The level of commitment of Brazilian development bank BNDES to support new capital market structures to finance infrastructure projects has been thrown into doubt by the bank’s recent strategy. Despite the bank’s clear official commitment to help develop alternative capital sources – with the aim of reducing the reliance on the bank’s own financing of infrastructure projects – the bank’s decisions regarding two recent transactions have led to speculation about how predictable its likely involvement will be in such deals. Concessionária Rodovias do Tietê’s recent R$1.065 billion ($463.86 million) deal to finance the expansion of some of its toll roads was closed without any support from BNDES. A source close to the transaction told Euromoney that Rodovias do Tietê had been in conversations with the development bank, which under its own internal rules could have bought up to 10% of the paper – just over R$100 million – acting as a normal investor. The issuer also discussed the possibility of BNDES giving financing directly to the company, in which case the bond would have had to have been structured with a flat amortization schedule. In the end, BNDES chose not to buy any bonds or participate in the financing and so the company structured the bonds with a customized amortization schedule to allow for expected greater cashflows in the future and front-loaded construction cost.
Stymied by BNDES
Because of the structure of the deal – Brazil’s first project finance structured debenture – failure to fully distribute the paper in the market meant that the firm underwriting provision was activated and Rodovias do Tietê had to sell the full transaction for inflation-plus 8%. The issuer reported R$650 million of demand at around inflation-plus 6.5% and support for BNDES at that pricing level might have conceivably helped the toll road operator complete the sale at a substantially lower financing cost. “BNDES could have bought it and achieved a lower interest rate for Rodovias do Tietê,” the source says, arguing that although any BNDES support wouldn’t have filled the shortfall in itself, a decision from BNDES to buy would have strengthened the marketing process and might have generated other orders.
BNDES has also been accused of preventing Rotas das Bandeirantes from refinancing its outstanding R$1.1 billion bond, which pays inflation plus 9.75%. The issuer had hoped to conduct a liability management exercise, but BNDES reportedly refused to allow the company to repay the outstanding bonds. Preventing liability management exercises lowers flexibility and might lower the attractiveness of capital markets to other infrastructure companies.
Infrastructure needs
BNDES declined to comment on its approach to either of these transactions, but in an emailed response to questions put to it by Euromoney stated that it projected the volume of investments needed for infrastructure in the coming years to be more than R$100 billion, much of which capital will be provided by BNDES. The response added: “However, to complement BNDES resources and to increase funding sources, the federal government hopes to attract a significant volume of private capital to finance infrastructure projects, including via the capital markets, which are the most efficient way to channel private savings in this area.”
BNDES also says that it has been – and will be – an active partner to companies seeking to raise capital for infrastructure projects. “BNDES has been supporting projects/companies that are working with the bank to issue debentures to complement the bank’s financing. To achieve this, under certain conditions, the bank shall allow financing guarantees to be shared as well as the possibility of applying contractual clauses related to anticipated cross-default. These mechanisms reduce the risks for investors in these types of debentures and reduce, as an effect, the financing costs for companies selling this paper. To have a reduced cost will make debentures become interesting capital structures for infrastructure projects. BNDES will also act as an investor, acquitting a portion of the bonds that are sold to the market.”
