Letter IEDI n. 1081—Long Term Financing: advance in private intermediation
The IEDI analyzes the development of the long-term credit market in Brazil, in the light of recent developments and lessons learned from the COVID-19 crisis. It is based on a study prepared by economists Ernani Torres Filho, Luiz Macahyba and Norberto Martins, researchers at UFRJ and former superintendents of BNDES and Anbima.
Among the previous Letters IEDI that also addressed the theme are editions no. 528 of Jul/12 “The Reform of Long-Term Financing”, n. 791 of Jun/17 “Long-term financing in Brazil: analysis and proposals for improvement”, n. 873 of Aug/18 “The future of BNDES and the capital market in Brazil”, and n. 1018 of Jul/20 “Guarantee funds and credit for small and medium-sized companies”, to name just a few examples.
Historically, long-term corporate credit in Brazil was led by the BNDES, through the intermediation of public funds. The development bank provided most of the resources used by industrial and infrastructure companies to finance the expansion and modernization of their production capacity.
The funds contributed by the private banking system and the capital market used to be smaller in size and complementary to BNDES operations, that is, they were intended for uses not covered by the Bank or for advances to be settled with future disbursements from this institution.
At the beginning of the decade of 2010, two reforms were introduced in the capital market that changed the scenario a little, promoting the development of domestic private intermediation. These were the creation of incentive debentures (Law nº 12.431/11) and the issuing of securities with restricted efforts (CVM Instruction nº 476).
These two institutional innovations allowed the development of a market with greater liquidity, capable of offering longer term funding (up to 7 years) and with lower intermediation costs. The scale of these issuances, however, remained limited until the second half of the decade due to high interest rates.
A new change was introduced with the macroeconomic adjustment policy adopted since 2015. The sharp drop in investment rates—from 20% to 15% of GDP—and the increase in the cost of BNDES loans reduced the demand for the institution's resources. The Bank's role was restricted and the institution's cash flow was directed towards accelerating the payment of its debts with the Federal Government.
At the same time, the reduction in interest rates in the period led investors to seek new ways to monetize their equity, which generated a reallocation of portfolios in favor of higher risk-return assets, such as long-term corporate debt and stocks.
In this situation, companies became more interested in accelerating their issuances in the capital market, as a way of reducing the average cost of their liabilities, but also, to a lesser extent, to finance their investments. Commercial banks, in turn, replaced a significant part of the role that the BNDES has traditionally played in financing purchases of machinery and equipment by companies.
As a result of these changes, R$ 173 billion were raised through the issuing of corporate debentures in 2019, a volume greater than three times the total disbursed by the BNDES in the same year (R$ 55 billion). The incentive debentures, focused on infrastructure projects, reached their historic maximum with the amount of R$ 33 billion in the same year.
These data indicate the ongoing changes in how the long-term credit market works in Brazil. The leadership in long-term corporate financing migrated from the BNDES to private intermediation via capital markets and banks.
However, the future sustainability of this recent change in the roles of different players in long-term financing is still an open question. The evolution of the interest rate will play a fundamental role in this trajectory. A substantial rise could generate a sharp reflux of corporate issuance.
Furthermore, in the event of a rapid resumption of economic growth, the capital market may not present the conditions of liquidity and depth necessary to adequately meet the fresh demand for funds.
In addition to these two aspects, private leadership introduces new characteristics to the long-term corporate credit market. A positive factor is the greater elasticity of supply, particularly in times of expectations favorable to credit acceleration.
On the other hand, private funding may contract sharply due to macroeconomic factors or an increase in financial fragility. For this reason, the country can benefit from the complementarity of BNDES operations, which are more stable throughout the economic cycle.
Public guarantee mechanisms can be more efficient than earmarked credit, as long as they are accepted by financial institutions, in order to favor the maintenance of an expansive credit trajectory in adverse circumstances, as the experience during the COVID-19 crisis has showed.
Likewise, public credit institutions and the BNDES, in particular, need to develop instruments and adopt criteria to fulfill an important role as a mechanism to induce and finance very long-term investments, particularly in infrastructure, and those necessary to promote a more productive, innovative and low carbon economy in the country.
The suggestions below, recommended by the aforementioned study, would contribute to the strengthening of long-term credit:
a) Review the Securities Commission's (CVM) public offering regulations in order to encourage the initial selling of corporate bonds to a wider public, particularly those associated with infrastructure debentures. Today, regulatory restrictions impose discriminatory costs on the use of pulverized emissions (ICVM 400), which have practically fallen out of use;
b) Create the 'qualified issuer' type, allowing companies with proven record of following the CVM's offering rules, to be authorized to issue debentures to the broader public without having to submit to a prior authorization from the Commission;
c) Strengthen credit guarantee mechanisms for MSMEs, creating conditions for their permanent operation, such as the PEAC program managed by the BNDES;
d) Evaluate the application of a 50% permanent reduction in the calculation of the fixed portion of the TLP rate, following the example of what the legislation already provides for constitutional funds for the North, Northeast and Midwest regions;
e) Grant income tax exemption to BNDES funding. The BNDES continues to play an important role in financing various activities—such as infrastructure, innovation, the environment, export financing—and reducing the procyclical component of the supply of funds, which tends to be more intense and pronounced in private financing, especially in long-term segments;
f) Authorize the Central Bank to operate as a dealer of last resort in the corporate bond market in times of market stress;
g) Create public guarantee mechanisms and incentives for funds that promote MSMEs access to the capital market.