Brazil: Program To Encourage The Fixed Income Market In Brazil

Last Updated: 12 June 2015
Article by Walter Stuber

As of June 5, 2015 Brazilian companies have access to a program launched by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social - BNDES) that should expand the alternatives for financing long-term projects in Brazil.

The Program to Encourage the Fixed Income Market, developed in partnership with the Brazilian Association of Entities of the Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais - ANBIMA) and with the support and participation of the Ministries of Finance and Planning, will allow that large companies (as defined below) that issue debentures linked to investment projects may have access to a larger proportion of the lowest cost credit offered by BNDES, which is the Long-Term Interest Rate (Taxa de Juros de Longo Prazo –TJLP).

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 validity1. 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.

With the view that the development of the capital market is an essential part of the growth strategy of the country, the main focus of the program is to divert private savings for long-term financing, using the credits at TLJP as a lever that can boost the issuance of debentures and other fixed income securities, such as Credit Rights Investment Fund (Fundo de Investimento em Direitos Creditórios – FIDC), Real State Receivables Certificate (Certificado de Recebíveis Imobiliários – CRI) and Agribusiness Receivables Certificate (Certificado de Recebíveis do Agronegócio - CRA). It is expected that this program would increase the supply of fixed income securities linked to projects that are funded by BNDES and entered into on market conditions.

These measures apply to large companies, which are those with annual revenues that are equal or exceed the amount of BRL 1 billion, considering the same economic group. The new rules apply to virtually all sectors of the economy, with some exceptions such as innovation financing and the Logistics Concessions Program (Programa de Concessões em Logística), including airports, ports, railways and airports, that are subject to specific conditions.

To have access to the maximum limit of TJLP defined by the operational policies of BNDES, the company will have to issue debentures or other fixed income securities (FDICs, CRIs and CRAs). For example, let´s consider an investment made in an industrial project with BRL 400 million of bankable items, whose financing from BNDES is limited to 50%. Without issuance of debentures, the client can initially borrow from BNDES the amount of BRL 50 million at the minimum financial cost (TJLP) plus BRL 150 million at market rates2. However, if there is an issue of debentures equal to BRL 50 million, the borrower will receive an additional amount of BRL 50 million at TJLP, raising to BRL 100 million the total value of funds obtained at the most favorable rate.

The minimum value required for the issuance of debentures will be BRL 50 billion. It is estimated that by combining the fundraising by BNDES with the issuance of corporate debentures, the cost of credit to the company can fall up to 2 percentage points a year, compared with a similar transaction without issuance of debentures.

The benefit will be also valid for companies that plan to appeal first to the market by issuing debentures and decide to supplement the funding with the BNDES credit line. All the issuances made from 6 months prior to the consultation until 12 months after the signing of the BNDES financing will be considered for this purpose.

Regarding the features of the securities, the indenture shall clearly specify the allocation of at least part of the resources for an investment project supported by BNDES. The placement of the securities will be through public offering and the average term of the transaction must be higher than 48 months.

The pricing and distribution of securities will be held preferably by way of book building, and the early redemption will only be allowed in the last year before the due date. Eventual renegotiation can only be performed after 48 months from the date of issue.

BNDES has currently a portfolio of 28 projects with potential to generate issuance of debentures to complement the financial resources needs3.


1 From April to June of 2015 the TJLP is 6%.

2 The market rates in this context are the Special System of Settlement and Custody Rate (taxa Sistema Especial de Liquidação e de Custódia – SELIC or the National Consumer Price Index Broad (Índice Nacional de Preços ao Consumidor Amplo - IPCA).

3 According to estimates of BNDES and ANBIMA, the new rules, coupled with the significant reduction of the levels of participation of BNDES financing, should generate a volume of debentures issues of at least BRL 3 billion in the coming months.

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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Walter Stuber
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