Appetite for debentures in Brazil seen rising
October 7, 2019 |
Despite unimpressive investment levels and an economic contraction, record amounts of issuances are anticipated to keep heading higher, according to panelists at the LatinFinance Project Finance and Infrastructure Summit in New York
Appetite for debentures in Brazil is expected to continue its impressive development, despite headwinds against even faster growth, panelists agreed at the LatinFinance Project Finance & Infrastructure Summit in New York on Thursday.
In Brazil, debt issuances continue to expand at remarkable speed, with $59 billion in issuance so far this year, up from $48 billion in all of 2018, $50 billion in 2017, and $33 billion in 2016, a recent report from S&P Global Ratings recently showed.
A combination of the record low benchmark Selic interest rate of 5.50% and a positive investment sentiment generated by the new administration, panelists said, is spurring borrowers and issuers to continue to tap into a growing number of debentures. The expectation in the market is that the central bank's rate-setting committee, also known as Copom, will continue to lower rates in a benign inflation environment.
“Brazil is trading very tightly at the moment, with the market showing that there is a lot of appetite at the moment. The 10-year Brazilian bond for well-rated companies is trading at 4%, which is not bad for a non-investment grade country”, Alianz Global Investors Director of Infrastructure Debt Jorge Camiña said.
The pricing and risk perception have both gone down, leading to an ongoing convergence between the offshore and onshore bond markets, according to Karla Fernandes, Managing Director Capital Markets Services, TMF Group Brazil.
All of this debentures market growth is taking place in spite of Brazil's current economic woes. Amidst the global economic slowdown, Brazil is also still struggling to lift itself back to a cycle of higher growth.
Despite an unimpressive investment level still hovering at around 15% of GDP, a first quarter economic contraction, and the expectation of a growth deceleration by year-end to 0.8% from 1.1% last year, capital flows to the local debentures market are still experiencing tremendous growth, the panelists said.
The bigger driver lies with companies’ refinancing needs.
"Many companies are taking advantage of the fact we are living in a borrower’s market, repaying BNDES deals and moving over to the debentures market," Karla Fernandes, Managing Director Capital Markets Services, TMF Group Brazil said. A recent regulation has recently allowed such loans from BDNES to be prepaid, she added.
Notwithstanding the positive growth of the debentures market, some challenges and limitations still persist.
For Raphael Barreau, Engie Brazil’s Head of Acquisitions, Investments and Financial Advisory, despite the momentum in debentures issuance growth, issuing long-term debentures for larger amounts is still challenging.
The French energy company recently raised more than a third of its $8.6 billion investment into the TAG pipeline through the sale of seven-year debentures.
“Six to eight years is still shorter for this type of long-term asset, there is exposure to foreign exchange and refinancing risk. We have seen long-term debentures, but for smaller amounts”, Barreau said.
According to Alianz’ Camiña, from the investor side, the main constraint for greater growth of the debentures market, lies not with an aversion to the country’s non-investment grade profile, but with the issue of dollar liability management.
However, there are ongoing discussions between various public and private sector parties in Brazil to seek the potential dollarization of more energy and infrastructure projects, with the potential outcome of these conversations still unknown, the panelists said.
Another growth headwind is the lack of standardization across the documentation process, TMG Group Brazil’s Fernandes noted.
Whereas other countries in the region closely follow New York or London documentation standards, each issuer in Brazil tends to have widely differing documents from one another, she said.
Another issue that would foment debentures issuance even more is a clarification over step-in rights. These provisions, when used in the context of project finance, are contractual mechanisms through which lenders may intervene in a project they are financing to deal with a specific breach of the covenants or to recover the project.
“The government is currently going to the market and asking it what it needs and giving it assurances. Agencies are fiercely discussing how to treat step-in rights and other such cases. The ANP seems to be ahead of other agencies in this regard”, Fernandes said.