On the first evening of their international roadshow, Rodovias do Tietê’s CFO, Ricardo Oliveira, and its controller, Thiago Jordão, were in Chile’s capital, Santiago. The first day had gone well and hopes were high that the following two weeks would generate substantial international orders for the first project-finance structured debenture issued in the Brazilian capital markets.
Then, on June 4, they were told that the Brazilian government had announced that it was scrapping the IOF tax that required international investors to pay 6% to buy Brazilian debentures. In an instant that stripped away one of the most attractive elements of the deal for non-Brazilian investors: this deal qualified under Lei 12431, a relatively new piece of legislation (a final amended version was passed into law in November 2012) that provides tax exemptions for international investors and individual domestic investors.
The law was introduced to attract international capital flows to Brazilian infrastructure investment projects, and the bookrunners had planned an extensive international roadshow in a bid to sell a sizeable portion of the deal outside Brazil. The roadshow was to leave Santiago, headed for Lima, London, New York, Boston and Los Angeles.
“The removal of the IOF made [Brazilian] government debt competitive with corporate debt – once that was done then immediately corporate debt increased by 150 to 200 basis points,” says Oliveira. “The 5.5% target became unfeasible – all reference points had moved and government paper was an attractive – tax-free – alternative for the foreign investors.”
“The NTNB 2022s [National Treasury Note with a return linked to consumer inflation index Ipca, plus interest set at the time of purchase and maturity in 2022] was the reference paper of our bond – the duration of our bond is 7.4 years – and when we were on the roadshow this yield went from 4.5% to 5.5%,” adds Jordão.
But the regulatory change wasn’t the only headwind. At the same time volatility in the international capital markets, caused by Federal Reserve chairman Ben Bernanke’s comments about likely tapering of the Fed’s US bond-buying programme, was repricing debt from emerging markets. The Brazilian central bank raised its base rate, the Selic, by 50 basis points – surprising the market, whose consensus expectation had been for a 25bp rise. Beyond these financial and regulatory obstacles, the public protests on the streets of Brazil (manifestações) that peaked with 1 million people protesting in nearly 100 cities, were headlining in the world’s media, casting Brazil in a chaotic light.
For the full article go to: Euromoney Magazine