Corporate debt: Brazilian companies survive “stress test” – Central Bank report
RIO DE JANEIRO, BRAZIL – Brazil’s loss of investment grade rating (2015) and the pandemic (2020) did not close the capital markets to Brazilian companies. In that five year period, they raised US$99.5 billion abroad and US$176.8 billion at home.
In times of double-digit inflation per month and overnight operations to protect assets, five years was a long term in Brazil. Today, with inflation stretched to 8.06% in twelve months and Treasury bonds maturing in 2050, five years is a mere pittance.
These events in 2015 and 2020 changed conditions for the issue of corporate debt securities. However, the market has not closed for Brazilian companies which passed informal stress tests when seeking funds.
The credit rating awarded by agencies is an international measure of the ability of countries and companies to fulfill their commitments with their creditors. The higher the rating, the lower the risk perceived by the agency and the lower the cost of money that a country or a company pays to investors to finance its spending.
Brazil earned its first good payer seal in 2008 from Standard & Poor’s, now S&P Global, and lost the seal in September 2015, downgraded to speculative investment. In December that same year, Fitch Ratings withdrew the seal it had also assigned to the country. And, in February 2016, Moody’s downgraded it amid a fiscal mess that led to the impeachment of ex-president Dilma Rousseff.
The Central Bank used the interval from 2015 to 2020 in a special study, published in the Banking Economy Report, in which it assesses the financing of companies domiciled in the country and their subsidiaries abroad by issuing securities in the international market.
Financing through the domestic securities market is used for comparison purposes regarding credit conditions, but it is also good news. The Central Bank confirms the strength of funding in the domestic market, especially in debentures.
In the last five years, the raising of funds by corporate debt instruments abroad totaled US$99.5 billion in 141 operations, while US$176.8 billion were raised in Brazil through 1,635 operations. This data released by the Central Bank, based on statistics from the Securities and Exchange Commission of Brazil (CVM), is a positive thermometer for companies in need of financing and also for investors in search of attractive opportunities for financial investment.
“The predominance of domestic over foreign capital markets as a source of funding for Brazilian companies is consistent with the result found by the International Organization of Securities Commissions (IOSCO) for emerging markets. However, for companies with securities abroad, foreign issues are predominant, a result that is corroborated for the 25 largest publicly traded companies with national control, according to the CVM study,” say the CB technicians.
The weight of Petrobras
In its analysis, the institution points out that foreign operations registered an average volume six times higher than the local market and with double the average maturity. The resumption of funding after the two events (loss of investment grade and outbreak of the pandemic) occurred at different times: in 2015 it took 10 months; in 2020, only three months.
A detail: last year, companies restarted issuing bonds under external financing conditions similar to those they had been practicing and which were better than in previous years, with lower costs and longer terms.
Contrary to what one might assume, given the impact of Brazil’s loss of investment grade, the Report on Banking Economics reports that this event did not prevent most companies from accessing international capital markets, under favorable conditions.
According to the Central Bank, while in the period 2015 to 2019 the refinancing and extension of debts was the main destination of the funds raised abroad, in 2020, the money raised may have been intended primarily for the building of safety cushion reserves.
Two findings corroborate the hypothesis of liquidity cushion formation: the absence of the need to refinance or settle short-term debt and the fact that funding is not associated with investments.
The special study also reveals the importance of Petrobras’ participation in the stock of foreign issues of corporate bonds. In 2015, the total stock of companies’ funding reached US$157 billion. The state-owned company accounted for 35% of this amount. In 2020, the total stock reached US$126 billion, with Petrobras’ share declining to 24%.
According to the Central Bank, 71% of the bond stock has a maturity of over five years.
As for the average effective cost of funding by companies with foreign bond issues in the last five years, the Central Bank reports that the peak was observed in 2016, 7.5% per year. In 2020, the rate declined to 5.5%. In these two moments, the spread of the operations remained at 2.7%.
However, the portion of the cost that reflects the country risk dropped substantially, from 4.8% in 2015 to 2.8% soon after the pandemic broke out.
The BC study considers that in 2020, the conjuncture guided by uncertainty about the effects of the Covid-19 pandemic on global economy presented a new scenario for Brazilian issuers.
“Country risk, at the turn of the first half of March, reached a level at which issuances become scarce or cease, 250 basis points. In the year, issuance occurred at a stop-and-go pace, in line with Credit Default Swap (CDS) levels. Four months of the year with no issuance, 14 stopped in February and resumed in June following sovereign issuance.”
Source: Exame
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