At a time when the reactivation of investments in general and in infrastructure in particular is becoming increasingly important for economic recovery, identifying the sources of funding for investment projects becomes essential. As is well known, it is not today that Brazil faces an acute shortage of market sources adequate for long-term financing.

In order to contribute to this discussion, this Letter IEDI discusses the main characteristics of the recent evolution of long-term financing in Brazil and some suggestions to strengthen and diversify its sources.

The groundwork work was developed for IEDI by the economist Ernani Teixeira Torres Filho, deeply knowledgeable about the financing conditions of the country. The full version of his research report, in greater detail, is available on IEDI's website (in Portuguese).

The general diagnosis is that the long-term corporate credit market is currently at a crossroads. This is because all segments dominated by banks are in sharp decline and BNDES' lending capacity, under the aegis of the adjustment of public finances, is increasingly restricted.

In addition, the dominance of the fiscal agenda on government actions almost eliminated, at the beginning of 2016, the incentives related to infrastructure debentures, which were essential for the development of this financing mechanism. However, at least for now, the government seems to have discarded this measure, thus avoiding a serious mistake.

Corporate credit, which has advanced a lot over the last 15 years following the total credit market, was not very much compromised by the impact of the global crisis in 2008, thanks to the performance of the official banks, especially the BNDES.

As of 2014, however, such expansion has come to an end. Like the rest of the credit market, corporate-focused segments began to contract. Initially, this phenomenon was restricted to commercial banks, but soon extended to the BNDES.

The debentures market, in turn, does not have sufficient strength to cope with this contraction in bank financing, be it by BNDES or other banks. This is because most of this market (almost 2/3 in 2015) is owned by leasing companies of banking conglomerates, whose main objective is to allow banks to avoid the reserve requirements imposed on other funding mechanisms and to incur lower payment of taxes. It is, therefore, an instrument of regulatory arbitrage and tax avoidance of banks.

Even the other debentures (not issued by leasing companies) do not, in fact, represent an alternative source of financing, functioning more as a substitute for short-term bank lines when the volume of operations exceeds certain limits.

The contraction of long-term bank financing and the limitations of the debentures markets mean that the only segment that presents conditions to expand in the coming years is that of infrastructure/ encouraged debentures (debêntures incentivadas/ de infraestrutura). Demand for these papers remains high and can help finance infrastructure projects.

For this reason, some measures have been suggested to leverage corporate long-term financing in the country, mainly through the acceleration of the issuance of encouraged debentures as a way to broaden the market for corporate debt securities as a whole. It follows from the study the suggestion to implement the following measures:

• Elimination of obstacles to the placement of corporate bonds in registered offers, based on CVM's former Instruction 400, allowing the home investor base to be as broad as possible. Companies with a tradition of placements on the capital markets should obtain an even broader license, as qualified issuers, with even more flexible authorizations to go to the market at any time.

• Greater use of BNDES funds in corporate restructuring operations through the use of convertible debentures in exchange for the requirement that the company goes to market to seek new resources or investors in terms previously established.

• Setting a target for increasing the stock of encouraged debentures to R$ 50 billion by the end of 2018, something like 20% of the market, discounting the emissions of leasing companies.

• Provision by the state banks – BNDES, Banco do Brasil and Caixa Econômica - of firm guarantees for the portion of the offers of infrastructure debentures not covered by private banks. This type of guarantee would only be exercised if the papers were not fully distributed to the public. The measure would promote an increase in the scale of encouraged debentures, facilitating the financing of new investment projects.

• Establishment of periodic auctions for the portfolios of public banks formed by encouraged debentures, through electronic platforms, such as the Treasury Direct, allowing a greater variety of investors.

• Income tax exemption for individual shareholders of financial funds exclusively for the acquisition of assets exempt from income tax, in any proportion. There is a legal requirement today that such funds have a very high percentage of government bonds or, alternatively, private securities of a same type. 

• Consolidate, within a single set of conditions, all issues of encouraged corporate bonds, regardless of the sector or destination of the issuer's investment project. This new regulation should be based on the rules of infrastructure debentures. At the same time, banks would no longer be allowed to issue bonds with tax benefits.

The full text is available in Portuguese.