal of the Board of Directors (Conselho de Administração ) of BNDES the President of the Republic will authorize the sale of common shares issued by Petrobras acquired directly from FFIE, under the terms and conditions mentioned beloe.

Prior to the sale of shares of the capital stock of Petrobras, BNDES shall offer these shares as a priority to the Union, represented by the Finance Minister. The Union will have a period of thirty days, counted from the receipt of the proposal from BNDES, to manifest itself about the acquisition of the shares. If the decision is favorable, the Union will purchase the offered shares, paying the price in cash within ten business days following the date of manifestation of the Finance Minister. The price shall be equivalent to the weighted average of the daily average prices of common shares of Petrobras in the trading sessions of thirty days prior to the manifestation of the Finance Minister.

After the completion of the procedures mentioned above, if the Union does not purchase the shares, BNDES may sell these shares without the need to consult again its Board of Directors and regardless of any new offer to the Union, provided that the sale is held within six months.

The procedure laid down in Decree 7,881/2012 shall not apply to transactions carried out by BNDES with federal government indirect entities or with a private investment fund from which the National Treasury is the single unit holder.

2. Federal Decree No. 7,880, of December 28, 2012 (Decree 7,880/2012) authorizes the capital increase of CEF in the amount of up to R$ 5,4 billion by transferring common shares of Petrobras which exceed the number sufficient to maintain the company´s shareholding control by the Union, as well as shares of other publicly-held corporations at the discretion of the National Treasury Secretariat (Secretaria do Tesouro Nacional - STN).

The exact value of the subscription and the number of shares to be transferred to CEF shall be determined using the closing quotation of the business day prior to the date of transfer of the shares pertaining to the negotiations carried out at the BM&FBOVESPA S.A. - Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros - BVMF). STN will adopt the measures relating to the transfer of ownership of these shares at the custodian entity.

The completion of the capitalization of CEF is subject to: (i) preparation of a prior opinion of STN attesting the existence and sufficiency of the shares and ensuring that the transfer of equity interests do not represent a loss of control by the Union; and (ii) a favorable resolution of the Board of Directors and the Fiscal Council's pronouncement, both of CEF.

Upon proposal of the Board of Directors of CEF, the President of the Republic shall authorize the sale of common shares of Petrobras transferred to pay in the capital increase of CEF, under the terms and conditions set forth below, which are basically the same to the ones already described for BNDES.

Prior to the sale of shares of the capital stock of Petrobras, CEF shall offer these shares as a priority to the Union, represented by the Finance Minister. The Union will have a period of thirty days, counted from the receipt of the proposal from CEF, to manifest itself about the acquisition of the shares. If the decision is favorable, the Union will purchase the offered shares, paying the price in cash within ten business days following the date of manifestation of the Finance Minister. The price shall be equivalent to the weighted average of the daily average prices of common shares of Petrobras in the trading sessions of thirty days prior to the manifestation of the Finance Minister.

After the completion of the procedures mentioned above, if the Union does not purchase the shares, CEF may sell these shares without the need to consult again its Board of Directors and regardless of any new offer to the Union, provided that the sale is held within six months.

The procedure laid down in Decree 7,881/2012 shall not apply to transactions carried out by CEF with federal government indirect entities or with a private investment fund from which the National Treasury is the single unit holder.

3. Provisional Measure (Medida Provisoria - MP) No. 600, of December 28, 2012 (MP 600/2012), increases the operational limits of CEF and therefore its ability to lend.

MP 600/2012 authorizes the Union to grant credit to CEF in the amount of up to R$ 7 billion in financial and contractual conditions to be defined by the Finance Minister to be framed as capital and hybrid debt instrument or equity element that will replace it in the formation of the Reference Equity (Patrimônio de Referência) under standards set by the Brazilian Monetary Council ( Conselho Monetário Nacional - CMN).

For coverage of this credit, the Union is authorized to issue Government bonds ( títulos da Dívida Pública Mobiliária Federal ) in the form of a direct placement in favor of CEF, the characteristics of which shall be defined by the Finance Minister. In the case of issuance of these Government bonds, the economic equivalence shall respect the value indicated above, i.e. it is limited to R$ 7 billion (ceiling). The remuneration to be received by the National Treasury in connection wit this transaction will have to be included in one of the following alternatives at the discretion of the Finance Minister: (i) it should be compatible with the long-term rate of remuneration; or (ii) it should be compatible with its acquisition cost; or (iii) it should be structured as a variable compensation.

4. Ordinances (Portarias) issued by the Undersecretary of Public Debt from STN.

Ordinance No. 761, of December 28, 2012, authorized the redemption at market value of 767,190 National Treasury Notes - Series B (Nota do Tesouro Nacional - Serie B - NTN-B), in the amount of R$ 2,317,437,004.40, belonging to BNDES, in anticipation of payment of dividends and interest on equity relating to income for the year of 2012.

Ordinance No. 763, of December 28, 2012, authorized the issuance of National Treasury Bills (Letra do Tesouro Nacional - LTN), NTN-B and National Treasury Notes - Series F (NTN-F), in favor of BNDES, up to 12,832,333 bonds, with the economic value of R$ 14,999,999,856.91, whose maturities vary between January 1st, 2013 and August 15, 2050, pursuant to a certain Financing Agreement (Contrato No. 807/PGFN/CAF de Financiamento), entered on the same date between the Union and BNDES. The first issue of 4,005,695 LTNs was redeemed by BNDES on January 1st, 2012, with a financial value of R$ 4,003,499,458.54.

Ordinance No. 769, of December 31, 2012, authorized the redemption at market value of 4,701,287 LTNs, in the amount of R$ 4,699,999,223.46, belonging to CEF, in anticipation of payment of dividends relating to income for the year of 2012.

Ordinance No. 770, of December 31, 2012, authorized the redemption at market value of 7,773.382 of Government bonds, comprising NTN-B and NTN-F, with the economic value of R$ 8,847,179,027.84, belonging to the FFIE.

According to the engineering financing transaction structured by the Brazilian Government, BNDES was authorized to buy shares of Petrobras deposited at the FFIE where FSB is the only unit holder, paying these shares with Government bonds issued by the National Treasury (NTN-B and NTN-F). These Government bonds were redeemed to increase revenues and ensure compliance with the fiscal goal of 2012. The assessment to justify this transaction is that the FSB´s funds were deposited in 2008 at FFIE as public savings to be used in times of need and lower economic growth as in 2012. In addition, BNDES also transferred resources to the Union as dividends based on the income earned until September 30, 2012. BNDES has been the main source of dividend distribution in 2012 and has paid more than R$ 10,5 billion dividends between January and November of 2012.

In the case of CEF, in addition to the divided distribution, the option was to increase the capital of CEF and expand its operational limits because CEF has fewer dividends to distribute than BNDES. However, this capitalization operation will have a similar effect, allowing CEF to return a substantial value to the Union.

In summary, to strengthen the Union's revenues in December 2012, on the last day of the year, the amount of R$ 12.4 billion was withdrawn of the funds previously invested by FSB in units of FFIE, corresponding roughly to 81% of the invested funds. The last-minute effort to ensure the primary surplus also involved new National Treasury dividends anticipations by CEF and BNDES. All the various measures adopted in the last days of 2012 but disclosed only in January 3, 2013 provided primary extra revenues of approximately R$ 19.4 billion. The National Treasury bought Government bonds from the two institutions (CEF and BNDES) and received back R$ 4.7 billion from CEF and R$ 2.3 billion from BNDES, as dividends.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Walter Stuber
 
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