Borrowings now feature larger volumes and extended terms, becoming increasingly central to corporate management strategies, while tax-exempt bonds are increasingly drawing individual investors

05/22/2024

Pierre Jadoul — Foto: Gabriel Reis/Valor

In Brazil’s relatively subdued stock market, corporate debt instruments like debentures and receivables certificates are carving out more substantial roles within investor portfolios and have become crucial elements of corporate financing strategies. This sector’s expansion and increased sophistication are clearly reflected in the secondary market activity, where these securities are traded before their maturity.

For instance, in terms of transaction volume, the secondary market concluded last year with 2.255 million operations involving all forms of corporate debt securities, marking an increase of more than sixfold over the past five years, according to data provided by B3, the Brazilian stock exchange, for Valor. This surge included a 70% growth in just one year, notably during a period characterized by globally high interest rates that generally deter investors from this asset class.

Financially, the trading volume of private bonds in 2023 reached R$839.7 billion, quadrupling over five years. In the first four months of 2024 alone, transactions have already amounted to R$277.95 billion.

The number of issuers has nearly doubled in the past five years, with a total of 626 in 2023. Regarding the value of assets traded, there was a significant jump from R$4.4 billion in 2019 to R$14.5 billion last year. In just the initial four months of this year, the figure has already hit R$5 billion, signaling solid potential for growth throughout the year.

Fabio Zenaro, B3’s director of over-the-counter products, commodities, and new business, notes that the fixed-income market has seen rapid evolution in recent years across all industry metrics. “Until recently, we were processing around 3,000 trades a day, and now, we’ve reached 20,000,” he said.

Mr. Zenaro recalls that more companies are now turning to the local market for financing, drawn by longer terms and a market capable of handling large operations, thereby enhancing the sector’s significance even further.

Despite technological advancements, corporate debt trading is predominantly conducted over the counter with broker mediation. Mr. Zenaro points out that only 1% of fixed-income trading currently occurs on electronic platforms, a stark contrast to international norms, where this could exceed 30% in the future.

On a typical day, investors contact brokers by telephone to locate assets and finalize transactions. Whereas the market previously saw fewer trades, compelling investors, including fund managers, to hold onto their assets until maturity, it now allows for much more active and flexible management.

At Legacy, for instance, securities are typically held in the portfolio for about six months, according to Leonardo Ono, the firm’s corporate debt manager. “It’s like the chicken and the egg scenario. I’m not sure if the liquidity came from the longer maturities of the assets or if the longer maturities brought about the liquidity,” he muses. With increased liquidity, the number of investors grew, but so did market volatility. “Many investors complain about the volatility, but that’s just a byproduct of increased liquidity.”

Mr. Ono also highlights that individual investors have played a significant role in bolstering the secondary market in Brazil. “The current high interest rate environment is likely to sustain the trend of individuals entering the corporate debt market,” he observes, noting that income tax-exempt bonds have made this market particularly attractive to investors, leading them to prefer corporate debt over public bonds. “Today, every investor maintains a portion of their portfolio in corporate debt,” he adds. The market could see further expansion with the entry of foreign investors and pension funds.

On the other hand, Pierre Jadoul, corporate debt manager at ARX Investimentos, points out that despite its growth, the Brazilian market remains highly concentrated in the banks, contrasting with more developed countries where capital market participation is more pronounced. “The migration of credit from banks to capital markets is a natural progression,” he asserts.

Mr. Jadoul reflects on a recent revelation within the Brazilian market: the realization that fixed income can be volatile, a fact underscored by mark-to-market practices, and that securities are susceptible to defaults, as seen in the recent cases involving Americanas and Light. He points out that mark-to-market practices have introduced more efficiency, allowing assets to be bought and sold at fair prices.

At ANBIMA, Brazil’s association of securities firms, the scope of private securities monitored has seen substantial growth year over year. Over the past five years, for instance, the assets tracked have tripled, now totaling around 900.

Vivian Lee, chief credit strategist at Ibiúna Investimentos, observes that improved transparency in pricing has played a crucial role in drawing investors, thereby boosting market liquidity. “Five years ago, the secondary market had fewer significant players,” Ms. Lee remarks. She notes that, following the pandemic, bank treasuries and multimarket funds have become more active participants.

With individual investors increasingly entering the market, regulatory oversight has intensified to prevent any misuse of the spread level, according to Mr. Zenaro from B3. He adds that BSM, the self-regulatory body of the stock exchange, plays a critical role in this oversight, ensuring that assets are not sold at prices that significantly deviate from market norms, thereby enhancing the transparency of corporate debt trading.

*Por Fernanda Guimarães — São Paulo

Source: Valor International