Role of Brazilian Development Bank under new administration is warning sign
01/03/2023
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Vivian Lee, socia da Ibiuna Investimentos. — Foto: Carol Carquejeiro/Valor
The corporate debt market is likely to start 2023 in a cautious tone after one more year of growth. Doubts about the role of the Brazilian Development Bank (BNDES) and the uncertainties common at the beginning of a new federal administration make it more difficult to predict how the coming months will be.
The arrival of new capital market rules, such as mark to market in securities trading, also clouds the horizon, as does redemptions from some funds that invest in debt.
“We must observe how the market will evolve over the weeks,” said Felipe Wilberg, head of fixed income and structured products at Itaú BBA. “Today, it is more uncertain than usual.”
Funding from funds that invest in debt began to slow down in October. In November, the situation worsened, according to Vivian Lee, a managing partner at the asset management company Ibiuna. “It was the first month with net redemptions of the funds we follow,” she said. Ibiuna monitors monthly the flow of funds with net assets over R$100 million that buy more than 20% of debt. The data is important because the inflow and outflow of funds influence the pricing of securities in the market.
It is unclear whether this is a one-off movement driven by the increase in year-end spending or whether it will persist. “We will monitor to see if it will become a trend starting in 2023,” said Ms. Lee. The market, in general, is likely to adopt a wait-and-see approach. “It doesn’t necessarily mean that asset managers will stop buying debt, but maybe they will stop buying while they watch what’s coming down the road.”
Until November, companies raised R$235 billion through bonds, data from Anbima, the association of securities firms, show. The market expects that the volume for the year will exceed the R$250 billion seen in 2021. The growth was driven by the migration of funds to fixed-income alternatives from equity – a move triggered in 2021, when the Central Bank started to raise Brazil’s key interest rate Selic.
The closing of the foreign market for raising debt also helped improve the local market. Brazilian companies halted the issuance of bonds in the foreign market in early 2022 because of the strong instability caused by the increase in interest rates in the United States, which made it difficult to set prices. Thus, large exporters like Petrobras opted for raising funds in the Brazilian market.
“The local market has partly supplied what cannot be raised abroad due to the lack of access to the bond market,” said Gilberto Nakayasu, head of corporate debt at Bradesco BBI. “Next year, if there is an increase in rates or a lower appetite from investors, companies will likely return to bonds.”
Mr. Nakayasu foresees for the coming months an increase in the premium charged by investors to take part in new offerings in the local market, considering the record volume of issues in 2022. “Whether we like it or not, unlike the foreign market, the number of investors available to buy securities is smaller and very concentrated. As a result, we expect some pressure on the rates charged on loans.”
Throughout the year, spreads did not vary much considering JGP’s main index, created to track the evolution of this market. “The spreads started the year at CDI [interbank short-term rate] + 1.8% and will end the year at CDI + 1.85%,” said Alexandre Muller, with JGP. “Even with a large volume of issuance, fundraising was great. Now, with funding slowing down in some assets, the offers are also decreasing. The market managed to balance itself out.”
Looking ahead to 2023, Mr. Muller says he is not yet convinced that issuance volumes will be higher. “Before that, we need to evaluate how the companies’ investment plans will be and if they will eventually fall because of high interest rates and political and economic uncertainties,” he said. The estimates also depend, according to him, on how individual investors will react to the new rules of the market. “Possibly there will be a contraction in this investor base.”
As of January, banks and asset managers must present to investors the prices of securities at the value at which they are traded in the secondary market or at the probable negotiation value. Until now, the most common thing is for investors to visualize their positions with yields on the issue rate curve or on the acquisition rate curve, ignoring variations in the market’s mood.
The growth of the local debt market next year still depends on the reduction of political and fiscal uncertainties, according to Pierre Jadoul, corporate debt manager at ARX Investimentos. “I don’t believe that this year will be bad, but it depends on how the new administration behaves. If it calms the market and gives positive signals from the fiscal standpoint, it will manage to take a lot of the pressure off future flows and bring a better environment for companies to invest.”
If the BNDES acts like when under President Dilma Rousseff, the number of issues is likely to fall, said Mr. Jadoul. “From the signals of [Aloizio] Mercadante [nominated to lead the development bank under President Luiz Inácio Lula da Silva], this doesn’t seem to be the path, but we’ll have to wait and see.”
*By Rita Azevedo — São Paulo
Source: Valor International