Latin Finance - September/October 2011 - 50

Brazil debentures

“How do we increase the number of players?” says a São Felipe da Mota, the superintendent of securities regulation at Paulo DCM banker, who declines to be identified. “This is the the CVM, says plans are underway to present basic deal details key. We’ve been asking that question for 10 years without a much like rule 400 issuers do, but budget limitations have solution.” slowed the process. Policymakers are busy with new initiatives for liquidity. Recently a new provision has allowed some companies to Anbima is creating a Novo Mercado for debentures, with the combine the two formats, selling under the 400 format but with hopes of doing what the Novo Mercado for stocks did for the the agility of the 476 rule. Retailer Lojas Renner was one of the country’s equity issuance. In July it announced a new index of first to try this hybrid standard, in July, with a 300 million real debenture prices for issues above 100 million reais in size. sale. There is also the recently passed provisional measure “We got the best from 476 and 400.” says Adalberto Santos, 517, which provides tax incentives for foreign investors and Renner’s CFO. “We got the best from 476 and 400.” If it weren’t individual accounts who wish to buy debentures used for capex for this designation, the deal would have been 476, he says. The or infrastructure projects. Tax benefits exist for investors buying company thought it important to reach more than 20 investors, real estate-backed securities, but have never before been used he adds, in its first domestic bond deal since 1994. in the debenture market. Arguably, the 476 already allows companies to tap the vast majority of the Brazilian Bank Appetite local buyside universe, which Brazilian Local Bond Issuance (BRL bn) Others point out that the consist of anywhere between Rule 476 raises volume key to growing the bond 50 to 100 accounts. market may lie deeper 45 “By being able to offer than regulation. A lot also to 50 and sell to 20 different 40 depends on the activity of investors, you basically cover Rule 476 Rule 400 35 state-backed development the whole market,” says lender BNDES. The bank’s Marina Anselmo, partner at 30 below-market rates and Brazilian law firm Mattos 25 increased activity in the Filho, which has worked on wake of the global financial numerous domestic bond 20 crisis have been criticized transactions. Even if a single 15 for restricting growth in asset manager has several other lending markets. funds, he or she still counts 10 For its part, BNDES has as a single investor, she adds. 5 added liquidity-boosting “We think the 476 rule 0 measures of its own. It has done its job,” Mota says 2005 2006 2007 2008 2009 2010 2011* plans a 10 billion real “It has made issuers’ lives program for corporate bond easier. In this sense it has * Year to August 1 Source: Itaú, CVM, Anbima acquisitions over the next been a success.” five years. To be eligible, Mota says issuers the transaction must include a market-maker, a minimum seeking scale can resort to the 400 format, which is designed to six-year tenor, and transparency in the bookbuilding process. accommodate larger deals. If more borrowers need to sell to a Most significantly, it will not purchase bonds paying a spread to broader array of investors, the CVM can adapt. the CDI interbank rate – used by more than 90% of debenture A deeper investor pool may be the answer to some of the issuances. market’s problems, but for now a 90-day lock-up period on Appetite for the type of corporate bilateral lending often 476 bonds isn’t encouraging any secondary trading and hence done under 476 could be affected by the other types of lending dampening liquidity in what is already a buy-and-hold market. that banks extend, says Alberto Kiraly, vice president of A more liquid market with access to issuers rated BBB on a Anbima. national scale requires more buyers, bankers say. An increase He says the debenture market could perhaps double in three in the number of players is what boosted the stock market, and years but increasing the investor base would depend on outside opening the market for retail investment would be the ultimate factors, such as BNDES and private sector banks’ appetites to goal. Getting fixed-rate bonds, which are generally more liquid lend. Consolidation among the big banks in Brazil could be than their floating counterparts, is also important. inhibiting it somewhat, as well as the fact that the large asset Brazil’s bond market has lacked depth and liquidity, due to managers are owned by the banks. distortions in the tax structure and the regulatory framework, “[Rule 476] has been positive for the market, and has given a culture of short-term indexation and high interest rates. By flexibility, but we have to realize that the development of the making 476 bonds the easier and cheapest route to the market, market is very much based on the appetite for credit among the regulators are not exactly encouraging broader participation on big banks,” Kiraly says. LF the buyside.

50 LatinFinance

September/October 2011

Latin Finance - September/October 2011

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