International and local financing attracted to Brazilian infrastructure

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By:
Rob Dwyer
Published on:

'Abundant' potential liquidity from international insurance companies and pension funds; with drop in rates, local capital markets financing is now cheaper than BNDES.

Private sector financing for infrastructure is beginning in Brazil, with international companies searching for the yields on offer in the sector and local companies increasingly seeing viable sources of medium-to-long term financing from the capital markets.

At the World Economic Forum in São Paulo in mid-March, CEOs of large construction companies confirmed their interest in committing money to the country’s huge infrastructure needs – and predicted a large pool of institutional investors’ capital would also be available to finance such projects.

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Joe Kaeser,
Siemens

“Once the government has a vision, and a plan in place, then investment will come [to finance Brazil’s infrastructure needs],” Joe Kaeser, Siemens’ president and chief executive officer, told the attendees of the São Paulo WEF. “Insurance companies in particularly will be keen to invest in infrastructure because [those investments] correlate with inflation, which is what they want in their portfolios.” 

Kaeser said he had had talks with Brazil’s president Michel Temer about the country’s need to develop an integrated plan to the country’s infrastructure needs, linking up governmental policies to finance, planning, energy and environment issues. 

“There is abundant money because Brazil has got the natural resources,” he says, adding that the country could easily build up from being a primary supplier of commodities to the next stage of the value chain. “I wouldn’t expect the government to finance these projects but there has to be a framework in place to enable the private sector to participate,” he said. “I would be happy to put in €1 billion tomorrow and then you leverage that up. But there has to be that framework in place first.”

Risk

Georgina Baker, vice president Latin America and the Caribbean at the International Finance Corporation in Washington, agreed that there are many large insurance companies that are interested in getting involved in the sector but that risk is still an issue. “IFC is working with very large companies with very large balance sheets, such as Allianz and Prudential, that are very nervous about infrastructure projects in emerging markets,” she said. “We will bring them into deals alongside us and then they will [build up their confidence in the asset class] and then they will do deals on their own, and then bring in other [private-sector] companies along behind them.”

Baker says that the insurance companies’ nervousness is natural: they are accustomed to investing in OECD countries and can easily assess credit risk and targeted returns in those jurisdictions. Moving to EM countries is a daunting step but “partnering with the IFC, which has its own money at risk” is a great educational process for these companies. These investors also benefit from the risk diversification of the IFC’s broad base portfolio, rather than just having exposure to one or two projects.

Rodolfo Spielmann, head of Latin America at the Canadian Pension Plan’s (CPP) investment board, has a positive view of the region’s infrastructure as an investment following experience of transactions in Chile, Mexico and Peru. He says the CPP isn’t ready to take project development risk – or “greenfield” risks – but believes that pension funds are perfectly suited to financing the operational stages of infrastructure projects. “The greenfield phase can be completed relatively quickly – in two or three years – and then we can bring in our pool of capital to finance from the brownfield phase.”

Spielmann says that, in this way, pension funds’ appetite for long-term risk can allow construction companies – and those that finance them – to recycle their early-stage assets, by passing on the 30+ year operational phase of the projects moving on to other higher risk/reward greenfield projects that suit their business models. In this way, different pools of capital with different risk tolerances and return expectations finance the entire lifecycle of the projects and ensure market liquidity throughout each stage.

He adds that in recent years BNDES, the local development bank, has crowded out the private sector and also created bottlenecks by focusing on financing the large “national champions” in preference to the SME segment that has fewer low-cost private financing options. “Long-term finance has got to come from international sources,” he added.

However, with the country facing fiscal constraints and a change in political philosophy about the role of state financing, BNDES is trying to take on less of the financing of local infrastructure projects and stop crowding out the private sector. 

Strategy

Part of this strategy is a change to its financing rules, with the bank adopting a new market-driven interest rate (TLJP) to replace its old committee-determined rate (TLP) that was effectively a significant market subsidy but is now above Selic – at 7%. With the country’s base rate falling to historic lows (the central bank just lowered the rate to 6.5% on 21 March) there is a completely new market phenomenon: companies pre-paying BNDES through local market debentures. 

Petrobras is just one of the large local companies that has access to unprecedented local capital markets rate and has brought forward BNDES debt repayment. International deals are also being used: in January this year Brazilian company Hidrovias do Brazil sold a seven-year, $600 million bond (yielding 5.95%) as part of an asset liability exercise, part of which was to pre-pay BNDES debt.

This shift to the capital markets financing will enable BNDES goal to switch its focus from financing large Brazilian companies – that have other financing options – and switch the proportion of its smaller credit portfolio to SMEs. In 2017 BNDES disbursed R$41 billion to large corporations, compared to R$128 billion in 2014.