Bankers in Brazil remain hopeful of a bright future for capex bonds, despite the failure of the first tax-exempt domestic infrastructure bond in Brazil to close, with volatile market conditions being blamed.
Ascendi’s and Bertin’s Concessionária Rodovias do Tietê, a toll-road operator, was seeking to issue R$650 million in 12-year debt.
The Brazilian government passed Lei 12431 in September 2010, allowing infrastructure-related corporate bonds to be issued that are income tax-exempt for domestic and international investors, and IOF (financial operations tax)-exempt for foreign investors.
Barclays was structuring the private placement but it declined to comment on what would have been the first issuance of Lei 12431-approved securities. To qualify for tax-exempt status, the bonds must be related to an infrastructure project and have a tenor of at least four years.
However, even if the trade returns to the market in the near term and manages to close, competitors were quick to pour cold water on the trade’s significance.
"It’s just tax structuring," says one. "It’s effectively channelling international funds using subsidiaries to avoid tax when bringing off-shore finds in Brazil. It’s less fundamental then what would be really exciting: a publicly traded bond with sales of about 80% going to offshore buyers not affiliated with the issuers."
The bond’s proposed issuing company is 50% owned by Ascendi (60% owned by Mota Engil), 40% owned by BES and the remaining 10% is owned by a subsidiary of Bertin.
Investors expected demand to be large, as it offers higher yields with little increase in risk.
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| Karina Saade, co-head of BlackRock’s São Paulo office |
Karina Saade, co-head of BlackRock’s São Paulo office, says the investment group is close to launching a buy-and-hold fund for international investors that would invest in these bonds. The fund would be the first time BlackRock has managed a domestic credit fund in Brazil, having previously restricted itself to on-shore investments to sovereign paper. "[This new structure] levels the playing field between the domestic and foreign investors – everyone gets a tax advantage," says Saade. "There have been two main impediments to international investors entering the domestic market. The first is tax, which this new product addresses. The second is liquidity, because there is no secondary trading of domestic credit in Brazil."
One head of Latin American debt capital markets says demand for what he calls international capex bonds will be underwhelming because the pricing in the local market will be unappealing for off-shore buyers.
He argues that Brazil’s domestic market will price the debt at about 80 basis points over government bonds (currently top-tier Brazil names are priced at between 110% to 112% of the CDI), which, when it is in single digits (at 9% on May 31, but expected to fall further) "is not compelling spread for an international investor when they have to give up all the liquidity that’s available in the NTN-F market to buy a floating rate debenture with no duration.
"The magic threshold to get real engagement from international investors is 150bp over government paper, at which point international investors would take interest, but before you would get to that point you would get priced out by the locals."
The domestic Brazilian credit market is valued at about R$400 billion but three quarters is held by banks and other financial intermediaries. The remaining 25% is sold to institutional investors, such as public asset managers and pension funds who typically hold to maturity.
As such, foreign investors who usually invest in mark-to-market funds and have shorter investment horizons find that the lack of secondary trading makes pricing the liquidity appropriately a challenge.
The government has been debating how to address the liquidity issue and has considered a range of proposals, such as establishing a liquidity fund for local banks and using BNDES to establish secondary trading.
Brazil has also created a ‘Novo Mercado’ on the debt securities to mirror its initiative on equities. This initiative has focused on standardizing documentation to encourage foreign-investor confidence and participation.
Other ideas include removing the fiscal penalties that prevent local companies buying their own bonds, and thereby potentially making Brazilian companies marginal liquidity providers. Another idea is to increase the investment hurdle rates of local investors, who can hit targets by investing in products that yield the benchmark rate to incentivize secondary trading.
Another feature of the bonds is that they cannot be linked to the overnight Selic rate, but must be linked to other indices such as the IPCA index. "You see this trend [away from linking bonds to the Selic benchmark] in sovereign borrowings as well," says Saade, "because the government has been trying to take issuances away from being linked to the benchmark rate to being other types of indexation – and they are now doing that in the credit market as well."
BlackRock has been following the development of the local credit market and thinks the time is nearly ready for entry, although Saade says it is still too early to think about structuring a product that needs liquidity.
"We are interested in launching a buy-and-hold fund," says Saade. "The question for us is whether global investors are looking for a Brazilian credit product or [they’d like to invest in Brazil as part of] a broad Latin American product. But there will be a lot of interest because investors are looking for yield and there will be a lot of supply, so the investable universe will grow. There will be a sizeable investable universe and lots of diversification by name and industry, so the opportunity is significant."
