Brazil Local Market Guide
-
Upload
jolin-majmin -
Category
Documents
-
view
54 -
download
2
description
Transcript of Brazil Local Market Guide
-
5/20/2018 Brazil Local Market Guide
1/83
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES ANDANALYST CERTIFICATIONS.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION
Client-Driven Solutions, Insights, and Access
Guide to
Brazil Local MarketsEconomics Brazil
This report, in its eighth year, provides international investors with a summary
of Brazils fixed-income market and describes in a nutshell the bonds and
derivatives available, the institutions and market players involved, and the
taxes levied on the different products. It also presents an overview of the
LOCuS system, which Credit Suisse clients can access to obtain financia
market data and real-time quotes.
13 March 2014Economics Research
http://www.credit-suisse.com/researchandanalytics
Research Analysts
Nilson Teixeira+55 11 3701 6288
Paulo Coutinho+55 11 3701 6353
Iana Ferrao+55 11 3701 [email protected]
Leonardo Fonseca+55 11 3701 6348
Daniel Lavarda+55 11 3701 6352
We acknowledge the significant assistance from
Pmela Borges, Felipe Leon and Tlio Sousain the preparation of this report.
-
5/20/2018 Brazil Local Market Guide
2/83
13 March 2014
Brazil Local Markets
Table of ContentsSummary 4
1. Introduction 5
2. Financial System 7
3. Exchange Rate 8
4. Interest Rates 12
4.1. Selic Rate ................................................................................. 12
4.2. CDI Rate .................................................................................. 13
4.3. Basic Financial Rate ................................................................. 14
4.4. Reference Rate ........................................................................ 14
4.5. Long-Term Interest Rate .......................................................... 15
5. Inflation Indexes 17
5.1. IBGE Indexes ........................................................................... 17
5.2. FGV Indexes ............................................................................ 18
6. Brazils Public-Sector Debt 20
6.1. Overview .................................................................................. 20
6.2. Domestic Public Securities ....................................................... 21
6.3. Secondary Market .................................................................... 27
7. Private-Sector Securities 29
7.1. CDBs and RDBs ....................................................................... 29
7.2. Corporate Bonds ...................................................................... 31
7.3. Agricultural Cash Forward Contract Bonds (CPRs) .................. 33
7.4. Certificates of Real Estate Receivables (CRIs) ......................... 34
7.5. Banking Credit Notes (CCBs) ................................................... 38
7.6. Receivables-Backed Investment Funds (FIDCs) ...................... 38
7.7. Judicial Requisitions to Treasury for Budget Appropriation
and Payment of Money Judgments (Precatrios) ............................ 40
7.8. Treasury Bills (LFs) .................................................................. 41
8. Derivatives and Swaps 43
8.1 Futures and Options .................................................................. 43
8.2. Swaps ...................................................................................... 55
9. Taxation of Foreign Investments in Brazil 59
9.1. Income Tax .............................................................................. 59
9.2. Tax on Financial Transactions (IOF) ......................................... 61
-
5/20/2018 Brazil Local Market Guide
3/83
13 March 2014
Brazil Local Markets
Appendix A: Financial System Entities 62
Regulatory and Oversight Entities ................................................... 62
Other Important Entities .................................................................. 64
Appendix B: Requirements for Foreign Investors 67
Appendix C: Form for Foreign Investors Registration with the CVM 68
Appendix D: Brazil Local Markets in LOCuS 71
Introduction ..................................................................................... 71
Brazil in LOCuS ............................................................................... 72
List of Web Sites ............................................................................. 80
-
5/20/2018 Brazil Local Market Guide
4/83
13 March 2014
Brazil Local Markets
SummaryThis Guide to FI Marketsin Brazilexplains in detail the operations of Brazils fixed-incomefinancial market. It describes the main financial assets and instruments traded locally(bonds and derivatives) as well as the applicable taxes. It also contains importaninformation on the main institutions that regulate and oversee the local financial system
Among the assets and financial instruments presented, we highlight the following:
federal public securities, the main public debt bonds traded on the local marketwhether fixed-rate or linked to a floating interest rate or inflation index; information is alsoprovided on auctions of public debt securities;
private bonds, especially certificates and receipts issued by financial institutions(Certificates of Deposit (CDBs), Non-Transferable Certificates of Deposit (RDBs), andTreasury Bills (LFs)) and by companies in general (bonds);
assets backed by credit receivables, especially Banking Credit Notes (CCBs) andspecific receivables such as Certificates of Real Estate Receivables (CRIs); there is alsoa description of Receivables-Backed Investment Funds (FIDCs), which raise capital fothe acquisition of receivables to be traded on the market in the form of fund shares;
precatrios, which are judicial requisitions to treasuries for budget appropriation andpayment of money judgments against public entities; these instruments are classified asreceivables, and the attached rights can be assigned to a third party by the respectiveholders;
derivatives, the main financial derivatives traded on the securities, futures, andcommodities exchange and on over-the-counter markets; these derivatives includeswaps involving interest rates, exchange rates, and inflation indexes as well as optioncontracts.
For each of these assets, we provide the yield calculations and data on volumessecondary-market liquidity, and timetables of issuances and maturities.
This guide is divided into nine sections and four appendices. The first section presents a
general overview of the participation of foreign investors in the Brazilian fixed-incomemarket. The second presents the main institutions that comprise the Brazilian financiasystem and their roles, described in further detail in Appendix A. The following sectionpresents Brazils foreign exchange market and describes the main currency tradingplatforms and the PTAX exchange rate calculated by the central bank and used as abenchmark for settlement of onshore and offshore contracts indexed to the USD. In thefourth section, we present the main interest rates used in the domestic markets, especiallythe Selic basic interest rate, used to guide monetary policy, and the Certificate of InterbankDeposit (CDI) rates. The fifth section contains an overview of the main inflation indexesused in Brazil. A more extensive discussion of these indexes can be found in the BraziInflation Guide, first published on June 25, 2009. The main features of public and privatefixed-income securities are presented in detail in sections six and seven, respectivelySection eight presents the main derivatives and swaps of interest, currency, and inflation
rates traded on the local market. Taxation matters are addressed in section nine. InAppendices B and C we present the main procedures a foreign investor needs to follow inorder to qualify to trade in the local market. Finally, Appendix D contains a guide to thepages on Brazilian fixed-income markets within the LOCuS system, which can beaccessed by Credit Suisse clients.
-
5/20/2018 Brazil Local Market Guide
5/83
13 March 2014
Brazil Local Markets
1. IntroductionThe flow of foreign portfolio investments into the main emerging economies has grownsignificantly in recent years (Exhibit 1). Historically, foreign investors financial investmentsin Brazil have been heavily concentrated in equities. Nevertheless, the share of foreigninvestments in fixed-income securities has increased since the mid-2000s (Exhibit 2). Webelieve this movement will continue in the coming years, owing mostly to the continuedwide gap between domestic and international interest rates and the withdrawal in June20131of the 6% Tax on Financial Transactions (IOF) levied on these investments sinceOctober 2010.
Exhibit 1: Net Foreign Portfolio Inflow into DebtInstruments
Exhibit 2: Breakdown of Stock of Foreign PortfolioInvestments in Brazil
USD bn % of total, USD bn
2008
1 28 6 5
10
3
1014
5
13 15
7 9
30
11 11
23
-4
0
1620
32
25
811
37
47
71
50
2009 2010 2011 2012 2013
Chile
Indonesia1
Brazil
Turkey2
Mexico1
450
400
350
300
250
200
150
100
50
0
100
90
80
70
6050
40
30
20
10
0Nov-02 Sep-04 Jul-06 May-08 Mar-10 Jan-12 Nov-13
Equities (%)
Fixed Income (%)
Portfolio Size(USD bn, LHS)
1Cum. 12 months through September. 2Cum. 12 months through November.Source: IMF, Credit Suisse
Source: Central Bank of Brazil, Credit Suisse
The share of domestic federal securities debt (DPMFi) held by foreigners in Brazicontinues to rise, although current levels are somewhat lower than in other emergingmarkets (Exhibit 3). The higher share of foreign investors in government securities has apositive impact on the domestic debt profile. Compared to local investors, foreigners areusually more prone to invest in fixed-income securities with much longer maturities. Hencethe increase in the participation of foreign investors has contributed to an extension in thematurities of government debt.
In addition to their impact on the maturity profile, foreign investors help increase liquidity inthe secondary market, particularly for instruments still sparsely used in Brazil, notablybonds backed by credit receivables.
1For securities traded in Brazil. Securities traded abroad with maturities of less than one year are subject to the IOF at 6%.
-
5/20/2018 Brazil Local Market Guide
6/83
13 March 2014
Brazil Local Markets
Exhibit 3: Share of Domestic Public Debt of EM Countries Held by Foreign Investors
% of total
Brazil Turkey Mexico
0
2
4
6
8
10
12
14
16
18
Dec-13Jan-08 Jan-10 Jan-12
16.1
Dec-13Jan-07 Jan-09 Jan-11 Jan-128
10
12
14
16
18
20
22
24
26
21.5
5
10
15
20
25
30
35
40
Dec-13Jan-07 Jan-09 Jan-11 Jan-12
36.9
Source: Treasuries, Credit Suisse
In the past few years, the Brazilian government has announced a set of measures toencourage long-term financing. The measures were structured in two main parts: taxincentives for long-term corporate bonds earmarked for investment projects and the
creation of a fund to stimulate the liquidity of those bonds in the secondary market(although this fund has not yet become operational). Through those measureshouseholds and foreign investors purchasing local corporate bonds that meet certaincriteria became exempt from income taxes and the IOF tax2.
