Brazil builds its way to growth

By:
Rob Dwyer
Published on:

BNDES to spend $250.8 billion 2013-16; also seeks to encourage private capital inputs.

BNDES, Brazil’s state development bank, hopes that its ambitious pipeline of infrastructure projects will help Brazil shrug off two years of sluggish growth. The bank says it intends to spend $250.8 billion on infrastructure projects between 2013 and 2016, a 36.2% increase on the past four years. In logistics (highways, railways, ports and airports) the bank will increase its divestitures by 123%, but it also wants to encourage private capital and is keen to develop capital markets to diversify infrastructure financing sources. Recent developments such as the financial closing of Brazil’s first dedicated infrastructure investment fund should help.

“Infrastructure and logistics can be a big engine of development in the next three or four years,” says Eduardo Chagas, manager of the energy department at BNDES. “Project bonds will be used more and more for financing infrastructure, and we understand that the capital markets must have an important participation, which requires financing agility and the interest of investors.”
However, a less favourable view of Brazil’s macroeconomic environment has led some international investors to question how much liquidity is available for infrastructure debentures. Daniel Vaz, head of debt capital markets at Banco BTG Pactual, said at the beginning of the year that he had heard a forecast that $15 billion-worth of such bonds would be issued in 2013 and total volumes of $80 billion to $90 billion in the coming years; he was sceptical about this.

He says: “We would need participation of foreign investors to reach these kind of volumes, and what we have seen since May has been a deterioration of the image of Brazil with international investors; they are only going to invest in the real when they have a positive macroeconomic view.” Vaz does say the rates offered in some of these investments will attract even bearish fixed-income managers to opportunities for yield, although the removal of the 6% IOF tax on foreign investment in Brazil’s public bond market “removed the cost opportunity of investing in an infrastructure debenture”.

Meanwhile, the market for domestic investors in infrastructure bonds took a step forward with the close of the first dedicated bond fund. Launched by Bradesco Asset Management in September, demand was such that it quickly closed and the bank is planning a second.

“Ours is a relatively small fund, just R$50 million [$21.9 million], targeting private banking clients with minimum investment of R$1 million [called qualified investors by Brazil’s CVM],” says Joaquim Levy, CEO of Bram. “There was tremendous demand for the transaction, and we closed the first tranche in just one week. We are now subject to a cooling-off period of four months and then we hope to have a new round as soon as we identify interesting paper coming to the market. Meanwhile, we will keep talking with the regulator [CVM] to see if we can include high-net-worth, albeit non-qualified investors [those with $200,000].”

Current regulations for standard funds state that they need more than 10 bonds to satisfy diversification for retail, while the law requires at least 67% in the asset class to get tax benefits and you may not find enough issues to satisfy the law.

The fund has so far invested in bonds financing roads and transmission lines, and Bram thinks the asset class will develop as infrastructure [Lei 12431] bonds are becoming a more integral part of the design for the concessions. Issuers can reduce the interest rate they are required to pay by using existing cashflow to back new money, which Levy says can sometimes lead to very attractive interest rates.

Two plus two

One limitation on the issuer is that the proceeds of the bonds, generally speaking, have to finance an infrastructure project made in the past two years or that will be made in the next two years. This will help infrastructure operators get projects started and then refinance the asset after two years of investing – when there is already something physical built – which better matches risk more suitable to capital markets investors.

“BNDES has become more aware of these products, which is important because it knows the growth of its balance sheet will decelerate,” says Levy. “If BNDES gets involved in earnest, it would be helpful because markets do like guidance. When we have a framework to guide strategy, investors will have greater confidence and will focus on specific deals, using their skills to develop innovative operations. So the prospect of a continuing supply of these bonds as part of the infrastructure push would create a growing asset class and justify the time and effort put in by banks and funds to develop these products, facilitating the financing of much-needed projects. Confidence about more deals will lead to more issues, which will lead to more investors.”

Levy also thinks it offers potential for international investors. “It would work beautifully for international investors,” he says. “With [government regulation] MP 627 it may be possible to start a fund with government bonds and gradually shift towards infra-bonds as new issues are made available.”