Brazil: New Measures To Foster Long-Term Financing In Brazil

Last Updated: 14 April 2015
Article by Walter Stuber

The Brazilian production sector will rely on new instruments to multiply the alternatives for financing long-term projects. The Brazilian Ministries of Finance and Planning, the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social - BNDES) and the Brazilian Association of Entities of the Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais - AMBIMA) developed innovative measures to direct private savings for long-term financing. The main focus is to increase the issuance of fixed income securities linked to projects funded by BNDES and which are subscribed under market conditions.

These measures have been announced on April 9, 2015 and should be implemented within 30 days.

One of the initiatives announced is the reduction of the average daily cost of credit by BNDES' borrowers for those companies that combine BNDES fundraising with the issuance of corporate debentures linked to projects financed by BNDES. The major issuers will have the opportunity to leverage the Long Term Interest Rate (Taxa de Juros de Longo Prazo – TJPL)1, which is the basic cost of financing granted by BNDES, and decrease by 1 to 2 percentage points a year the financial cost of the operation comparing with the hypothesis of the same transaction without issuance of debentures. The measure is aimed at companies with a minimum AA rating and for operations of at least R$ 50 million, with a maturity exceeding 48 months.

The same benefit will be also worth for companies that plan to appeal first to the market by issuing debentures, and decide to supplement the funding with BNDES credit line.

Another measure is a mechanism to extend the guarantees for investors purchasing debentures linked to the investment projects. BNDES will guarantee for up to two years the interest payment of debentures originated in operations that have been carried out by BNDES and for which BNDES has assigned rating. In the event of late payment of interest by the issuer the commitment will be honored by BNDES and the investor directly, with the activation of this mechanism, whereby BNDES becomes a creditor of the issuer. The issuer, in turn, will have to pay to BNDES, and if it does not honor such commitment, the issuer will be in default before BNDES. It is a stand-by financing. If there is a need for some adjustment, the debenture holder has a service of interest, which facilitates the process of debt rollover.

These measures are aligned to the perception, shared by the public and private players, that it is paramount to expand the capital market weight in the long-term financing in Brazil.

For the Brazilian Government, the macroeconomic adjustment underway must create favorable conditions in the near future for the development of the Brazilian capital market. It was highlighted that the announced measures have a great symbolism, to the extent that changes the relationship between free and directed credit in the Brazilian economy. Instead of being substitutes, free and directed credit will be complementary.

For AMBIMA, the efforts for development of the corporate debt market should be continuous and compatible with the degree of economic maturity and the need for long-term financing in Brazil. In this sense, ANBIMA supports the intensification of the partnership between BNDES and the financial institutions in the search for solutions for the financing of investments. Thus, these measures open the way for a series of joint initiatives between the public and private sectors, with the aim of strengthening the Brazilian capital market and broaden the targeting of resources for the financing of investments, so necessary for the sustained growth of the country.

1 The TJLP is disclosed by the Brazilian Monetary Council (Conselho Monetário Nacional - CMN) until the last business day of the quarter immediately preceding the three-month period of its validity. It has duration of a calendar quarter and is calculated in accordance with the following parameters: (i) goal of inflation calculated pro rata for the twelve months following the first month of validity, including rate based on annual targets set by CMN; and (ii) premium risk. From January to March of 2015 the TJLP is 5.5%.

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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