2 In October 2010, the government increased the IOF levied on foreign investments in fixed-incomesecurities traded in Brazil, including infrastructure bonds, to 6%. The government reduced to 0% first theIOF on infrastructure bonds (in December 2011) and, later, the IOF on all private securities traded in thecountry (in June 2013).
-
5/20/2018 Brazil Local Market Guide
7/83
13 March 2014
Brazil Local Markets
2. Financial SystemThe basic features of Brazils financial system were established through a series oinstitutional reforms that started in 1964/65 with the creation of the National MonetaryCouncil (CMN) and the Central Bank of Brazil and ended in 1976 with the creation of theBrazilian Securities Commission (CVM).
Additional measures to restructure the financial system involved regulations to separateproprietary trading from asset management (information barriers), the introduction ocompliance departments within financial institutions, the creation of a credit risk centernew directives to control market risks and interest rate risk (already applicable to foreign-currency transactions), and the reform of securities market legislationwhich increasedthe participation of minority shareholders in company decisions and introduced corporategovernance practices.
Exhibit 4 illustrates the institutions operating in the Brazilian financial system and agenciesin charge of oversight and regulation. The role of the major regulatory and oversightagencies is explained in detail in Appendix A.
Exhibit 4: Regulatory and Oversight Agencies
Other settlement and custody systems
Foreign exchange brokers
Central Bank Securities Commission (CVM)Operating Institutions
Financial InstitutionsFinancial Institutions
Full-service banks
Commercial banks
Savings and loan associations
Credit unions
Development banks
Investment banks
Leasing companies
Settlement and Custody Systems
Selic
Cetip
Consortium managers
Asset Management
Credit, finance, and investment companies
Mutual funds
Investment clubs
Foreign investors' portfolios
InMaturityediaries
Commodities and futures exchange
Stock exchanges
Autonomous investment agents
Brokerage firms / securities dealers
Source: Brazilian Securities Commission (CVM), Credit Suisse
-
5/20/2018 Brazil Local Market Guide
8/83
13 March 2014
Brazil Local Markets
3. Exchange RateThe Brazilian exchange rate system is a dirty float system. The central bank actively buysand sells dollars both in the spot and derivative markets. According to the monetaryauthority, the interventions in the FX market aim to cover a lack of liquidity and ensure thathe market functions properly. To make the system more transparent, the central bankintervenes in the market through primary dealers3, disclosing information to the market onweekly basis, generally on Wednesdays4.
In 2005, the National Monetary Council (CMN, Appendix A) concluded the process ounifying Brazils FX markets. Under the new regime, the differences in legislation and thecommercial5and tourism6 rates were eliminated. Virtually all exchange rate transactionsmust be registered with the central bank; however, unification of the FX markets significantlysimplified transactions involving foreign currencies and reduced red tape, especially fooffshore remittances.
Under the previous system, each type of transaction required a different set of documentsWith the unification of the markets, the documents necessary for FX transactions ceased to beclassified by type. Moreover, the financial institution carrying out the transaction is responsiblefor submission of all necessary documentation, except in certain situations.
Spot Market
The spot FX market has a daily average turnover of around USD 3bn. Spot trades can bemade on the So Paulo Securities, Commodities, and Futures Exchange (BM&FBovespa
Appendix A), on the over-the-counter (OTC) market, or at foreign exchangeclearinghouses. All trades must be registered in the Central Bank Information System(SISBACEN, Appendix A).
The spot dollar market of the BM&FBovespa was created in February 2006. It is a tradingsystem that allows parties interested in buying and selling dollars to make bids through abroker or a bank, which are responsible for sending accepted orders to traders at theBM&FBovespa for execution. Although this market provides more transparency and safetyin trading, it has very low liquidity, in part due to the costs involved in settlement services
Before the emergence of the BM&FBovespa spot dollar system, transactions in the spotdollar market were carried out only in the interbank FX market, between brokerage firmsand banks authorized to operate by the central bank.
3The central bank currently intervenes in the FX market via 14 previously selected financial institutions(primary dealers). The dealers are chosen every six months, and at least two institutions must swapfunctions in each period. The number of dealers may also change between periods. The central bankuses the following five criteria for selecting dealers:1. information provided to the central bank (weight of 30%), used by the central bank to determine how
each institution operates in the FX market;2. imports and exports (25%), volume of FX transactions linked to imports and exports traded by th
institution;3. financial FX (20%), the volume of financial FX transactions carried out by the institution;4. USD-linked securities and reverse FX swaps (20%), volume of public debt bonds adjusted fo
currency gains/losses and currency coupon swaps traded by the institution; and5. interbank market (5%), volume traded by the institution in the FX interbank market.
4The Treasury also buys dollars in the market to cover external debt obligations. The Treasurys purchaseoperations are made using Banco do Brasil.
5This segment was used for: (i) exports/imports; (ii) federal, state, and municipal governments; (iii) foreigninvestments in Brazil and loans to residents; and (iv) payments for services.
6 The floating FX rate segment was for tourism transactions, contributions to associations, donationsinheritances, retirement and pension benefits, maintenance of residents and health treatment.
-
5/20/2018 Brazil Local Market Guide
9/83
13 March 2014
Brazil Local Markets
PTAX Rate
The PTAX is the official exchange rate used for settlement of financial contracts indexed tothe dollar. It is used as a benchmark for USD-linked onshore and offshore contracts (forinstance dollar future contracts and dollar-linked rates, such as non-deliverable forward(NDF) contracts settled in USD, and bonds).
The central bank is responsible for calculating and publishing the PTAX rate. The PTAX isthe arithmetic average of the rates obtained in four daily consultations of exchange dealersConsultations are carried out at around 10:00 a.m., 11:00 a.m., 12:00 noon, and 1:00 p.m(local time). The exchange rate for each consultation corresponds to the average of rateseffectively quoted by the dealers, excluding in each case the two highest and two lowest7
The results are released after each survey, and the PTAX rate is released around 1:00p.m. (local time).
Government Intervention
As a response to the post-crisis BRL appreciation, the government implementedmeasures aiming to reduce excessive volatility of the local currency. However, themajority of these measures have been reverted since June 2012, following thesignificant depreciation of the BRL in 2Q12 (from BRLUSD 1.80 in March to 2.05 inJune) and in 2013 (BRLUSD 2.45 in August). The main interventions in the FX markeduring this period were (Exhibit 5):
Taxation of foreign investment in fixed income: The Tax on Financial Transactions(IOF, described in more detail in Chapter 9) was charged on investments by nonresidents in fixed-income securities traded in Brazil. The rate, which increased from 0%to 2% in October 2009 and from 2% to 6% in October 2010, applied to the purchase ofBRL by foreign investors. The regulation also required a simultaneous FX transaction if
the investor decided to migrate from an equity, futures, or commodities investment to afixed-income asset. In this case, the investor would have to pay the IOF tax as well. TheIOF was reduced to 0% in June 2013.
Taxation of foreign investment in equities: The IOF of 2% was imposed on non
residents investments in equities, including American Depositary Receipts (ADRs), inOctober 2009. In November 2009, the levy on investments in ADRs was reduced to1.5%. The IOF rate on investments in equities traded in Brazil was reduced from 2% to0% in December 2011 and on ADRs, from 1.5% to 0.0% in December 2013.
Establishment of mandatory reserves for banks short FX positions:In January 2011the reserve requirement was implemented on 60% of the short positions in dollars thatexceed the lower of USD 3.0 billion and the institution's Tier-1 capital. The reserves aredeposited at the central bank in local currency and are not remunerated. The upper limitwas lowered to USD 1.0 billion in July 2011. In June 2013, the government cancelled thereserve requirements for banks short positions in dollars entirely.
Taxation of foreign loans:In March 2011 the Tax on Financial Transactions (IOF) wascharged on external loans with maturities of less than one year. The levy was extended
to loans with maturities of less than two years in April 2011, three years in March 2012,and finally to five years later in March 2012. The IOF was maintained only for loans withmaturities of less than two years in June 2012. The threshold was later reduced to oneyear in December of the same year.
7This methodology went into effect in July 2011. The PTAX rate according to the former methodology wasthe average (volume-weighted) FX rate of transactions in the spot FX market with settlement two daysafter the transaction (T+2). This calculation was made after purging transactions whose volume exceeded5% of the volume traded in the day. The rate was announced after the market close (5:30 p.m., locatime) and was based on only one daily survey.
-
5/20/2018 Brazil Local Market Guide
10/83
13 March 2014
Brazil Local Markets 1
Taxation of short positions in financial derivatives: In July 2011, the IOF wasimposed at the rate of 1%on increases in short positions in financial derivatives whosesettlement value is influenced by movements in the FX rate (e.g., USD options, futuresand forward-rate agreements (FRAs). The 1% IOF was also levied on domesticinvestors to prevent increases in short dollar positions. Specifically, a new acquisition orsale of an exchange derivative resulting in an increase in short position or decrease inlong position greater than USD 10 million in one day was subjected to the 1% IOF on the
notional value of the transaction. The government withdrew this measure in June 2013.
