At the present time, the issue of long-term financing of companies and, especially, their investments assumes, more than ever, strategic importance for the Brazilian economy. The private investment financing model that has prevailed in recent years, with a predominant role of the BNDES, presents deep difficulties to continue operating on the same bases. This is particularly so given the replacement of the TJLP (long term interest rate) by the TLP (new long term interest rate) and the early amortization of the resources granted to the BNDES by the Treasury.

In this scenario, the creation of a new financing model for private investments, including those in infrastructure, is an urgent priority. For this reason, the IEDI has been publishing a series of studies by researchers in the area with evaluations and suggestions for the development of new medium- and long-term financing channels and for the reformulation of the BNDES's role, which should remain an important agent in our credit system. One of such studies was carried out by CEMEC/FIPE researcher Carlos Rocca, made available in full on the IEDI website (in Portuguese) and synthesized in this Letter.

Also included in this series of works are the following studies: "Long-Term Corporate Credit at a Crossroads: Where Are We and Where Can We Go?" (Letter IEDI No. 791 of June 9, 2017) and "The BNDES at a Crossroads: How to Avoid Its Dismantling" (Letter 828 of January 30, 2018) prepared by economist Ernani Teixeira; "For a new development, a new BNDES" (Letter 834 of March 5, 2018) by consultant João Furtado and "The importance of BNDES for Brazilian companies' access to credit and productivity" (IEDI Analysis of  June 1, 2018) authored by Filipe Sousa and Gianmarco Ottaviano.

According to Rocca, it is clear that the Brazilian capital market is relatively small for the size and level of development of our economy and has shortcomings such as very short deadlines for corporate debt, low liquidity and great concentration in only a few large companies. The origins of this situation are: the permanence of high interest rates for decades, the attractiveness of public debt securities vis-à-vis the risks and the profitability of stocks and private papers and, from 2010, the strong competition derived from the increase in the supply of BNDES funding at subsidized rates.

In this context, and as one would expect, various sources and experienced analysts have started to express concerns about the reduction of the BNDES size and the capacity of the Brazilian capital market to respond in a timely and effective manner to our long-term financing needs.

However, according to the author, with the maintenance of a low-interest rate environment, as is the case today, where the Selic base rate is at one of its lowest historical levels (6.5% pa), there are reasons to believe that the capital market presents sufficient growth potential to become the main source of funds for long-term financing in the Brazilian economy:
 

a. Instruments and vehicles of the capital market participate with 70% of the mobilization of financial savings in the Brazilian economy. Also, despite the sharp drop in investment rates, the participation of the capital market in the financing of businesses' and households' investment, which was only 10% in 2010/2014, rose to 11.7% in 2017 due to the fall in interest rates and the reduction of BNDES disbursements;

b. There is great scope to increase the participation of corporate debt securities in the economy’s consolidated portfolio of net financial assets, which was only 4.4% in December 2017. A simulation made under the hypotheses of the investment rate rising to the average level of 2010/2013 (21.7% of GDP) and a BNDES participation equivalent to that observed in 2006/2007 (1.5% of GDP), among other assumptions, indicate the need to increase by 67% the volume of resources to be raised in the capital market for investment financing. The share of corporate debt securities in the consolidated portfolio would increase from 4.4% to only 6.6%, which is certainly not particularly difficult to achieve;

c. The speed with which investors and companies have adjusted to the interest rate fall and to the changes in regulation reinforces the perception that the new conditions will allow rescuing the functionality of the capital market. Some examples: the successful experience of infrastructure debentures; the increase in the participation of closed corporations in the debt market (ICVM476/2009); the strong increase in primary stock offerings and debt contracts in 2017 in response to falling interest rates, reaching the highest value since 2005; the rapid migration of investors from short-term fixed income funds to multi-family funds and equity funds in response to the 2017 interest rate decline;

d. Infrastructure debentures, with 79% of offerings with maturity greater than 5 years and 38% above 10 years, show the potential for lengthening the maturity of common debentures.

There are, however, challenges to be overcome in order to recover the functionality of the capital market as the main source of long-term resources in the Brazilian economy. Among the challenges already pointed out by several researchers and market entities, we must highlight at least two:
 

• maintaining low real interest rates and raising the liquidity of the secondary market for corporate debt;

• having the BNDES acting in synergy with the capital market.

Regarding this second challenge, among other alternatives, some of which have already been adopted and/or announced by BNDES, the main initiatives are: subscription and support to issues of debenture as an alternative to loans; purchase of infrastructure investment funds; acting as a market maker for infrastructure debentures; the use of resources raised in the domestic market as a source of funds to finance its operations; and the possibility of securitization of receivables in its portfolio.

The author emphasizes that even in the event of a strong development of our capital market, the BNDES will continue to play a major role, especially in financing infrastructure, technological innovation and small and medium-sized companies in areas and at maturities for which the market does not offer viable funding solutions.

The full text is available in Portuguese.