The state of Rio de Janeiro’s pension fund changed the way it manages and accumulates assets in 2013. In a bid to ease financial pressure on the state government, the fund moved to a pay-as-you-go system with the creation of a capitalized fund.
The change left it with a hole in its finances.
“We had a financial deficit,” says Gustavo Barbosa, Rioprevidência’s chief executive. “In 2013, we looked at the next years [and] we identified that we would suffer some financial deficit, due to problems with the flows of our assets. So this was the main motivation for this operation.”
In what Barbosa describes as a liquidity operation, Rioprevidência raised $2 billion through the sale of a 6.25% 2024 securitization, and a further 2.4 billion reais ($1 billion) through a local placement of a 6.25% 2022 tranche, in a debt sale in June.
“We are doing this after the restructuring of the pension fund,” says Barbosa, adding the firm expects to return to a financial surplus from mid-2019. “We expect a great increase in production from Petrobras and other concessionaires.”
The notes were secured by the full amount of royalties owed to the Rio de Janeiro state government from oil and gas producers in the territory. Petrobras accounts for around 90% of those revenues.
But this bond, sold through a special purpose vehicle, Rio Oil Finance Trust, was not just any simple future flow securitization. For a start, it was the largest structured bond ever sold by an emerging markets issuer.
Mechanically, the deal was also novel. The securitization was the first to combine international and Brazilian tranches sharing the same collateral package. The borrower spent two weeks speaking to investors about the structure and the rationale for the instrument, meeting around 300 accounts.
By the time of the roadshow, Rioprevidência had spent long hours working with lawyers and banks over the best structure. As a government entity, the fund faced some specific hurdles.
“We are really very rigid in terms of what we can do,” says Barbosa. “At the beginning of the operation, the lawyers and the banks asked the government to guarantee a potential default of Petrobras [and] any financial gap in the future flow. But this wasn’t possible. Our laws don’t allow such a guarantee. So we had to come up with a structure that was really a true sale, with no guarantees, but huge collateral.”
The tight structuring paid off. Spreads on the securitization versus Petrobras tightened from the first issue in June. The pension fund was able to tap the structure again in November — just as noise around investigations into Petrobras gathered steam, to add a further $1.1 billion.
The original design of the instrument helped all the way, says Barbosa. “What made it a success was that it was beautifully structured,” he says.
BNP Paribas and BB Securities were global coordinators, structuring agents and joint lead managers. Citi was indenture trustee and payment agent. Law firms Campos Mello and DLA Piper advised Rioprevidência, while Hogan Lovells, and Souza, Cescon, Barrieu and Flesch advised the lead managers. Alston and Bird advised the trustee bank. LF
WINNER: Rioprevidência