In sum, the governments intervention measures aimed at controlling FX rates, still in placeas of February 2014, are:
IOF levy of 6.0% on external loans with maturities of less than one year; and
IOF levy of 6.38% on credit card transactions abroad, on payments in foreign currencymade with debit cards, on foreign currency withdrawals abroad, on purchases oftravelers checks, and on the addition of foreign currency to prepaid cards.
-
5/20/2018 Brazil Local Market Guide
11/83
13 March 2014
Brazil Local Markets 1
Exhibit 5: Interventions in FX Market
OCTOBER
19: Increase in Tax on Financial Transactions (IOF) rate on foreign inflows for equities and fixed-incomeinvestments from 0% to 2%.
OCTOBER04: Increase of IOF on investments in fixed income, from 2% to 4%. Investments in equities remain subject to the IOF of 2%.
07: Simultaneous FX transactions for foreigners that transfer their investments from the securities, futures, and commodities exchange toother investments in the financial and capital markets, such as fixed-income securities.
18: New increase in IOF tax rate on inflows for the purchase of fixed-income securities, from 4% to 6%.
JANUARY
06: Imposition of reserve requirements on banks' short dollar positions.
Reserve requirement applies to 60% of short positions in dollars exceeding lesser of USD 3.0 billion and the institution's Tier -1capital. Reserves are deposited with central bank in local currency and will not be remunerated.
10: Brazils Sovereign Fund permitted by its bylaws to deal in the FX market.
13: Resumption of central banks reverse swap auctions, taking long FX positions in derivatives markets.
25: Resumption of Maturity auction facilities by central bank in FX market.
MARCH
28: IOF rate on credit card t ransactions abroad raised from 2.38% to 6.38%.
29: IOF levy of 6% on foreign financing with maturity of less than one year.
APRIL
06: IOF levy of 6% on foreign loans is extended to transactions with maturity of up to 2 years.
JULY
08: Reduction in limit for reserve requirements on banks' short position in dollars.
Minimum deposit charged on 60% of short dollar positions that exceed lesser of USD 1.0 billion and bank's regulatory capital. Depositmust be made in cash and will not be remunerated.
27: IOF levy of 1% imposed on increases in short positions in financial derivatives whose settlement value is affected by FX rate changes.The levy will apply only to net short positions above USD 10.0 million.
27: Legal framework established for IOF levy on derivatives market. Government permitted to raise IOF rate to up to 25% of value oftransactions in derivatives market.
DECEMBER
01: IOF rate on investments in stocks and bonds of infrastructure companies reduced to 0%.
MARCH01: IOF levy of 6% on foreign loans extended to transactions with maturities of up to 3 years.
02: Maximum period of advance payments by exporters limited to 360 days; transactions must be financed by importer of goods.
12: IOF levy of 6% on foreign financing extended to transactions maturing within 5 years.
JUNE
14: Maturity of loans subject to IOF levy reduced from 5 to 2 years.
28: Rules on advance payment transactions extended to financial institutions and other companies.
DECEMBER
04: Maximum period for advance payment of export transactions extended from 1 to 5 years.
05: Maturity of loans subject to IOF levy reduced from 2 years to 1 year.
JANUARY
30: IOF levy on foreign investment in shares of real estate investment funds reduced from 6% to 0%.
JUNE
04: IOF levy on foreign investments in fixed income reduced from 6% to 0%.
12: IOF levy on increases in short positions in financial derivatives whose settlement value is affected by FX rate changes reduced from1% to 0%.
25: Cancellation of reserve requirements on banks short position in dollars.
JULY
03: Elimination of maximum Maturity (5 years) for prepayment of export transactions.
24: IOF levy on foreign investment in ADRs reduced from 1.5% to 0%.DECEMBER
27: IOF levy on payments in foreign currency made with debit cards, on foreign currency withdrawals abroad, on purchases of travelerschecks, and on the addition of foreign currency to prepaid cards increased from 0.38% to 6.38%.
NOVEMBER
18: Reduction in IOF rate on foreign investment in ADRs from 2% to 1.5%.
Source: Central Bank of Brazil, Ministry of Finance, Credit Suisse.
-
5/20/2018 Brazil Local Market Guide
12/83
13 March 2014
Brazil Local Markets 1
4. Interest RatesInterest rates in Brazil (for example, the Selic basic interest rate and the Certificate ofInterbank Deposit (CDI) rate) are expressed mainly in compound annualized terms, basedon a year of 252 business days. They differ from the US standard compounding methodwhich uses a 360-day year (Exhibit 6).
Exhibit 6: Counting of Days for Interest Rates in Brazil
Calendar Days 360 / Linear
ie effective rate in the period ie effective rate in the period
ia effective annual rate ia effective annual rate
d
days between date 1 and date 2(1) Does not accrue on weekends or holidays
ia360
die= ie= (1 ia)
business days
252 1
Business Days (1) / 252 Exponential
Source: Credit Suisse
4.1. Selic RateThe Special Settlement and Custody System (Selic) is an electronic system run by thecentral bank for registration, settlement, and custody of transactions involving publicsecurities. All Selic transactions are settled immediately; debits and credits are madedirectly to each institutions reserves account at the central bank.
The Selic rate is the average of rates for one-day financing transactions backed byfederal public bonds, carried out in the Selic system in the form of repurchase (repo)operations8. The interest rates for the transactions used to calculate the Selic ratereflect the liquidity conditions in the bank reserves market. These interest rates are notinfluenced by counterparty risk in the buyback transactions since all trades are backedby federal public securities.
The Selic rate is also the basic interest rate used as a benchmark for monetary policy. The
Selic rate is set by the Monetary Policy Committee (Copom) at its eight regular meetingsheld each year. The Copom defines not only the target for the Selic rate but also theCommittees bias. If a negative or positive bias is adopted, the central bank governor canalter the Selic rate target at any time between Copom meetings, provided this changefollows the direction of the announced bias. Using a bias has become unnecessary inrecent years, however, as inflation and volatility have both decreased significantly. Thebias has been neutral since March 2003.
The establishment of the target induces banks operating in the Selic system to carry outone-day buyback transactions around the target, since the daily activity of the central banktends to offset surpluses or shortfalls in bank reserves, bringing the target close to the rateeffectively negotiated.
8Sales of bonds with a buyback commitment assumed by the seller and a resale commitment assumed bythe buyer.
-
5/20/2018 Brazil Local Market Guide
13/83
13 March 2014
Brazil Local Markets 1
4.2. CDI RateThe CDI rate is the average rate of one-day transactions backed by fixed-rate Certificatesof Interbank Deposit (CDIs), registered and settled by the Cetip clearinghouse (Appendix
A). Its calculation takes into account only one-day trades between institutions of differenfinancial groups.
The majority of CDI trades are made for a period of one day (overnight) and are referred toas DI Over. A repo based on the CDI rate takes place when two institutions agree on an
interest rate and close the deal electronically (Exhibit 7). The Cetip transfers ownership ofthe CDI to the purchasing institution and creates a credit that impacts the sellinginstitutions reserve account at the central bank on the same day (T). On the next day(T+1), the transaction is reversed, and the purchaser receives its reserve funds, plus thepreviously agreed interest rate (DI Over rate). In October 2013 a new methodology was
adopted to calculate the DI Over rate. Under the new methodology all CDI transactionsrecorded and cleared by the Cetip are used to obtain the DI rate weighted by volume.
According to the former methodology the 5% upper and lower tails were excluded from thecomputation.
Exhibit 7: CDI Settlement
CDI
T+1 End of T+1
Interest$ +Buyer
Seller
$ CDI
$
T End of T
$ + Interest
CDI
CDI
Source: Credit Suisse
Even though the central bank does not operate directly in this market, the CDI rate tendsto be very similar to the Selic rate (Exhibit 8).
Exhibit 8: Effective Selic Rate and DI Rate
Basis points, p.a.
0.065
0.085
0.105
0.125
0.145
0.165
0.185
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
0.205
Effective Selic Rate
DI Rate
Source: Central Bank of Brazil, Credit Suisse
-
5/20/2018 Brazil Local Market Guide
14/83
13 March 2014
Brazil Local Markets 1
4.3. Basic Financial RateThe basic financial rate (TBF) was created to be used as a benchmark rate fortransactions within the financial system with maturities above 60 days. The TBF rate is theaverage of rates paid on Certificates of Deposit (CDBs) and/or Non-TransferableCertificates of Deposit (RDBs)9with maturities of 30 to 35 days. These transactions areweighted by their respective volumes and involve only trades of the 30 largest institutions
on a given day, by volume of their issues of CDBs and RDBs. In the calculation of theweighted average, the two highest and the two lowest rates surveyed and the securitiespurchased by institutions from the same conglomerate are removed from the sample. TheTBF rate is used mainly as the basis for calculating the Reference Rate (TR).
4.4. Reference RateThe Reference Rate of Interest (TR) was created in 1991 as a reference rate for futureinflation built into nominal market interest rates. The idea behind the TR is to strip out theexpected real interest rate from the nominal interest rate represented by the TBF. Thedifference between these two rates points to the expected inflation for the period.
The TR rate is published daily by the central bank and is valid until the same day of the
following month. The calculation of the TR is based mainly on the TBF (average of CDBand RDB rates), to which a reduction factor is applied. The TR reduction factor is afunction of the TBF, and the parameters of its formula are periodically updated by thecentral bank (Exhibit 9).
