Brazil needs more infrastructure projects to improve productivity and generate growth.
However, the Brazilian Development Bank (BNDES), which has funded so much of the infrastructure projects to date at its subsidized TLJP long-term interest rate, has to lower its funding levels.
So the government’s plan is to increase the amount of financing of infrastructure sourced through local capital markets.
To date, tax incentives within the structure have attracted private-banking clients, who are keen to reduce aggregate tax rates and increase returns.
Most complex, least sophisticated
Institutional investors have kept their distance. The risk-free rate is so high there is almost no reason to go down the risk spectrum to corporate bonds, which have almost investment-grade ratings and are simple to understand.
That has led to a curious mismatch: the most complex bonds being sold to the least sophisticated investor group.
These buyers are largely led by their advisers at private banks or by ratings, which are far from perfect tools with which to make a buying decision. They don’t include risk/reward evaluations or liquidity risk assessments, or even comment specifically on the quality or track record of third-party assessors used in these deals.
In the rest of the world, it’s the opposite – specialized teams crunch industry risk and project cash lows, built up over years of expertise and experience.
Throw in the relatively poor performance of projects in Brazil to date – including huge and costly delays from environmental and licensing authorities – and there will certainly be some failures during the course of the 15 years or so of many of the debentures.
At that point, there will be some serious questions asked about the rush of private banks into the asset class. The upside? Those who do lose money will almost certainly be able to afford to.