As Brazil’s Central bank continues to slash benchmark interest rates to record lows, Brazilian capital markets enter a brave new world, with investors forced to leave the comfort of public bonds to venture into more profitable alternatives. Among them, corporate bonds are a rising star—which could spell good news for companies and the government alike.

According to Anbima, the Brazilian association

of financial and capital markets entities, the local capital market raised BRL 240.1 billion in the first seven months of the year. This was 38.7 percent higher than the same period of 2018. Of this total, BRL 117.4 billion (48.9 percent) was related to corporate bonds.</p> <p>“The agents expect that this year’s good performance will continue in the following months, considering the significant amount of issuances that are still under analysis by [the Brazilian Securities and Exchange Commission] CVM,” wrote Anbima.</p> <h2>What does it mean for the economy?</h2> <p>Corporate bonds are a debt instrument companies use to get funds for projects, investments, or acquisitions, manage their debts and other activities. In exchange for the money, enterprises pay bond creditors previously established interest over a given period of time. Normally, this interest is attached to the so-called &#8220;DI&#8221; rate (the rate banks pay for lending money to each other, which follows the Selic benchmark rate)—paying a share of it, or full price plus spread—or the official consumer inflation index (IPCA). Some bonds may also be converted into stocks.</p> <div class="flourish-embed" data-src="visualisation/688528"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>With Selic-based investments returning just 5.5 percent per year, Anbima data shows an increase in the share of corporate bonds paying the DI rate plus spread fees. This kind of fundraising alternative has become more attractive for investors—as they can earn more than they would from other fixed-income assets—and cheaper for companies, considering the Selic rate was 14.25 percent just three years ago.</p> <p>With a higher demand for these assets, companies can fund their projects more easily and increase investments. When it comes to capital intensive endeavors such as infrastructure, this instrument becomes even more important. Since 2011, Brazil has a special stimulus package for infrastructure-related bonds valid until 2030. Individuals and foreign funds which apply money into these bonds do not have to pay income tax over the course of their investment. Currently, the areas that get the largest chunk of these investments are energy, transport, <a href="https://brazilian.report/power/2019/05/21/bolsonaro-brazil-congress/&#91;">sanitation</a>, and telecoms.&nbsp;</p> <p>A recent <a href="https://economia.uol.com.br/noticias/reuters/2019/08/26/analise-emissao-de-debentures-por-eletricas-sera-recorde-e-ja-compete-com-bndes-e-bnb.htm">Reuters News report</a> states that energy companies are already enjoying the effects of the corporate bond boom and, by the end of the year, they are expected to have absorbed 80 percent of roughly BRL 30 billion. If projections come true, that would be a new record.</p> <h2>Who is paying for it?</h2> <p>Traditionally, the Brazilian government has been closely linked to any major infrastructure project, whether it be through state-owned companies or financed via Brazil&#8217;s development bank, the BNDES.</p> <p>Following president Dilma Rousseff’s controversial impeachment in 2016 (on the grounds of administrative misconduct over accounting maneuvers concerning public banks) the BNDES has been in the public spotlight, with members of the current government pledging to open the bank&#8217;s &#8220;black box&#8221; of loans.</p> <div class="flourish-embed" data-src="visualisation/688536"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>Critics point out that the bank financed high-risk endeavors in countries such as Angola and Cuba, suffering losses and defaults. Not to mention the growth of “national champions” such as meatpacker JBS and <a href="https://brazilian.report/money/2019/06/18/odebrecht-recovery-debts/">construction giant Odebrecht</a>, later involved in massive corruption scandals.</p> <p>In 2017, president Michel Temer managed to replace BNDES’ <a href="https://brazilian.report/money/2018/04/24/bndes-brazil-development-bank/">interest rate</a> for <a href="https://www.bndes.gov.br/wps/portal/site/home/financiamento/guia/custos-financeiros/tlp-taxa-de-longo-prazo">one</a> that is connected to market conditions. That helped to diminish the vortex of public accounts and made the Central Bank’s monetary policy more effective, as companies could no longer escape it by resorting to a cheaper source of funding.</p> <p>Since taking office, President Jair Bolsonaro has echoed calls to open the BNDES &#8220;black box,&#8221; while Economy Minister Paulo Guedes committed himself to shrinking the bank’s structure, demanding it return billions to the Public Treasury. Outsourcing the funding of infrastructure projects to capital markets may be just the right way to do it, fostering the economy at the same time.</p> <h2>Quid pro quo&nbsp;</h2> <p>According to newspaper <a href="https://www1.folha.uol.com.br/mercado/2019/07/governo-conclui-nova-lei-de-credito-a-infraestrutura.shtml"><em>Folha de S. Paulo</em></a>, the government&#8217;s economic team is preparing a new bill to create a type of bond related to infrastructure. This type of operation would extend income tax exemptions enjoyed by Brazilian individuals and foreign investors (in place since 2011) to local funds.</p> <p>The report explains that, if Congress approves the bill, companies may either choose not to pay income tax themselves and therefore be able to offer higher interest, or the benefit will go to the bond buyers. Higher returns would be more appealing to pension funds and institutional investors, because they care more about that than paying tax, Adolfo Sachsida, the economic policy secretary, told <em>Folha</em>.&nbsp;</p> <p>Furthermore, the new law will allow companies to issue bonds in order to pay for banking loans taken out up to five years ago, instead of the current limit of two. That would help infrastructure projects, which take longer to progress past planning stages.

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MoneySep 19, 2019

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.