Exhibit 9: Formulas for Calculation of TR
TR = 1R
1 TBF
Where:
R= TR reduction factor
TBF= Basic Financial Rate on thereference day
B= function of the TBFrate
TBF(% p.a.) B*
TBF> 16 0.48
15 < TBF 16 0.44
14 < TBF 15
0.4013 < TBF 14 0.36
10.5 TBF< 13 0.32
10 TBF 10.5 0.31
9.5 TBF< 10 0.26
9 TBF< 9.5 0.23
R = 1.005 B TBF
* The rule for deMaturityining the B factor is defined byCentral Bank Resolutions 3446 and 3356/07.
Source: Central Bank of Brazil, Credit Suisse
The TR rate is mainly used as the basic rate for the Brazilian savings and loan systemwhich finances housing construction. Yields on savings deposits are split into twocomponents:
I. basic remuneration, at the Reference Rate (TR), and
II. additional remuneration, corresponding to:
0.5% p.m., when the Selic basic interest rate is higher than 8.5% p.a.;
70% of the annual Selic rate, when the Selic is less than or equal to 8.5% p.a.
9Please refer to section 7.1.
-
5/20/2018 Brazil Local Market Guide
15/83
13 March 2014
Brazil Local Markets 1
Until May 2012, the additional remuneration was 0.5% p.m., regardless of the Selic rateThe change to the taxation rules governing returns on savings deposit accounts occurredto prevent funds from migrating from government bonds and other securities indexed tothe Selic rate to savings deposits (the Monetary Policy Committee (Copom) set the Selicrate below 8.50% in June 2012).
The continued reduction in the Selic basic interest rate in recent years has helped raise
the competitiveness of savings deposits versus other financial investments, mainlybecause the investments are exempt from income tax, which varies between 15.0% and22.5% for most types of investment (Exhibit 10).
Exhibit 10: Passbook Savings and DI Over Rates
% p.a.
CDI rate
Savings yield5
10
15
20
25
30
Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
Source: Central Bank of Brazil, Credit Suisse
4.5. Long-Term Interest RateThe Long-Term Interest Rate (TJLP) was created in November 1994 to stimulate long-term investments, which were previously less feasible due to the absence of a market forlong-term credit in the country. At present, the TJLP is the main rate for credit lines fromthe Brazilian Development Bank10(BNDES) and from the Workers Support Fund (FAT)The TJLP can theoretically be used in any transaction in the financial markets, but thatrarely occurs.
The Long-Term Interest Rate is effective for a calendar quarter and is calculated based onthe following parameters:
(i) the inflation target, prorated for 12 months as of the first month in which the rate iseffective, based on the annual targets set by the Brazilian Monetary Counci(CMN); and
(ii) the risk premium, which embeds an international real interest rate and a componentreflecting Brazils country risk in a medium- and long-term perspective.
The rate is set by the CMN and published by the last day of the quarter immediatelypreceding the date on which it is to take effect (Exhibit 11).
10As of December 2012, the total volume of BNDES loans was equivalent to 10.7% of GDP and the totavolume of all bank loans in the country was equivalent to 53.5% of GDP.
-
5/20/2018 Brazil Local Market Guide
16/83
13 March 2014
Brazil Local Markets 1
Exhibit 11: Long-Term Interest Rate (TJLP) and Target for Selic Rate
% p.a.
TJLP
Selic
5
10
15
20
25
30
Dec-01 Dec-03 Dec-13Dec-05 Dec-07 Dec-09 Dec-11
Source: Central Bank of Brazil, Credit Suisse
-
5/20/2018 Brazil Local Market Guide
17/83
13 March 2014
Brazil Local Markets 1
5. Inflation IndexesThere are several price indexes in Brazil, mainly due to the countrys history of high
inflation. We discuss all of these indexes at length in our Inflation Guide: Inflation indexesin Brazil, published on June 25, 2009.
The Broad Consumer Price Index (IPCA) is the index most closely followed by market
agents, due to its status as the standard price index of the inflation-targeting regimeAnother factor that heightened the importance of the IPCA versus other indexes was thegrowth in government bonds linked to the IPCA (NTN-Bs), compared to growth in themarket for government bonds linked to other inflation indexes, such as IGP-M (NTN-Cs).
Despite the greater importance of the IPCA, market agents also follow the other priceindexes, in particular the General Price Indexes (IGPs) and the CPI put out by the Instituteof Economic Research Foundation (Fipe). These indexes differ in their underlying basketsof goods and services, household target as a function of income brackets, andgeographical locations. In the case of the IGPs, producer inflation has higher weight in theindex than consumer inflation.
5.1. IBGE IndexesThe Brazilian Statistics Bureau (IBGE) publishes three important inflation indexes eachmonth: IPCA, IPCA-15, and INPC. The indexes follow the same method of calculation budiffer in terms of the data collection period and the composition of the basket of productsand services.
IPCA
The IPCA reflects prices on a nationwide basis (data collected in nine major metropolitanareas, plus the cities of Goinia and Braslia), for goods and services used by householdswith monthly income between 1 and 40 times the monthly minimum wage11. The change inthe index is calculated on the basis of the weighted arithmetic average of the price groupsand the weighting is variable according to past inflation.
The most frequently analyzed breakdown of the IPCA is between market prices andadministered prices. Around 25% of the IPCA is composed of goods and services whoseprices are administered directly or indirectly by the government; the remainder isrepresented by market prices. Recent inflation analyses have also made the distinctionbetween food and other items in the inflation index more relevant.
IPCA-15
The IPCA-15 index is calculated using the same methodology of the IPCA. The differenceis the period of the price surveys (sampling period). The IPCA-15 uses the prices collected
from the 16th day of the previous month to the 15th day of the current month, while theIPCA is collected from the first through the last day of the month (Exhibit 12). Given thathe IPCA-15 is released before the IPCA, it has become a good method for determiningthe trend of the IPCA.
11From USD 339 to USD 13,560 as of February 2013.
-
5/20/2018 Brazil Local Market Guide
18/83
13 March 2014
Brazil Local Markets 1
Exhibit 12: Period of Data Collection and Publication of IPCA-15 and IPCA
IPCA (Broad Consumer Price Index)
From the 1st tothe 30th day ofthe referencemonth
of the following month
IPCA-15 (Broad Consumer Price Index, mid-month)
From the 16th day of themonth before the referencemonth to the 15th day of thereference month
of the reference month
Surveyperiod
Approximatemonthlyrelease date
Index
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
5.2. FGV IndexesThe General Price Indexes (IGPs) are published by the Getlio Vargas Foundation (FGV)They combine prices surveyed in various production chains, ranging from basicagricultural prices to inputs in the construction sector. The IGPs are made up of three sub
indexes: the Producer Price Index (PPI), the Consumer Price Index (CPI) and the NationaConstruction Cost Index (INCC, Exhibit 13).
Exhibit 13: Composition of General Price Indexes
% of total
INCCRepresents the value
added by the constructionindustry to GDE
Represents the valueadded by the retail sectorand consumer services
to gross domesticexpenditure (GDE)
CPI
60%
30%
10%
PPI
Represents the valueadded by production,transportation, andwholesale trade to
GDE
Source: Getlio Vargas Foundation (FGV), Credit Suisse
The FGV releases three general price indexes during the month: IGP-10, IGP-M, and IGPDI, which use the same calculation methodology and differ only in their collection period(Exhibit 14).
-
5/20/2018 Brazil Local Market Guide
19/83
13 March 2014
Brazil Local Markets 1
Exhibit 14: Survey Periods and Publication of IGPs
IGP-10
From the 11th day of themonth before the referencemonth to the 10th day of the
reference month
of the reference month
IGP-M
From the 21st day of themonth before the referencemonth to the 20th day of
the reference month
of the reference month
Survey
period
Approximatemonthlyrelease date
Index IGP-DI
From the 1st to the 30th
day of the referencemonth
of the following month
Source: Getlio Vargas Foundation (FGV), Credit Suisse
The IGP-M is one of the most widely used indexes, mainly since it is published before theend of the reference month, while the results of most indexes are not reported until the
following month. The IGP-M is the only IGP index that collects partial data every ten dayscalled previews. The announcement of the partial results for the 10- and 20-day periodsenables analysts to anticipate changes in the overall IGP-M index. The IGP-M previewsmeasure the change in prices in 10- and 20-day periods over a fixed comparison base(Exhibit 15).
Exhibit 15: Calculation of IGP-M and IGP-M Previews
21 20 2021 30 10
Month 3 IGP-M = Average A / Average B
Average B Average A
1st
IGP-M proxy in month 3 = Average C / Average B
2nd IGP-M proxy in month 3 = Average D / Average B
Month 1 Month 2 Month 3
30 1 1
Average C
Average D
Source: Getlio Vargas Foundation (FGV), Credit Suisse
-
5/20/2018 Brazil Local Market Guide
20/83
13 March 2014
Brazil Local Markets 2
6. Brazils Public-Sector Debt
6.1. OverviewThe improvement in solvency indicators and the active role of the Brazilian Treasury havecontributed to a significant change in the debt profile and to an increase in the average
time to maturity of domestic federal public securities debt (DPMFi), namely:
increase in the shares of fixed-rate securities and inflation-linked securities in totadebt;
reduction in the shares of Selic-floaters and USD-linked securities12(Exhibit 16).
