Brazil: The Role Of BNDES In The Brazilian Capital Markets

The growth of companies is attributed to capital investments from shareholders, reinvestment of profits and credit operations. In the current stage of the Brazilian economy, it is fundamental to strengthen and increase the number of companies with securities traded in the capital markets, an important instrument for furthering internal and external savings.

The Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES) operates several financing modalities available to companies and can also participate as an underwriter of securities in publicly-held corporations, or in companies that, in the medium run, can enter capital markets, including operations for internationalization, restructuring of competitive companies, mergers and acquisitions.

Innovative small and medium-sized companies, which are prioritized in the BNDES' capitalization efforts, can receive direct participation and/or participation through closed investment funds. Depending on their regional or sectorial operations, this offers a greater operability range, thus allowing the leveraging of private resources for the capital of these companies.

The BNDES' operations in the capital markets aim to:

  1. strengthen capital markets through new market operations; 
  2. disseminate the concept and encourage the use of corporate governance by companies;
  3. expand the demand and liquidity of securities;
  4. contribute to the democratization and strengthening of the capital structure of companies; 
  5. develop products that make the capital markets more attractive and safer to small investors;
  6. develop the closed funds industry; and 
  7. support innovative small and medium-sized companies.

To achieve these goals, the BNDES permanently operates:

  1. in the development of technical tools, utilizing innovative investment analysis techniques, specific mechanisms for each security value, legal models and varied divestiture mechanisms; 
  2. in the elaboration of indirect programs through a minority stake in closed funds administrated by third parties - emerging companies, private equity, of governance/liquidity – which perform the important task of expanding and providing a wider range to the operations; and 
  3. in the proliferation of better corporate governance practices within companies in which it has a vested interest, so as to provide greater transparency and respect for minority shareholders, working together in this regard with the Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) and the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros). 

BNDES can participate, as a subscriber of securities, in publicly-held corporations, for public or private issues, or in companies that, in the short or long run, can enter in the capital markets, for private issuance. The securities considered are the following: stocks (shares); simple debentures; convertible debentures or permutable by shares; subscription bonus; options and other related products; as well as shares (quotas) of Direct Credit Investment Funds (Fundos de Investimento em Direitos Creditórios - FIDC).

For subscription operations of securities, the equity participation that results from the subscription of shares or from the conversion of debentures will be limited to 1/3 of the total capital of the company. In case of companies with annual net revenues equal to or less than US$ 250 million, found in the closing balance sheet for the year preceding the approval of the transaction, this limit can reach 40%.

BNDES may subscribe unsecured debentures, issued by publicly-held corporations, with real guarantee, fluctuating guarantee or without preference (unsecured), traded at the securities market through primary or secondary public distributions. The purposes of these subscriptions are the following:

  1. to develop the fixed income market of corporate securities, issued by publicly-held corporations operating in the economy sectors supported by BNDES, except for financial institutions, leasing or other enterprises integrating financial conglomerates;
  2. to contribute to business strategy execution of the issuing corporations, with a clear identification of results for the Brazilian economy at medium and long-term; 
  3. to support the adoption of distributing and negotiating procedures that privilege, among others, the transparency, the dispersion of securities in the market, the liquidity, including the market-maker participation, standardization and governance; 
  4. to optimize the management of BNDES funds, directed to eliminate the unbalance between liability and asset positions generated by the operations performed in the ambit of its corporate object; 
  5. to generate new sources of funds, upon a policy of return on investments higher than the usually carried out, which, as a result of the increase in results, may contribute to a cost reduction of the other financial products offered to its clients; and
  6. to increase the offer of financial products and services to BNDES clients.

The supportable items are: (a) investments in fixed assets;  (b) working capital, in cases when it is essential to the success of the issuing corporation's business; (c) research and development expenditures or in other intangible assets that are key factors for the success of business undertaken by the issuing corporation; (d) mergers and acquisitions, in cases when scale and scope gains resulting from business consolidation are important to stimulate the issuing corporation's growth; and (e) other purposes not described in the previous items, provided that there is an identification, at the issuing corporation's strategy, of reasons justifying the BNDES support by means of the acquisition of debentures.

The subscription or acquisition of debentures in public offers will be limited to 15% of: (a) the total amount of each series initially offered, in case of a primary offer; (b) the total amount of each series, in a secondary public offer; and (c) the volume of each outstanding series, in case of acquisition in the secondary market.

BNDES also supports investments by subscribing FIDC´ shares, using market conditions, directed to support productive or suppliers´ chains. The supportable FIDCs aim at commercialization of machines and equipment in the internal market; and fixed capital investment projects.

The FIDC that presents any of the following aspects will be excluded:

  1. conflict of interests in the Fund management proposal; 
  2. non-alignment of the FIDC investment model and/or focus to the operation priorities of BNDES; 
  3. existence of any lawsuit with CVM or any entities directly or indirectly controlled by the Federal Government, or other institutions, that BNDES considers impeditive for the analysis process; 
  4. spread proposed by the administrator and/or manager in disagreement with the rates defined in the norms of BNDES; 
  5. risk rate of the Fund shares, executed by a risk rating agency, when its classification is lower than A; and 
  6. shares spread in disagreement with he rates usually used in the market. 

The proposals formulated and submitted to BNDES by the Fund managers or administrators must include: (a) the names and history of the agents involved in the Fund structure and administration/management, such as structuring agent, administrator/manager, risk rating agency, attorneys' office, audit company, custodians and others; (b) draft of the regulation, which defines the subordination of the shares in case of more than one class, eligibility criteria of credit rights, amortization policy and share recovery policies and selection of assignors and drawees; (c) costs involved in the structuring and administration rates; and (d) attraction policy of other investors. 

The level of participation is limited to 25% of the total senior shares issued, in case of Funds directed to the commercialization in the internal market of machines and equipment, and up to 80% of the total share issued, in case of Funds directed to fixed capital investments. The participation limit is to R$ 120 million per Fund. The Fund must be constituted in the form of closed condominium with shares registered for the negotiation in an electronic negotiation system of corporative securities.

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
Adriana Maria Gödel Stuber
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