Source: Bloomberg
The goal is to make it easier for companies to tap debt or equity markets, according to Marcos Pinto, secretary for economic reforms. The ideas, which are still being hashed out, include lowering fees associated with issuances and simplifying audit requirements, he said in an interview.
Pinto, who Finance Minister Fernando Haddad appointed to help advance Brazil’s capital markets and stimulate the economy, is collaborating with securities regulator CVM on the plan, which is set to undergo a public consultation by the end of the year. It’s expected to yield “exceptional rules of an experimental nature” for publicly-held companies with annual gross revenues of less than 500 million reais ($89.5 million) to raise money via equity or debt sales, the regulator said in a statement to Bloomberg News.
Despite a recent boom in Brazilian debt markets, mid-sized companies continue to struggle with double-digit interest rates that the central bank signaled will persist for longer. The country’s benchmark Selic rate is currently at 10.5%, down 3.25 percentage points since August 2023 but far higher than the 2% lows hit during the pandemic. Medium-sized issuers also grapple with a heavy tax burden and few banks that offer credit, which makes debt more expensive.
“A large company goes to the capital markets, directly to the investor and is able to raise funds at a much lower cost, but smaller ones can’t because it’s expensive in Brazil,” Pinto said in an interview. “We want to reduce the cost of issuances so that smaller companies can do them, too.”
Brazil’s capital markets remain in nascent stage — historically high rates keep investors risk-averse, preferring to park their cash in government bonds rather than corporate credit or stocks (less than 1% of the population invest in the local equity market, and the latest data show a pullback). The shallowness of the market is seen as a key hindrance for the country to bolster investment and accelerate growth that has lagged Latin America in the past decade.
Pinto’s plans also involve implementing a recently passed tax reform in the financial sector, changes to rules around how collateral is used in loan transactions, increasing competition in the financial sector and a makeover of the insurance market.
Funding via capital markets has gained popularity, rising to 338 billion reais in the first half of the year, more than double compared with the prior-year period, according to Anbima, the country’s capital markets association. Issuance of local notes, known as debentures, increased to 206 billion reais during the first six months of 2024, an all-time high, while equity sales — particularly IPOs — have all but vanished.
Still, bank loans continue to be the main funding source for most companies. “If you open the door to the capital market, there will always be an alternative transaction that you can do,” said Marcelo Leitao, securitization director at Opea Securitizadora SA, a structured finance firm.
Raising money in the local bond market could lower companies’ spreads on average by around 2% when compared to bank loans, Leitao said.
Hurdles
Small and medium-sized companies confront various obstacles, including hefty advisory fees for structuring transactions. The lack of name recognition among investors also plays a role, as well as concerns about credit risks that lead investors to favor higher-rated companies.
The high-yield market, meanwhile, is still “very bruised,” according to Nicole Vieira Leta, a partner at Polo Capital. Brazilian corporate bonds got hammered last year when century-old retailer Americanas SA uncovered a massive accounting fraud, sending it to seek protection from creditors.
Rodrigo Gallegos, a partner at RGF & Associados, said two of his clients — both middle market companies he declined to name — decided to shelve their financing plans because of high costs. “Both my clients were frustrated because they were unable to move forward,” he said. Based in Sao Paulo, RGF specializes in financial restructuring.
Some are skeptical that the government’s plan will be a game changer for companies. CVM and Anbima fees each make up less than 0.1% of the cost of a debenture and expenses with audit firms vary, according to Caio Viggiano, managing director of fixed income at Banco Itau BBA.
Despite the challenges, Pinto said the plan’s intention is to open doors for companies.
“What we want to precisely is to reduce this cost in aggregate, so that the entry barrier is lower,” he said. “The market doesn’t change overnight. This is another step that needs to be taken.”
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