Exhibit 16: Breakdown of Domestic Federal Debt Securities (DPMFi)
% of total
Fixed-rate
Inflation
Selic
FX
14.87.8 2.2
12.520.1
27.936.1 37.3 32.2 33.7
37.9 38.3 41.243.3
5.9
7.012.5
13.5
14.9
15.5
22.526.3
29.3 28.628.1 29.6
35.536.1
57.056.6
62.9
63.2
59.953.9
40.035.5 37.4 37.0 33.4
31.522.8 20.022.3 28.6
22.410.8 5.2
2.7 1.3 0.9 1.1 0.7 0.6 0.6 0.6 0.6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Brazilian Treasury, Credit Suisse
In theory, the new profile would make the public debt less risky by reducing the share thais directly exposed to exchange rate fluctuations and monetary policy cycles. In addition tothe change in debt profile, the average time to maturity also rose (Exhibit 17) 13
Accordingly, the country has also experienced a reduction in the portion of debt maturingin the next 12 months and an increase mainly in the stock of debt maturing within threeyears (Exhibit 18). From 2011 to 2013, however, the stock of debt maturing within oneyear increased slightly, while the stock of debt maturing in one to three years declinedThis movement is explained by the Treasurys more aggressive policy of swapping S eliclinked securities for fixed-rate securities, which typically have shorter maturities.
12The exposure of the DPMFi to the dollar is different from the debt profile due to dollar swap contractswhereby the central bank receives an amount equivalent to the FX gain/loss (plus a fixed interest rate)and pays the CDI interest rate.
13The Treasury calculates the average maturity of securities as the weighted average of the tenors of thevarious flows (intermediate coupons and principal), with the weightings corresponding to the presenvalue of each payment. The average life is calculated as the average of the remaining tenor of thesecurities, weighted only by the present value of the principal. In other words, the calculation of theaverage life is less conservative than the calculation of the average maturity.
-
5/20/2018 Brazil Local Market Guide
21/83
13 March 2014
Brazil Local Markets 2
Exhibit 17: Average Time to Maturity and Durationof DPMFi Exhibit 18: Profile of DPMFi Maturities
Months BRL trillion and % of total
0
15
30
45
60
Oct-97 Oct-01 Oct-05 Oct-09 Oct-13
Average time to maturity
Average duration
Up to1 year
1 to 3years
More
than 3years
0.5 0.6 0.8 1.1 1.3 1.6 1.90.4 0.6 0.7 1.0 1.2 1.4 1.8 2.0
44
32
24
41
29
30
46
37
17
36
41
24
27
36
37
25
40
35
25
36
39
55
26
19
1999
28
36
37
2001
35
44
20
2003
42
41
17
2005
30
41
29
2007
25
37
39
2009
22
41
37
2011
26
33
42
2013
Source: Central Bank of Brazil, Brazilian Treasury, Credit Suisse Source: Brazilian Treasury, Credit Suisse
Brazils external securities debt as a percentage of total securities debt has dropped
significantly since 2006, in part owing to the external debt bond buy-back program(initiated in January 2006, Exhibit 19). The Brazilian Treasury no longer uses external debbond issuances as a source of funding, but rather for operational purposes. According tothe Treasury, the main aim of the new external debt issuances is to build a sovereign yieldcurve in the international market in both USD and BRL, to serve as a benchmark foprivate-sector issuances.
Exhibit 19: Breakdown of Public Securities Debt
% of GDP
6.1 4.1 4.4 3.1 2.4 2.0 2.1 2.0
46.146.0
41.7 43.2 42.5 43.0 43.6 42.2
2006 2007 2008 2009 2010 2011 2012 2013
DPFMi
DPFe
52.250.1
46.1 46.3 44.9 45.0 45.7 44.2
Source: Brazilian Treasury, Credit Suisse
6.2. Domestic Public SecuritiesSince 2002, the Brazilian Treasury has been the only entity responsible for issuances ofpublic debt, both domestic and external. In the past, the central bank was responsible fothe issuance of external debt and shared the responsibility for domestic debt issuanceswith the Treasury. Since then, the central bank has been responsible only for repooperations, by managing a stock of securities originally issued by the Treasury. Currentlythe Treasury issues fixed-rate bonds with maturities of up to 20 years and inflation-linkedsecurities for up to 40 years (Exhibit 20). In the external market, the Treasury has alreadyissued fixed-rate securities in BRL maturing within 35 years (maturity in 2045).
-
5/20/2018 Brazil Local Market Guide
22/83
13 March 2014
Brazil Local Markets 2
Exhibit 20: Features of Domestic Public Debt Securities
LFT NTN-B LTN NTN-C**Security NTN-F
no coupon per semester no coupon per semester Coupon per semester
- 6 - 6Interest (%, p.a.) 10
26.6 95 18.6 84Average time to maturity* (months) 40.6
440.5 605.8 547.7 66.0Outstanding* (BRL bn) 200
5.1 4.2 15.6 -Daily average volume** (BRL mn) 2.5
Selic IPCA Fixed-rate IGP-MIndex Fixed-rate
Still issued?
*As of August 2013. ** NTN-C 010131: interest of 12% p.a.. **In 2013, YTD through August
Source: Central Bank of Brazil, Brazilian Treasury, Credit Suisse
Almost all of Treasurys primary issuances are made via public auctions. At the end o
each month, the Treasury publishes a timetable with the dates of the auctions for thefollowing month as well as the total maturities and the maximum volume of securities thatwill be offered. Banks, brokerage firms, and other institutions registered in the Selic
system can take part in the auctions, which are executed in the Central Bank InformationSystem (SISBACEN, Appendix A). Settlement is on the day after the effective date of theoperation (T+1).
The terms of the auctions depend on the type of securities offered. IPCA-Linked NationaTreasury Bills (NTN-Bs) and Selic Floater Treasury Bills (LFTs) are sold through auniform-price auction, with a single sale price (or cutoff price). The other securities aresold in multiple-price auctions14 (also known as discriminatory auctions), with paymenbased on the offered bid. Settlement takes place on the following business day and can bemade in cash or in other securities, according to the features of the securities being tradedThe Treasury follows a relatively stable timetable of primary issuances, with regulaauctions on Tuesdays, Wednesdays, and Thursdays, depending on the type of securityoffered15(Exhibit 21). These regular auctions always take place from 12:00 noon to 1:00
p.m. (local time).
Exhibit 21: Features of Auctions of Public Securities*
as of December 2013
Settlement Cash Securities
Security
Frequency
Auction type
Weekday Tuesday
(1st step, sale)Wednesday
(2nd step, exchange)
Cash
NTN-F
2 weeks
Discriminatory(multiple-price)
Thursday
NTN-B
2 weeks
Uniform(single-price)
2 steps?
Cash
LTN
1 week
Discriminatory(multiple-price)
Thursday
Cash/Securities
LFT
4 weeks
Uniform
Thursday
* As of December 2013
Source: Brazilian Treasury, Credit Suisse
14In the discriminatory auction, each buyer offers his bid, which may or may not be accepted by theTreasury. Thus, in this case, the sale prices may be different among the various buyers.
15In accordance with the 2013 Annual Financing Plan (PAF 2013), the Treasury will concentrate issuancesmainly in fixed-rate securities (LTNs and NTN-Fs) and IPCA inflation-linked securities (NTN-Bs).
-
5/20/2018 Brazil Local Market Guide
23/83
13 March 2014
Brazil Local Markets 2
In addition to the auctions described above, the Treasury also holds other kinds of auctionsaiming to spread out maturities, lengthen tenors, change compositions, and stimulatesecondary market liquidity. In exchange auctions, for example, the Treasury receives onlyother public securities as payment for the issuance, and in buyback auctions the Treasuryrepurchases previously issued securities. These auctions take place at a lower frequency(Exhibit 22) than the regular ones and have lower liquidity, sometimes ending with no deal.
Exhibit 22: Frequency of Exchange and Buyback Auctions*
Security Exchange Early redemption
Quarterly -
Variable Monthly
Quarterly -
Monthly Monthly
LTN
NTN-F
LFT
NTN-B
* As of December 2013
Source: Brazilian Treasury, Credit Suisse
On the following pages, we present a description of the main public securities issued andtraded in the local market.
LTN (Fixed-Rate, Zero-Coupon)
Issuer: Brazilian Treasury Adjustment of nominal value: Not adjusted
Index: Fixed-rate Redemption of principal:At maturity
Nominal value on reference date: BRL 1,000.00 Number of days in year: 252 business days
Interest rate: 0% (sold at discount) Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)
Interest: No payment of interest Negotiation: Yield-to-maturity (YTM)
Yield from Unit Price YTM: Yield-to-maturity (252 business days)
NV: Nominal value (BRL 1,000.00)
UP: Unit price (market price for 1 security)
bd: Business days between settlement date (inclusive) and maturity date (exclusive).
