Lula administration is considering restricting issuance of bonds by the oil and gas sector

03/22/2024

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Percy Soares Neto — Foto: Divulgação

The federal government is considering imposing new restrictions on the issuance of tax-exempt debentures and limiting their use to finance fixed concession payments. According to sources, one idea is to direct the instrument, which offers an income tax exemption for individual investors, to sectors that need cheaper financing, such as renewable energy, basic sanitation, and power transmission lines. In practice, the use of this instrument by the oil and gas industry could be limited.

According to one source, the plan is to limit the use of these securities by sectors where profitability has been higher. More specifically, there will be restrictions on the oil and gas sector. “The O&G industry, for example, has a significant margin and the cheap funding is not a game changer,” the source said.

This would allow the government to raise more revenue at a time when it needs to broaden its revenue sources. This year, the National Monetary Council (CMN) has already imposed several restrictions on the use of underlying assets to issue tax-exempt securities, such as Real Estate Credit Bills (LCIs), Real Estate Receivable Certificates (CRI), and Agricultural Credit Bills (LCAs).

“The biggest expectation we had was whether there would be a restriction on the size of the company, more or less as was done with CRAs [agribusiness receivables certificates] and CRIs. But what we’ve heard is that that kind of size restriction shouldn’t happen,” said a source who has been following the issue.

A source in the oil and gas sector said that if the restriction goes through, it will close a funding door for companies, especially the smaller ones that have less access to funding than Petrobras.

Among the groups in the sector that have recently raised funds through tax-exempt bonds is PetroRio. The company launched a R$2 billion offering in February to finance oil projects. 3R Petroleum issued R$1 billion of securities in November 2023 and Enauta raised R$1.1 billion in September.

The government is also studying whether to restrict the use of the instrument to honor fixed concession payments, a source says. This restriction could potentially lower the amount paid, thereby impacting state and municipal revenues. This limitation might extend to both tax-exempt and infrastructure debentures, the latter of which were established by law in January of this year but have not yet been subjected to regulation. “This would be very bad news for states and municipalities,” the source said.

Private-sector companies have also criticized the proposal. “We will have less competitive auctions. This will certainly reduce the appetite of investors to pay subsidies and is likely to increase the cost of capital for projects. We are very concerned,” said Percy Soares Neto, executive director of ABCON (National Association of Private Water and Sewage Concessionaires).

The proposal to limit the use of debentures for subsidies is in line with the federal government’s assessment that the amounts offered in the auction will ultimately be paid by the users of the infrastructure services. This is because tariffs could be lower if governments did not seek to get higher fixed concession payments when they structure projects. In addition, the federal government has encouraged bids with the lowest tariff and the highest concession payments.

Mr. Soares acknowledged that the diagnosis is correct, but believes that imposing limits is a mistake. “The best solution would be to seek a dialogue with the bidder.”

In the decision taken at the February meeting, the CMN also decided to forbid CRI and CRA offers from listed companies that are not related to the two sectors (real estate and agribusiness). Behind this decision was the government’s plan to increase revenues and make the securities more effective, so that the funds raised would be directed to the sectors.

Since 2016, there has been a loosening in the understanding of the CRA rules, and companies operating in other sectors, such as restaurant chains and supermarkets, have been able to issue bonds of this type. As of 2022, companies that pay rent will also be allowed to use these contracts to back CRIs, further expanding the volume of offerings.

With the expected reduction in these securities, investors migrated to tax-exempt debentures. Secondary market bond prices fell, and demand grew to the point where there was even room for offers with no premium over government bonds.

At the same time as it is studying restrictions on tax-exempt bonds, the government is working to regulate infrastructure debentures. The law creating the instrument, which allows tax exemption for issuing companies, was approved in early January, but the decree with details such as the sectors that will be able to issue them has not yet been published. According to sources, the rules are expected to be published by the next week.

The Ministry of Finance declined to comment because “the matter is still under discussion within the federal government.”

*Por Fernanda Guimarães, Taís Hirata, Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/