Project bonds all talk in Brazil
Decoupling the country’s economy from inflation will take a long time and prevents long-term credit from developing.
Brazil was labelled the country of the future for many years before it emerged as one of the world’s strongest emerging markets. A similar label could be applied to project bonds in Brazil. At a recent Project Finance Magazine conference in São Paulo, there was much discussion about the suitability and potential of the capital markets to emerge as a source of debt financing for the country’s needs. There had been much the same discussion at last year’s conference.
The country badly needs infrastructure development. The bottleneck of agriculture, commodities and energy projects waiting for finance is problematic enough, but the country won the rights to host the 2014 FIFA World Cup and the 2016 Olympics, adding yet more urgency.
Sources of liquidity exist. Internally, Brazil’s pension funds are growing fast and the long-term nature of project assets is a natural fit to these investors’ liabilities. The government is trying to foster this project: tax on interest paid on debentures related to infrastructure projects has been cut to 0% for individuals, from 27.5% and to 15% for companies from 34%. Surely, supply and demand can meet to take the pressure away from state-run development bank BNDES? Or BNDES could step back from its financing at subsidised interest rates and allow the marketplace to begin to fund these projects commercially?
There are examples in the market. Secured bonds related to drillships made the headlines for their innovation and ability to attract financing to the oil and gas sector. However, many argue that these aren’t project bonds but Petrobras bonds in another form. Critics say the issuer’s long-term supply contract with Petrobras was the real collateral – not the drillships – for investors, and the drillships were either built, or all-but-built, so investors were not taking any construction risk. These deals could be an important source of capital refinancing for Petrobras suppliers but fall short of the definition of project bonds in Canada or, locally, Peru.
In Brazil, the fundamental reason why project bonds remain a future financing option is that interest rates remain too high. Long-term financing through banks or pension funds is still so high that once they get beyond seven years the interest rates are prohibitive or, if used as a project’s debt, the project would need to look very different to the kind of projects that today – based on lowest tariffs – are being built.
The main issue for long-term funding in Brazil is the yield curve – and behind this is inflation. Money in Brazil is indexed. The CDI is inflation-linked, and so, therefore, are many contracts – such as salaries and rental agreements – that reference this. Decoupling Brazil’s economy from inflation will take a long time and in the meantime this prevents long-term credit from developing.
Banks don’t lend for 10 years or more because they cannot fund it. Pension funds are a good fit for project bonds in theory, but today they can still access high interest rates through sovereign paper with low risk.
Project bonds will remain a financing tool for the future.