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Business News/ News / Companies Forced to Tap Alternative Funding as Brazil Blocks Tax-Exempt Bonds
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Companies Forced to Tap Alternative Funding as Brazil Blocks Tax-Exempt Bonds

Some Brazilian corporates will be forced to come up with alternative financing plans after the country restricted the issuance of certain tax-exempt local bonds that have grown increasingly popular with individual investors.

Companies Forced to Tap Alternative Funding as Brazil Blocks Tax-Exempt BondsPremium
Companies Forced to Tap Alternative Funding as Brazil Blocks Tax-Exempt Bonds

(Bloomberg) -- Some Brazilian corporates will be forced to come up with alternative financing plans after the country restricted the issuance of certain tax-exempt local bonds that have grown increasingly popular with individual investors.

The government last week barred companies outside of the real estate and agribusiness sectors from issuing asset-backed securities known as CRIs and CRAs that allow issuers to borrow against receivables as a way to boost investment in those two areas of the economy. 

It’s a reversal from previous decisions from the nation’s securities regulator dating back to 2016, which had broadened the scope of the instruments as long as proceeds were used to fund payments like rent or agribusiness-related products. That had prompted a torrent of sales from banks to fast-food chains and supermarkets, fueling a billion-dollar market. 

“The exemption existed to channel resources for two industries, and then the rule became super flexible," said Leonardo Ono, credit portfolio manager at hedge fund Legacy Capital. “In terms of fundamentals, this change makes sense." 

The restriction, the extent of which took markets by surprise, comes as the government looks to increase revenue to meet an ambitious fiscal target set by Finance Minister Fernando Haddad for the year. 

At the same time, it’s also part of a plan to correct what the government sees as distortions in financial markets, said a person with knowledge of the matter, who requested anonymity because the matter isn’t public. As part of that push, the administration has already begun taxing offshore and exclusive funds, and plans to tax dividends in an income tax reform.

Banks

Lenders had just started to use CRIs for rent payments and CRAs linked to their trading subsidiaries. Last year alone, Banco BTG Pactual SA issued 15 billion reais ($3 billion) in CRAs and Itau Unibanco Holding SA issued about 2.5 billion reais in CRIs, according to Uqpar, a Rio de Janeiro-based firm that provides securitization data in Brazil. 

Outside of the financial sector, health care provider Rede D’or was one of the biggest issuers, with about 2.26 billion reais, Uqbar said. Dasa, Zamp — which controls Burger King’s Brazilian operations — and gas station chain Posto Ipiranga had also issued similar debt, sparking debate among market participants around the scope of these instruments. 

Rede D’Or said in an emailed statement that CRIs it sold starting in 2018 allowed for it to build more than 300,000 square meters (3.2 million square feet) that house some 2,000 hospital beds, “putting it among the largest real estate developers in the country" and fostering thousands of jobs. Posto Ipiranga and Dasa declined to comment, while Zamp didn’t respond to a request for comment.

A Trillion Reais

In its Thursday decision, the nation’s monetary council — a government body in which the finance minister, the planning minister and the central bank chief have a seat — also adjusted the structure for tax-exempt bank bonds called LCIs, LCAs and LIGs, blocking the use of subsidized credit as collateral. 

“We expect a rise in bank’s cost of financing, since they won’t be able to renew some of these low cost instruments: it’s a negative for the credit profile," Moody’s Investors Service analysts led by Daniel Girola said in a note this week. 

BTG declined to comment. Itau Chief Executive Officer Milton Maluhy said Tuesday on an earnings call that the tax exempt bonds represent around 15% of the bank’s total funding. The change, according to him, affects a small portion of the collateral that the bank used. Although there will be “some migration to other financing sources," it “shouldn’t change the bank’s cost of financing in a material way."

Banco Bradesco SA’s CEO Marcelo Noronha told reporters Wednesday that the government measure “reduces liquidity a little," but largely doesn’t affect the bank.  

Combined, the market for these securities — including CRAs, CRIs and the instruments used by banks — has ballooned to more than 1 trillion reais ($200 billion), according to capital markets association Anbima. Individuals have about 854 billion reais invested in LICs, LCAs and LIGs, while CRIs and CRAs reached about 158.6 billion reais. From 2022 to 2023, that number surged by 40%. 

Rule Change

The National Monetary Council decided that only companies whose revenue largely derives from the real estate sector can issue CRIs, bonds backed by real estate receivables, and only companies from the agribusiness sector can sell CRAs, which are backed by agribusiness receivables. And only debt from those industries can be used as collateral in those transactions. 

Both the Finance Ministry and the central bank said the new rules do not apply to debt instruments that have already been issued. About 90 billion reais of CRIs and CRAs were sold in 2023, according Anbima. 

Attracted by the tax incentives, local investors were accepting maturities as long as 10 years in some of those issuances, similar to global bonds, and banks and companies that were planning to issue more of those type of bonds will have to seek other structures.

While the move was rumored to be in the works, the changes were harsher than anticipated and should cause an abrupt drop in the sales of CRIs and CRAs, said Romulo Landim, partner and legal director at Octante Capital, an asset manager and securitization firm.

“This will force public companies to seek new forms of financing through non-exempt debt instruments, whether that is in the domestic or in the international bond market," Landim added. 

--With assistance from Martha Beck, Aline Oyamada and Ezra Fieser.

(Updates with Bradesco CEO comment in 13th paragraph.)

More stories like this are available on bloomberg.com

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Published: 08 Feb 2024, 12:29 AM IST
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