Latin Finance - November/December 2012 - 18

Brazil infrastructure

uncertainty surrounding legislation and a lack of experience in placing bonds with a non-recourse structure. Now that the legislation is passed and the first deals are in the books, attention is on BNDES and whether — and how — it will cooperate with the private sector. Traditionally, BNDES has been seen as crowding out the private sector and cherry picking deals. Otávio Lobão Vianna, head of the capital markets department at BNDES, has said that alone “cannot support all the financing for this sector. We spent $56 billion reais ($27.5 billion) in the sector last year and that’s lots but not nearly enough for all the projects.”

suit the bank and bond investors. “If you put together good, well-structured deals, the BNDES is very open to guarantee sharing,” he says. Itaú is discussing a guarantee sharing for bonds for a hydroelectric power plant with BNDES. Vaz says his bank is already working on a series of operations too. He predicts the first project finance bonds will be linked to energy transmission and distribution and road projects where the legislation is clear and there is a track record. Indeed, he predicts the Tietê

bonds may not be fully non-recourse but hybrid bonds that require a specific equity support agreement from the sponsor.

Reasons to be fearful

Project finance plays

Vianna predicts that both simple debentures and securitized bonds, through Credit Rights Investment Funds (FIDCs), will be used in the project finance sector. Moreover, BNDES will push the development of a secondary bond market and buy issues of bonds in conjunction with its lending programme. The bank will also engage in direct equity participation and private equity funds, he says. As part of the rethink of its role, BNDES is showing more flexibility in two key areas. It has promised to share more readily in guarantees, covering areas such as cost and time over-runs. It has also signalled a willingness to sign cross-default clauses, which could see it aligned with bondholders rather than claiming seniority in the debt structure. A concerted effort between BNDES and private sector participants to publish prices should help Brazil’s secondary market to take off too. “We are going to get a good secondary market soon. Maybe next year or in 2014, you will see lots of activity in the secondary market” says Joaquim Levy, chief executive at Bradesco Asset Management in São Paulo. The development is expected to help align the BNDES’ aims with those of capital markets. Alberto Zoffmann, director of the project finance department at Itaú BBA in São Paulo, sees tenors lengthening with intelligent, customized instalment schedules that

“We are going to get a good secondary market soon. Maybe next year or in 2014, you will see lots of activity”
Joaquim Levy, Bradesco Asset Management
concession holders will soon be back. Other sectors that will tap the markets later include ports, airports, railway and logistics. Bankers agree that initially pricing will be difficult. Vaz believes the bonds will come with a generous yield but that prices should quickly drop and tenors extend. He predicts initially, that tenors will be limited to 12 years but that within one to two years, loans could reach 20 years. The bonds will be structured with a longer grace period to accommodate the interest payments to the BNDES in the first years, he says. Leitão, however, says that yields will come in low, at least initially. Pent-up demand from Brazilian pension funds will enable issuers to borrow cheaply and only as the market matures, and there are more issues to choose from, will yields increase, he says. He also believes the first

Foreign investors may not benefit much from the new law. First, the decline in interest rates may stimulate issuance in Brazil but it is bad news for investor returns. The fall in overnight interest rates to 7.25% from 12% just last August makes the yield of the whole Brazilian fixed-income market just less attractive, says Leitão. Brazilians don’t have much choice. Domestic legislation severely curtails buying of overseas assets, forcing Brazilian pension funds to shop at home. With lower yields on government debt, pension funds are already forced to take on more risk through the corporate market to compensate for the loss of yield on overnight and government bonds. The shift into corporate bonds has already led to spread tightening across the high grade market with many names trading within 1% of the sovereign. For many top Brazilian issuers, spreads over the sovereign are lower domestically than overseas, says Fábio Jacob, director of commodities and flow structuring at Credit Suisse Brasil. There are other disadvantages for investors. The most significant is the lack of liquidity in the secondary bond markets, say Leitão and Jacob. Foreign investors need to be prepared to hold corporate securities until maturity. Levy expects the secondary market to develop in the next year or two, but Jacob and Leitão say that while probable, the pace of development is not certain. Even though law 12,431 has been well drafted, there are lingering questions. It needs to be interpreted and tested out in the courts. One thorny question is whether proceeds can be spent to pay the concession fee, says Leitão. That is vital as the Brazilian government has sought to maximize its revenues from privatizations. Winners of the concession for Guarulhos airport, for example, are paying R$16.2 billion. “I have consulted a number of lawyers and there is no clear understanding on this point,” says Leitão.

18 LatinFinance

November/December 2012

Latin Finance - November/December 2012

Table of Contents for the Digital Edition of Latin Finance - November/December 2012