Unit Price from Yield
-1
252
bd
UPNV
YTM =
Pricing
UP =( )2521+ YTM
bd
NV
Liquidity / Daily Average (BRL mn)
Up to 1 year
1 to 2 years
2 to 3 years
0.1
1.1
6.6
4.8
2.9
2.3 1.7 1.4 1.2 1.0 1.6
3.00.1
1.3
1.31.1
0.8 1.61.1
0.8
1.0
1.8
0.1
0.30.4
0.1 1.1
0.6
0.6
1.2
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Average Time to Maturity (Months) Monthly Average of Issuances (BRL bn)
2007 2008 2009 2010 2011 2012 2013
11.6
6.3
11.3
14.8
18.2 17.816.2
5
10
15
20
Dec-07 Dec-09 Dec-11 Dec-13
7.0
19.6
15.2
Source: Brazilian Treasury, Credit Suisse
-
5/20/2018 Brazil Local Market Guide
24/83
13 March 2014
Brazil Local Markets 2
LFT (Selic-Floater Bond)
Issuer: Brazilian Treasury Adjustment of nominal value:Adjusted by the Selic factor
Index: Linked to Selic basic interest rate Redemption of principal:At maturity
Nominal value on Reference date: BRL 1,000.00 Number of days in year: 252 business days
Interest rate: 0% (sold at discount) Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)
Interest: No payment of interest Negotiation: Yield-to-maturity (YTM)
YTM: Yield-to-maturity (annualized for 252 business days)
SELIC: Cumulative daily Selic rate factor fromReference date (inclusive) to settlement date (exclusive)
UNV:Adjusted nominal value (by the Selic rate factor) NV: Nominal value on reference date (BRL 1,000.00)
UP: Unit price (market price for 1 bond)
bd: Business days between settlement date (inclusive) and maturity date (exclusive).
Quote: Price as a percentage of Adjusted Nominal Value
Pricing
UP UNV( )2521
bd
YTM+= 1-=
252
bd
YTMUPUNV
UNVUPQuote =
SELICNVUNV = SELIC is the BZSELCA
Index on Bloomberg
Liquidity / Daily Average (BRL mn) Issuances, Monthly Average (BRL bn)
6.8 7.1 6.87.4
4.4
1.0
7.2
2007 2008 2009 2010 2011 2012 20132003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Nov-13
Up to 1 year 1 to 2 years more than 2 years
840443 450 370 158 195 174 217 155 186
1243
1034
388 348
551
666
294 402130
171264
380 529 518 367
1403
Maturity/Outstanding Volume (BRL bn) Average Time to Maturity (Months)
*As of December 2013
112.2 113.0
11.8
34.3
84.0
2014 2015 2016 2017 2018 20
25
30
35
Dec-07 Dec-09 Dec-11 Dec-13
21.8
34.2
28.9
Source: Brazilian Treasury, Credit Suisse
-
5/20/2018 Brazil Local Market Guide
25/83
13 March 2014
Brazil Local Markets 2
NTN-B (IPCA inflation-linked bond)
Issuer: Brazilian Treasury Adjustment of nominal value: Not adjusted
Index: Fixed-rate Redemption of principal:At maturity
Nominal value on reference date: BRL 1,000.00 Number of days in year: 252 business days
Interest rate: 6% p.a. Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)
Interest: 29.56301410 per semester Negotiation: Yield-to-maturity (YTM)
77.682.6 86.4
50.660.9
2014 2015 2016 2017 2018*As of December 2013
Maturity/Outstanding Volume (BRL bn) Average Time to Maturity (Months)
50
60
70
80
90
100
Dec-07 Dec-09 Dec-11 Dec-13
57.0
95.0
91.9
Liquidity / Daily Average (BRL mn) Issuances, Monthly Average (BRL bn)
4.7
2.42.0
4.8
6.25.6
3.9
2007 2008 2009 2010 2011 2012 2013730 626 681
1121 1293 1557
3406535 457 272 250
449678
1873
4109
2006 2007 2008 2009 2010 2011 2012 2013
Up to 2 years 2 to 4 years More than 4 years
488
Coupon: Interest paid every semester
UNV:Adjusted nominal value (by the IPCA rate factor)
IPCA2: IPCA index number for the previous month
IPCA1: IPCA index number for the month prior to reference date
PR: Prorated adjustment of IPCA inflation forecast (% mom)
YTM: Yield-to-maturity (annualized for 252 business days)
NV: Nominal value on reference date (BRL 1,000.00)
UP: Unit price (market price for 1 bond)
bd: Business days between settlement date (inclusive) and maturitydate (exclusive).
Quote: Price as a percentage of Adjusted Nominal Value
Pricing
UNV
UPQuote=
(1 +YTM) 252
bdi
CouponUP +=
n
i=1
UNV
252
bdn
(1 + YTM)
PRNV UNV=IPCA2
IPCA1)(Coupon=
21
1- UNV+6%1
Source: Brazilian Treasury, Credit Suisse
-
5/20/2018 Brazil Local Market Guide
26/83
13 March 2014
Brazil Local Markets 2
NTN-F (Fixed-Rate Bond)
Issuer: Brazilian Treasury Adjustment of nominal value: Not adjusted
Index: Fixed-rate Redemption of principal:At maturity
Nominal value on reference date: BRL 1,000.00 Number of days in year: 252 business days
Interest rate: 10% p.a. Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)
Interest: 48.808848 per semester Negotiation: Yield-to-maturity (YTM)
Average Time to Maturity (months) Issuances, Monthly Average (BRL bn)
6.6
2.3
3.5
4.5
1.9 2.2
3.3
2007 2008 2009 2010 2011 2012 201322
28
34
40
46
Dec-07 Dec-09 Dec-11 Dec-1322.8
42.8
39.4
Pricing
NV: Nominal value (BRL 1,000.00)
Coupon: Interest paid every semester UP: Unit price (market price for 1 bond)
YTM: Yield-to-maturity (annualized for 252 business days) bd: Business days between settlement date (inclusive) and maturity date (exclusive)
Unit Price from Yield Yield from Unit Price
NVCoupon = -1)(1+10% 21
+( )2521+YTM
bdi
CouponUP=
n
i=1
NV
( )2521+YTMbdn
Liquidity / Daily Average (BRL mn)
31 208 23534
296 42813226 513
203
143
1778
123 12408
175150
42
1
2007 2008 2009 2010 2011 2012 2013
Up to 1 year 1 to 2 years 2 to 3 years
Source: Brazilian Treasury, Credit Suisse
-
5/20/2018 Brazil Local Market Guide
27/83
13 March 2014
Brazil Local Markets 2
6.3. Secondary MarketDespite the sizable stock of domestic debt, the liquidity of the secondary market is lowFrom 2009 to 2013, there was an increase in total liquidity, reversing the downward trendobserved from 2004 to 2008 (Exhibit 23). The recent increase was due to the growth intrading of fixed-rate securities (NTN-Fs and LTNs) and IPCA-linked bonds (NTN-Bs).
Exhibit 23: Daily Average Trading Volume in Secondary Market
Per bond and total, BRL billion
Others
LTN
LFT
NTN-F
1.0 1.2 0.9 1.0 1.9 2.03.5
7.7
0.6 1.01.7 1.6
1.1
2.0
2.51.1 1.2
0.6 0.6
0.8 0.80.7
3.2
1.26.7 6.2 4.4 3.7
2.53.1
3.43.0
3.9
7.2
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
4.1
8.2 7.66.3 5.9
4.7
5.7
7.7 7.5
9.3
20.2
NTN-C
NTN-B
Source: Central Bank of Brazil, Credit Suisse
The increase in volume was concentrated in securities with longer maturities. Part wasdriven by Provisional Decree 28116, published in February 2006, which exempted nonresident investors from paying income tax on the purchase of public securities. Themeasure affected mainly securities with longer maturities, especially above two years(Exhibit 24). The government made investments in fixed income securities by nonresidents subject to the Tax on Financial Transactions (IOF) in October 2009 and
increased the rate in 2010, but on a temporary basis; in early 2013, the tax rate on fixedincome portfolio inflows was once again reduced to zero.
Exhibit 24: Average Daily Trading Volume and Share of Securities Maturing inMore Than Two Years in Secondary Market
Per linker, USD million
Other
Fixed-rate
Inflation-linked
Selic% of total
0.7 0.5 0.5 0.4 1.41.01.1 0.8 0.5
1.1 1.83.2
6.4
1.0
2.22.1
2.0
4.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.90.5 0.7
1.52.3
1.5 1.7
3.94.3
5.5
11.8
21.0
5.88.5
24.7
38.2
33.0
29.1
50.0
58.1 59.358.6
Source: Credit Suisse, Central Bank of Brazil
16Converted into Law No. 11312 in June 2006.
-
5/20/2018 Brazil Local Market Guide
28/83
13 March 2014
Brazil Local Markets 2
As an alternative to the daily average, another measure of liquidity in the secondarymarket is turnover, defined as the ratio between the total value traded in the past 12months and the current debt stock. According to this criteria, there was also a sharpincrease in the liquidity of NTN-Fs until 2010, which has reverted in recent years.Meanwhile, the liquidity of LTNs dropped significantly as the relative importance ofthese securities has been surpassed by the higher issuances of NTN-Fs (fixed-rate
securities with longer maturities) and other securities, such as NTN-Bs. The turnoveof NTN-Bs, in particular, has recovered since 2010, after a decrease between 2006and 2008 (Exhibit 25).
Exhibit 25: Turnover of Public Debt Securities(Excluding Central Bank Portfolio)
% of outstanding volume
155
35
79
18
318
79
33
90
3
269
125
39
166
4
238
147
42
116
7
178
299
205 212
14
284
NTN-B LFT NTN-F NTN-C LTN
2006 2008 2010 2012 2013
Source: Credit Suisse, Central Bank of Brazil
-
5/20/2018 Brazil Local Market Guide
29/83
13 March 2014
Brazil Local Markets 2
7. Private-Sector SecuritiesThe market of private fixed-income bonds has grown at a very strong pace in recent yearsbenefiting not only from the countrys macroeconomic stability but also from changes in
the legislation that have enabled the development of new credit methods.
