"Because BNDES recognizes its role as a catalyst to infrastructure capital markets development, it has made changes to its traditional loan structure, providing further incentives to pursue complementary issues of debentures in the capital markets. Nonetheless, certain structural features need to adapt to reflect a capital markets mindset," said
Among the bank's modifications is pari-passu seniority among complementary debentures and the long-term loan granted by the bank. Given the short history of infrastructure debentures in
Other positive changes aimed at increasing project viability from a sponsor's perspective are more flexible debt amortization schedules and performance triggers following complementary debenture issuance, which allows for increased overall leverage, and, consequently, higher sponsor returns.
BNDES' objectives are moving in tandem with those of the Federal Government. From an investor perspective, Law 12.431, which created Infrastructure Debentures, provides for lower income tax thresholds for investors, thus lowering the opportunity cost associated with project finance transactions. The implied requirement of increased pricing associated with projects of longer duration is lower for infrastructure debentures given the fiscal benefits available.
The experience of other emerging markets which have benefited from similar measures by development banks, such as below market-rate financing costs, demonstrates the importance of BNDES's role. However, continued availability of below market-rate financing could further hinder capital markets development.
BNDES could improve conditions by using its high negotiating leverage to impose more capital markets-friendly requirements, such as interest rate indexation matching and technical advisor requirements.
BNDES' single-lender mindset demonstrates there is room for further improvement. Certain conditions embedded within their long-term financing documents include cross-default clauses with other companies within the project company's economic group, which, in theory, defeat the stand-alone nature of project financing. While this supports portfolio management efficiency and low delinquency rates on a bank balance sheet perspective, it may undermine other efforts aimed at developing project finance transactions. Nonetheless, while these cross-default clauses exist, it has not been practice of the bank to exercise this option. Fitch believes BNDES's interests are aligned with those of the infrastructure debenture investors.
Other areas which might improve are BNDES's reserve account requirements for the underlying long-term financings, which are relatively low compared to other capital markets structures, providing for limited flexibility should operational shocks or counterparty issues arise. Given the pari-passu nature of the financing structure, this could potentially constrain debenture ratings, absent other compensating structural features.
For more information, a special report titled "Evolving Role of BNDES and Infrastructure Debentures" is available on the Fitch Ratings web site at www.fitchratings.com or by clicking on the link.
Additional information is available at www.fitchratings.com.
Bernardo Costa, +55 11 4504 2607
Fitch Ratings Brazil Ltda
Alameda Santos,700 Seventh Floor
Glaucia Calp, +57 1 326 9999 ext 1110
Source: Fitch Ratings
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