Companies in Brazil, Latin America’s largest economy, are increasingly turning to local bonds known as debentures to finance their projects.
Debentures issued by Brazilian firms reached a record 88.2 billion reais (US$15.9bn) in January-August, up from the previous record of 63.5bn reais in the same period of 2023, according to Brazil’s financial and capital markets association Anbima.
The sectors that issued most debentures in the first eight months were electric power, transportation and logistics, and water, with 34.5bn reais, 20.7bn and 10.5bn, respectively.
There are two types of debentures commonly used in infrastructure: incentivized debentures, which offer a tax break to investors and have been available since 2011, and infrastructure debentures, which provide a tax exemption for the issuing company, which have been authorized for use early this year.
Debentures have existed for decades and gained traction in recent years as authorities created new classes of these bonds with tax incentives, making them more attractive to local investors who previously preferred government bonds.
“Debentures are now an additional option of long-term financing for projects, which is why even in times like now with rising interest rates, many are able to maintain the viability of their projects as they have better access to long-term financing that was previously highly limited to operations with banks,” Ricardo Carvalho, managing director of Fitch Ratings’ Brazil corporate finance group, told BNamericas.
In mid-September, the central bank raised its Selic rate from 10.50% to 10.75% and signaled that it expects more hikes in the coming months.
In times of rising interest rates, banks tend to focus on short-term lending and debentures have become an attractive option for companies looking for long-term financing.
Brazilian group EPR, a JV formed by infrastructure firm Equipav and fund manager Perfin, recently raised 1.3bn reais via an issue of 17-year incentivized debentures to finance works that are part of the Triângulo Mineiro highway concession package in Minas Gerais state.
The increased use of debentures has also given rise to a lucrative business for banks as they participate in the structuring of these operations.
EPR’s issue was structured by development bank BNDES along with Bradesco BBI, a unit of local banking giant Bradesco, and Spain’s Banco Santander.
“The debenture mechanism has been very successful in terms of financing the sector and we already have record issuing volumes. The path is paved, and I think this helps to grow our sense of optimism regarding the highway sector in Brazil,” Marco Aurélio Barcelos, president of highway concessionaire association ABCR, told BNamericas.
Debentures are also becoming more important for water companies, which have large investment obligations in the coming years as the offering of concessions and PPPs advances.
The government recently allowed greater use of debentures to finance projects in this sector, with the cities ministry approving an increase in the proportion of debentures that can be used to finance tender fees.
“Our main problem is to guarantee adequate water and sewerage coverage for the entire population in the shortest possible period of time and there has been a lack of progress for many years, so any measure is valid to speed this up,” Luciene Machado, project structuring superintendent at BNDES, told BNamericas.
Previously, water companies that won concessions or PPP contracts in auctions based on the highest bid were allowed to finance up to 50% of the amount offered with debentures, but that limit is now 70%.
Debentures have also become a financing option for mining companies, which have long faced difficulties in accessing long-term financing in the Brazilian capital market.
The board of gold producer Aura Minerals, which last month approved a 2030 debenture issue of 500 million reais, recently increased the amount to 1bn reais.
The proceeds will be used to finance its Almas project, an open pit mine in Tocantins state that is the first greenfield project by Aura.
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