The private sector issues many types of securities in the domestic market, especially
Certificates of Deposit (CDBs) and Non-Transferable Certificate of Deposit (RDBs), privatesecurities debt (debentures/corporate bonds), Banking Credit Notes (CCBs), Certificatesof Real Estate Receivables (CRIs), and Receivables-Backed Investment Funds (FIDC)The most significant are CDBs/RDBs and corporate bonds (Exhibit 26), even though thestock of the other securitiesespecially CCBs, CRIs (Exhibit 27), and FIDCshas beengrowing substantially in recent years.
Exhibit 26: Stock of CDB/RDBs and Corporate Bonds Exhibit 27: Stock of CCBs and CRIs
BRL bn BRL bn
Corporate bonds
CDB+RDB
43
44
85
155 2
10
248
283 3
38 3
97
505
585
152
126
283 3
29
362
684
768
782
683
598
546
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
CCB
CRI
45.
4
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.
71.
72.
9 6.
7
12.
9
20.
5
18.
4
18.
2
22.
5
24.
7
26.
7
0.
6
0.
92.
1
2.
22.
97.
2 10.
6
18.
9
27.
8 33.
4
Source: Cetip, Brazilian Association of Financial Market Institutions (Andima), Credit Suisse Source: Cetip, Credit Suisse
7.1. CDBs and RDBsCertificates of Deposit (CDBs) and Non-Transferable Certificates of Deposit (RDBsare private securities issued by financial institutions (commercial, developmentinvestment, and full-service banks) with the aim of raising funds in the market fofinancing commercial credit operations, with negotiated rates and maturities. CDBsrepresent the vast majority of these two securities in the market (99%), especiallysince RDBs are not transferable, i.e., they cannot be traded in the secondary market,whereas CDBs do not have this restriction. This is the main reason why there is a lowstock of RDBs vis--vis CDBs (Exhibits 28 and 29).
-
5/20/2018 Brazil Local Market Guide
30/83
13 March 2014
Brazil Local Markets 3
Exhibit 28: Stock of CDBs Exhibit 29: Stock of RDBs
BRL bn BRL bn
152 126
281326 360
682
767 782
683
598546
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2.5
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.3
0.8
1.7
2.12.0
0.90.7 0.7
0.8
0.4
Source: Cetip, Credit Suisse Source: Cetip, Credit Suisse
CDBs, like RDBs, may be fixed-rate or linked to an index (95% of the total in Decembe2013), while fixed-rate securities represent only 5% of the total (Exhibit 30). Thecomposition of the stock of these securities has remained roughly constant in recent yearsThe CDB rate is calculated based on a year of 252 business days, as are the CDI and
Selic rates.
Exhibit 30: Stock of CDBs and RDBs, by Index
BRL bn
Floating rate
Fixed-rate
8143
262308 340
654739 763
665
584 521
9
2121 22
30
29 19
19
15
26
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013119
684
770 782
684
599547
362329
283
127152
Source: Cetip, Credit Suisse
Trading in CDBs is done mainly on the over-the-counter (OTC) market and registered withthe Cetip clearinghouse, with settlement on the same day (D+0) or on the next day (D+1)The liquidity of the secondary market of CDBs is very low (Exhibit 31), and the averagevolume of daily trades as a percentage of the total outstanding volume dropped from 52%in 2004 to 8.2% in 2010, increased to 16.1% in 2012, and declined again to 7.9% in 2013.
-
5/20/2018 Brazil Local Market Guide
31/83
13 March 2014
Brazil Local Markets 3
Exhibit 31: Daily Trading Volume of CDBs in Secondary Market
BRL mn and % of total outstanding volume
61
169
259280
260 279
668
343
257 262
384
17019.1
28.2
52.0
25.0
19.8 19.3
24.9
11.28.2 9.6
16.1
7.9
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Daily average (BRL mn)
Total value of tradingas % of stock
Source: Cetip, Credit Suisse
7.2. Corporate Bonds
Corporate debt bonds (locally referred to as debentures) are generally issued by largecompanies whose aim is to raise longer-term funds to finance projects and/or adjustmentsin their capital structure. These bonds can be issued only by companies formed as publiclyor privately held joint stock corporations. However, only publicly traded companies canmake issuances for general investors (public issuances), while unlisted companies canonly issue securities to a restricted group of investors (private issuances).
Corporate bonds may pay periodic coupons, at fixed or floating rates or even linked to FXor inflation indexes (especially the IGP-M). In general, corporate bonds pay a risk premiumin the form of a fixed spread or a percentage over the CDI interest rate, which reflectscompanies risk classification. Debenture contracts include special clauses that define
types of guarantee, possibilities of repricing debts 17 , convertibility into shares, earlyredemption, etc. The bonds may be issued without a fixed period for the redemption of theprincipal amount (perpetual bonds).
The stock of corporate debt bonds in the domestic market has augmented significantlysince 2005, but the composition of this expansion has changed greatly. In early 2009, theBrazilian Securities Commission (CVM) implemented rules for a new type of public offeringof private securities such as non-convertible corporate bonds, commercial paper, andCCBs. These offerings are referred to as restricted efforts distributions (per CVM Directive476 (ICVM 476)), involve less paperwork, and can be made only to qualified investorsIssuances under this regulation do not need to be registered with the CVM until the end ofthe distribution process. Accordingly, the offering process has become much faster andshould explain the significant rise in these distributions share of total bond issuances(Exhibit 32). There are also a few restrictions on this kind of offering. For instance, the
number of investors the issuer can approach for the bookbuilding process is limited to 50,only 20 of those can participate in the offering, and the securities can only be traded 90days after the initial purchase.
17Repricing is a mechanism used by the issuing companies to periodically alter (in accordance with theclauses negotiated in the issuance) the terms agreed upon with the holders, to adjust the bonds to markeconditions. If investors do not accept the new conditions proposed by the company, the company wilhave to acquire the bonds in advance.
-
5/20/2018 Brazil Local Market Guide
32/83
13 March 2014
Brazil Local Markets 3
Exhibit 32: Issuances of Corporate Bonds
BRL bn
15 15 5 10
42
69
48 40
12 16 3
50
11
15
36 59
72
80
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Restricted efforts distribution
Pubic offerings
Source: Brazilian Association of Financial Market Institutions (Andima), Credit Suisse
Regarding the classification of bonds, the bulk available in the market is formed of bookentry bonds, linked to the DI interest rate and not convertible into shares of the issuingcompany, with a guarantee subordinated to the other creditors of the company
(Exhibit 33).
Exhibit 33: Main Classifications and Features of Corporate Bonds
Form % of total
Convertibility
Guarantee
Book-entryCustody and book-entry processes carried out by a financialinstitution duly authorized to operate by CVM 99.6
Registered Registration and control of transfers made by issuing company 0.4
Non-convertible Not exchangeable for other assets 99.9
Convertible Exchangeable for shares of issuing company to settle the debt 0.0
JuniorNo priority over other creditors of the company;priority only for shareholders
54.8
Unsecured debtNo priority in disposal of company assets in the event of compositionwith creditors 38.0
CollateralSecured by assets of issuing company or third parties (pledge, lien,or receivables)
5.9
Floating-rate
Priority of bondholders to dispose of assets of issuing company in the eventof bankruptcy; company may transfer assets without prior authorization ofcreditors
1.3
91.4
5.6
0.7 1.1 0.21.0
DI IPCA IGP-M TR USD Other
Source: Brazilian Association of Financial Market Institutions (Andima), Credit Suisse
-
5/20/2018 Brazil Local Market Guide
33/83
13 March 2014
Brazil Local Markets 3
Trading in the secondary market is carried out on the trading floor or on an OTC market, byinstitutions authorized to operate by the central bank and by the CVM. The NationaDebenture System (SND), an entity run by Cetip based on the policies and directivesestablished by the Brazilian Association of Financial Market Institutions (Andima, Appendix
A), concentrates practically the entire volume of these securities traded in the secondarymarket. The BM&FBovespa stock exchange also has systems dedicated to the trading ofixed-income bonds in general, including corporate bonds, namely BovespaFix (an electronic
system run by orders) and SomaFix (OTC market). Investors interested in buying corporatebonds must do so via a financial institution authorized to operate in these markets.
In order to foster investments in infrastructure and in intensive economic production inresearch, development, and innovation, at the end of 2010 the government createdvarious incentives for private investments in such areas. Such incentives, laterconsolidated under Law No. 12431/2011 of June 2011, include a reduction in the rates ofthe Income Tax (IR) applicable to earnings of individuals, legal entities, and foreigninvestors originating from bonds issued by Specific-Purpose Entities (SPEs) formed toimplement such projects (Law No. 12431/2011) . Income tax payable by individuals andforeign investors was reduced to 0%, while the corporate income tax was reduced to 15%
In September 2012, the Brazilian Development Bank (BNDES) announced new measures
to incentivize the issuance of these bonds. The measures seek to lower the issuers cosof funding for these bonds. For those who buy the bonds, the initiatives expandguarantees and reduce investment risk. According to the new rules, the bond issuancesmay, at the discretion of the BNDES, share guarantees with potential loans taken out bythe bank for the same project. Another change is the inclusion of a cross-default clauseregarding loan agreements and potential public issuances for the same infrastructureproject. In other words, if the company defaults on the bond payment it will be blockedfrom taking out additional loans from the bank. According to the clause, the BNDES candeclare early maturity of a loan if there is any type of nonperformance in connection withthe bonds. Accordingly, the clause increases the security of the market participants owingto the relative importance of the BNDES as a long-term financier of projects.
