Eliane Lustosa, BNDES director of capital markets, is working with Brazil’s banking and pension fund associations – Anbima and Abrapp respectively – to try to encourage private-sector financing of Brazilian infrastructure.
In a wide-ranging interview with Euromoney magazine, to be published in the February issue, Lustosa says the development bank – which is responsible for 15% of total lending to the private sector and has a balance sheet that is similar in size to the World Bank – is trying to lower its financial disbursements while supporting a larger number of projects and companies.
Squaring the circle of doing more with less means bringing in private-sector financing – with both the banking and institutional investor segments having complained about being crowded out in recent years.
Lustosa is now targeting the creation of new debenture instruments that would enable pension funds, and other institutional investors, to finance long-term projects.
Banks, too, will be encouraged by the government changing the interest rate charged by BNDES to the private sector. The bank will migrate to a new rate, called the TLP, equivalent to the five-year NTNB rate.
Previously the bank used a rate called the TJLP, which was set on a quarterly basis by the National Monetary Council; members include the head of the central bank and ministers of finance and planning.
That rate was set at substantial discount to the Selic, averaging 6% since the start of 2013 compared with the yield of five-year local currency bonds of 12%. The difference between the rate at which the government financed itself and market rates represented an effective subsidy to those companies granted TJLP loans.
This, combined with a change to the bank’s mission that emphasizes the creation of funds that will finance small and medium-sized companies that can demonstrate “social externalities” across a range of categories – including infrastructure, sustainability, health and education – should increase space for the private banks to compete.
Critics of BNDES have long argued that the lion’s share of its disbursements have been channelled to large Brazilian corporates that could finance themselves through the domestic and international capital markets.
However, in practice many of the large banks found themselves over-exposed to the large corporate sector in the latest downturn – which was complicated and exacerbated by the Lava Jato (Car Wash) corruption inquiry that led the financial distress of some of Brazil’s largest companies.
“The banks complained about being crowded out of the large corporate segment in the past, but I don’t think they are now ready to step in and finance these clients the way they would have been five years ago,” says one banking analyst.
Meanwhile, Claudio Gallina, senior director and head of the South America and Caribbean region in the financial institutions group at Fitch Ratings, says the longer-term nature of the funding will prevent the banks financing these initiatives in any scale.
Despite the precipitous fall in Brazil’s Selic rate in recent years, the nominal rate is still 7.25% and the implementation of new risk-weighted capital regulations penalize long-tenor bank debt.
“It is very difficult for the banks to finance long-term infrastructure, and international investors have the dollar risk – the FX [issue] is difficult and very costly to manage,” says Gallina.
Maybe that is why Lustosa is targeting structures that bring in the institutional investors through local capital-markets issuance.
“There should be some instruments [developed] that help capital markets in an end of itself,” says Lustosa.
For example, BNDES has just launched an R$500 million fund to purchase debentures linked to renewable energy companies. The fund, managed by Vinci Partners, will be a mix of public and private finance.
“We chose Vinci and we have been discussing the idea with pension funds with the idea of having at least AA- ratings,” she adds.
Lustosa, who joined the bank in July 2016, is also exploring the possibility of securitizing BNDES’s large portfolio of projects to help develop the necessary liquidity in the market that will encourage a pipeline of new deals to explore going straight to market.
“There is a chicken and egg problem, but there are infrequent new issues and buyers tend to hold on to them,” she says.
“BNDES has lots in our portfolio and there could be a virtuous circle from bringing these projects to market, getting the market to finance them, which would create more liquidity and lead to more projects coming to the market and, ultimately, BNDES could finance more projects [by committing a smaller percentage of capital to a larger number of projects].”
However, not all the issues Lustosa is grappling with are technical. She says one of the biggest challenges to developing new pockets of liquidity for infrastructure finance, which will enable BNDES to step back from shouldering the vast majority of the financial commitment, is behavioural.
“We are trying to be creative at a time when, thanks to the Car Wash investigations, the responsibilities for individuals is high,” says Lustosa. “It’s difficult to find people [to authorize new approaches]. I keep asking, let’s come out from under the table.”
“It’s easier for a public servant to do nothing because then they are not going to be responsible for anything. It’s always easier to say no.
“So now we have an overshooting of that [approach] and people are afraid to take decisions. They are afraid – and it’s not just BNDES but also the regulatory agencies. We have to face that: it’s human. After all, the winner of [the 2017] Nobel prize for economics was a behavioural economist.”