Optimism over Brazil hybrid rule change

Optimism over Brazil hybrid rule change

Economy & Policy Corporate & Sovereign Strategy

Brazil's central bank is considering changing a regulation that has held back banks' sales of hybrid tier one instruments, sources say. Brazil's version of Basel III rules, the global framework that governs bank capital, does not allow hybrids to offer a coupon reset.

But the country's largest banks are lobbying the regulator to change the rules — and they could have success, said Enrico Bentivegna, partner at Pinheiro Neto. “Based on our experience with the Central Bank, I wouldn’t say it’s very likely, but it is likely, that the Central Bank would change [the rule] if it’s shown that it would be detrimental to their own banks in Brazil.”

Coupon resets, common in European bank capital instruments, mean a security's interest rate is changed at the first call date to reflect movements in the underlying benchmark.

The features give investors some comfort over an instrument's long-term yield if it is not called at the first opportunity.

“There’s no doubt Brazilian banks are disadvantaged by not having this tool available to them at the moment compared to their peers,” said Robert Whichello, global head of syndicate at BNP Paribas. “It’s possible that they could have market access without the reset. But that access is going to be less often, and will probably come with a cost.”

Banco do Brasil is the country’s only lender to sell a new-style hybrid tier one instrument. Most recently, it sold a 6.25% $2bn perpetual non-call 11-year instrument in January last year. That deal came before Brazil’s regulator had finalized its implementation of Basel-III, and was structured in such a way that the borrower could alter the terms of the security to comply with the final rules.

Brazil's bank regulator has prohibited coupon resets on the grounds that they make hybrid securities less equity-like. “It’s important to realize that regulators are looking at these hybrids not only from the holders’ perspective — more importantly, they’re looking at them as a banking regulator,” Alejandro Garcia, LatAm FIG analyst at Fitch Ratings said.

“These securities are supposed to be loss-absorbing. From the perspective of the robustness of a banking industry, there’s an argument for a fixed-rate because ultimately, it’s important these securities are permanent….

“If there’s a reset that happens when the bank is going through some stress that could put more pressure on the bank,” said García.

Many Latin banks have strong capital ratios and have made limited use of hybrid capital in the past.

All spoke at LatinFinance's 12th Brazil Issuer & Investors' Forum in Sao Paulo on Wednesday. LF