Brazil's state-owned National Bank for Economic and Social Development (BNDES) is changing its long-standing role as one of the sole providers of funding for infrastructure projects in Brazil allowing for private banks to gain a foothold in the market in Brazil.
Over the course of the last couple of years, companies looking for long-term funding for most infrastructure projects in Brazil would go to BNDES. They offered the lowest rates for long-term financing and shaped the procedures and processes for project finance in Brazil. With most projects relying on local currency receivables, there was very little room for Brazilian commercial or international banks to lead those transactions other than acting as "repassador", or "intermediary of a BNDES facility".
At the end of 2017, in reaction to changes in the government and new credit limits, BNDES started to re-evaluate its role as lender and a big effort has begun to redefine how they would participate in new deals, changing their focus from being the sole lender of projects to become one participant in club or syndicated loan transactions or even an investor in a capital markets issue. In its pursuit of the new role, many participants of the project finance market would expect BNDES to become a guarantor rather than a lender. BNDES would still promote development but take a less dominant role in financing infrastructure projects allowing for commercial banks and innovative structures with new investors to gain a foothold in the market in Brazil.
Impact of BNDES' new role
BNDES's new role would have a big impact on the local lending and borrowing environments. Historically, the cost of capital from BNDES has been much lower and its less predominant role could increase the overall cost of a project. Since the bids for new government concessions have relied highly on BNDES funding, future transactions will definitively face the impact of not having financial subsidy from BNDES, and the Capital Market itself will become an an alternative for covering the BNDES. The new pricing model; however, needs to be adjusted to the new cost of lending. Another question that remains is how long the banks will be able to lend, will they be able to go as far as 15 to 20 years?
Benefits to local and foreign companies
Reducing BNDES's role as sole lender may help projects get financed faster as risks will be shared and, if acting as guarantor, can affect an even bigger number of borrowers, promoting more investments and faster development.
BNDES's less predominant presence in the usual financing structures may open a space for supporting more industries and projects that are not as easily financeable. Mature industries that can get financed more easily, could go straight to commercial banks.
This change could also bring different players bidding for construction projects since they have access to different sources of local and international funding.
International lenders will have to overcome local currency issues based on the industry that they are looking to get financed. For example, most of the power utilities are Brazilian and so those transactions would have to be done in local currency. While infrastructure projects for an airport would be dollar-based and easier for a commercial bank to finance.
While BNDES has stated this is their plan, the market is eager to see what their role actually becomes in the future.
TMF Group in Brazil
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