It’s Called The Novo Mercado de Renda Fixa

It’s Called The Novo Mercado de Renda Fixa — the New Market for Fixed Income. Launching as soon as the end of this year, it aims to make Brazil’s secondary market for corporate bonds more robust and liquid; in 2010 the current market traded just 45 million reais ($28 million) a day, according to JPMorgan Chase & Co. “We have a secondary market, but you must buy directly from a bank or the issuer,” says Marcos Assi, a consultant in corporate governance, financial risk and compliance with São Paulo–based Daryus Consulting.

The Brazilian Financial and Capital Markets Association (Anbima) is driving the Novo Mercado. The trade organization and other proponents hope the new market will open Brazil’s bond trading to more local and foreign investors, including small ones. In turn, Brazilian companies should be more willing to issue debt at potentially lower rates “because investors will be more confident that they can sell those bonds on the secondary market if necessary,” says Marcela Meirelles, Latin America strategist in the emerging-markets group at Los Angeles–based investment firm TCW Group.

That should go a long way toward helping Brazil address the need to pour hundreds of billions of reais into infrastructure such as roads and airports — a major problem given the seemingly permanent shortage of domestic savings. “The government doesn’t save enough, and the private sector doesn’t save enough,” Meirelles notes.

Foreign investors hope the project succeeds. For now they must play mostly offshore, buying Brazilian corporate bonds issued in U.S. dollars, an already well-developed market. Last year, according to Dealogic, there were 37 issuances of dollar-denominated investment-grade and high-yield bonds, totaling $23.1 billion. Real-denominated issuances reached 30 but totaled just $6.9 billion. Investment-grade bonds issued in reais can pay as much as 42 basis points over the benchmark risk-free rate (currently 12.5 percent), whereas similar dollar-denominated bonds yield only 250 basis points over U.S. Treasuries.

Most investors would welcome access to a broader universe of Brazilian corporates. “Local-currency-denominated bonds offer more-attractive risk-adjusted returns than do their dollar-denominated counterparts,” Meirelles says.

Rather than replace the existing market for corporate debentures, the Novo Mercado will provide another playing field. Any new bond offering on this market must have a maturity greater than or equal to four years, a rate that’s fixed or indexed to inflation or Brazilian LIBOR, and a bank or other entity acting as its market maker for at least the first year. “If your paper meets the preconditions, it will enjoy certain benefits,” says João Teixeira, São Paulo–based vice president of Anbima’s corporate finance committee.

The main benefit is access to two funds, the Liquidity Support Fund (FAL) and the Liquidity Guarantee Fund (FGL). Seed money for both funds will come from the Brazilian National Development Bank (BNDES), regulatory agencies and possibly private sources. After the FAL creates an attractive trading volume, Teixeira hopes, private money will do the heavy lifting.

The FGL will act as a kind of Federal Deposit Insurance Corp. for fixed-income investors. If an investor holding paper traded on the Novo Mercado must liquidate but can’t find a buyer, it can sell to the FGL at a discount. “Obviously, there is an issue of moral hazard, so we are addressing this very carefully,” Teixeira says.

The Novo Mercado could lead to better tax treatment for foreign investors, who now typically pay two taxes on corporate bonds: a 15 percent income tax on the coupon (sovereign bonds are tax-exempt) and a 6 percent imposto sobre operações financeiras (IOF), or financial operations tax, up front on the notional value of any fixed-income investment. As a result, JPMorgan reports, foreign investors earn less after taxes on corporate bonds than on presumably safer government bonds.

Proposed fixes include tax exemptions for corporate bonds that trade on the Novo Mercado, as long as they fund infrastructure projects. “If the government doesn’t do anything about the IOF tax, my sense is the New Market will still have little appeal to foreign investors,” says TCW’s Meirelles.

Because the FGL is crucial, the Novo Mercado’s architects plan to have it in place by year’s end. And what if real interest rates remain high and the IOF unchanged? The initiative will move forward, Anbima’s Teixeira says, even if that means a slow start: “We expect to see transactions in the short term, though it won’t be a huge volume.”

Fonte: Gregory Taggart, Capital & Investing at INSTITUTIONALINVESTOR.COM