7.3. Agricultural Cash Forward Contract Bonds (CPRs)CPRs are used to finance transactions in agribusiness. They can be issued by farmers ocooperatives and are negotiable on the secondary market.
Regarding settlement, there are two types of CPR:
Physical CPR: Settlement occurs upon physical delivery of the product. The CPRestablishes the quantity, place, and date of product delivery. The terms of the contracmay be amended by mutual agreement between parties.
Financial CPR:Settlement occurs via transfer of funds from the issuer to the buyer onthe securitys maturity date. The settlement amount depends on the specificationsestablished in the contract. In general, CPRs consider the selling price of the agriculturaproduct on the settlement date. There are also Financial CPRs whose amount payable
is defined at the time of issuance (Fixed-Price Financial CPR) or pegged to futurecommodity prices or a futures exchange, especially the BM&FBovespa.
The law allows CPRs to have various types of guarantees. The most common arefiduciary alienation and pledge of crops, herds, and/or agricultural implements andequipment. Some CPRs are secured by bank bonds or insurance policies. Due to the highcost of bank guarantees, most CPRs are secured by bonds issued by farmers themselves.
To be traded on the secondary market, CPRs must be registered with a custodiainstitution, especially the Cetip clearinghouse. CPRs are registered according to thephysical volume of the product they refer to, but they do not state the financial value of the
-
5/20/2018 Brazil Local Market Guide
34/83
13 March 2014
Brazil Local Markets 3
transaction. The liquidity of CPRs in the secondary market is very low, with many dayslapse without any activity. Additionally, average maturities are short, as these securitiesare settled in the next harvest.
7.4. Certificates of Real Estate Receivables (CRIs)CRIs are traded without restrictions; they are issued by securitization companies and
backed by operations that involve rights to real estate (most commonly credits related tothe sale of new properties, see Exhibit 34). However, the broad definition of the real estaterights that serve as collateral enables the CRIs to be used not only to implement new reaestate projects, but also to deploy companies capital and enable the disbursement ofunds for investment activities.
Exhibit 34: Flowchart of Issuance of CRIs
Collectingbank
Contract
$
CRI
$Property sold
Contract
$
Payment ofinstallments
$
$
Amortization andInterest
1 2 3
4
Securitizationcompany
InvestorsBuyer Real estate
developer
Source: Credit Suisse
Although CRIs were implemented in 1997 (Law 9154), only recently have they started tocontribute more significantly to growth in home loans18andlike corporate bondssee aboost in originations driven by ICVM 476 (Exhibit 35).
Exhibit 35: Volume of CRIs Issued
BRL bn
Restricted efforts distribution (ICVM 476)
Public offerings
0.2 0.1 0.3 0.4
1.5
4.8
2.3 2.3
3.7
3.2 1.7
0.9
5.5
9.5
6.98.1
3.1
7.7
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2.1
1.1
13.2
10.1 9.8
Source: Brazilian Securities Commission (CVM), Credit Suisse
18CRIs can be issued exclusively by home loan securitization companies and are generally composed ofvarious Real Estate Credit Notes (CCIs), which represent credits issued by the lender.
-
5/20/2018 Brazil Local Market Guide
35/83
13 March 2014
Brazil Local Markets 3
The increase in the volume of CRIs in the last decade has been fostered by the morefavorable macroeconomic scenario, declining real rates, the expansion of home loans andcertain legal and tax changes, especially:
Creation of pool of assets available as security for debts or obligations: Since2004, each real estate project must have its own capital and separate accountingfrom the operations of the developer. If the real estate developer goes bankrupt, the
owners of the properties can retain a different company to conclude the projectThus, a CRI investor is not exposed to the risk of potential liabilities of the realestate developer, but only to the risk of the operation that generated the home loan.Hence, the main concern of the investor is the financial capacity of the originaborrower, whose flow of payments will be applied toward settlement of the security.
Fiduciary alienation (al ienao f id uciri a): This institution governs the transfer oownership to the borrower (buyer of the property). The buyer is the contingent owner,
meaning that full ownership is obtained only when the loan is fully paid off. If payment othe loan is interrupted, the lender can recover full ownership and possession of theproperty without filing suit. Fiduciary alienation for home loans does away with the needto collect overdue debts in court, enabling extrajudicial enforcement of the guarantee.
Income tax exemption:Since January 2005, individuals are exempt from income taxon net gains earned on CRIs as well as Real Estate Bills (LHs), and Real EstateCredit Notes (CCIMs). Corporate and institutional investors are not exempt fromincome tax.
In December 2010, the Ministry of Finance announced a package of measures tostimulate private long-term credit. It exempts foreign investors from income tax onearnings on CRIs that fulfill certain requirements (e.g., average term greater than fouryears, impossibility of early redemption, and link to a government-approvedinfrastructure investment project). The government also allowed CRIs to be bookedaccording to the rules for the allocation of savings deposits.
The new legislation led to a significant reduction in costs and, especially, in theaverage time for recovery of properties in connection with non-performing loans. Thereare no official statistics on the average recovery time for properties, but some issuerssuggest it is nearly six months (Exhibit 36).
-
5/20/2018 Brazil Local Market Guide
36/83
13 March 2014
Brazil Local Markets 3
Exhibit 36: Timetable for Recovery of Real Estate
T+15Second telephone call to verify whether the problem persists and the borrower intends to makepayment. Verification of receipt of the collection letter and possibility of renegotiation. Paymentdeadline is T+30.
T+30
Third phone call to make the borrower aware that if payment is not made within ten days, anofficial collection notice will be sent. Status reported to securitization company.
T+40
First collection notice, sent by registered letter, notifying the borrower of the debt amount.
T+60
Second collection notice, sent by registered letter, notifying the borrower of the debt amount anddemanding payment within 20 days.
T+80Letter sent to the appropriate Real Estate Registry Office to officially report the arrearage andother costs. A 15-day period is granted for the borrower to settle the arrears at the Real EstateRegistry Office.
T+83
If Real Estate Registry Office is unable to locate the borrower, a formal collection notice ispublished in the newspaper.
T+98
After payment of the Municipal Tax on Property Transfers (ITBI), ownership of the property isvested in the securitization company by Real Estate Registry Office.
T+110
Public auctioneer retained; publication of Invitation to Bid at first auction.
T+128
First public auction held (for at least the real propertys appraisal value).
T+130
Invitation to Bid at a second auction is published, if necessary.
T+133
If property is sold, the difference between the amount of the winning bid and that of the debt pluscharges and expenses is returned to borrower.
T+143
Second public auction is held (awarded to highest bidder, as long as the bid covers the debt plusexpenses and charges).
T+148
If the property is sold, the difference between the amount obtained at the auction and the debtplus all expenses and charges is reimbursed to the borrower.
If the property is not sold at the second auction, a debt settlement instrument is issued by thesecuritization company considering the debt paid and releasing the borrower from further liability.
T+5
Telephone call to inquire about the delay and schedule a new payment date, no later than T+10.
T+10
First collection letter sent out.
Source: Fitch Ratings, Credit Suisse
-
5/20/2018 Brazil Local Market Guide
37/83
13 March 2014
Brazil Local Markets 3
Box 1: Certificate of Additional Construction Potential
The Certificate of Additional Construction Potential (Cepac) is a security subject to CVMregulation, whose contract affords buyers the right to:
build in urban areas above the standard limits on land occupation (e.g., total occupied
area or maximum height of buildings); or change the real estate property use in relation to that established in land occupation
laws.
Cepacs are used by municipal governments as an additional source of funding for urbaninfrastructure works in certain areas. The municipal government defines, for a specificregion of the city, a list of projects for urban improvement (e.g., construction of overpassesand squares) that ultimately tend to increase the value of the properties in those regionsDuring execution of the listed projects, the municipal government auctions the Cepacs tofund part of the construction. Then, Cepac buyers become entitled to perform constructionbeyond the legal limits.
Cepacs do not create any liability for the issuing municipalities and issuances may be
public or private. The acquired rights are specific to each operation and cannot betransferred to constructions on plots of land belonging to other regions of the city. Thesesecurities may be traded on the secondary market and ownership does not require thebuyer to own plots of land or buildings in the regions to which the securities are related.
Cepac prices vary according to expected changes in property prices in regions wherepublic projects will be executed. In addition to the risk of prices in areas benefited by publicworks not appreciating, one of the main risks associated with Cepacs is the risk osignificant changes in the master plan, for instance if the municipal government increasesthe maximum permitted height of buildings, which reduces the value of the additionaconstruction rights.
As of September 2007, two urban operations had been registered with the BrazilianSecurities and Exchange Commission (CVM), both by the City of So Paulo: gua
Espraiada and Faria Lima. The first Cepac was issued in July 2004 via an auction held onthe over-the-counter market (Soma) of the So Paulo Stock Exchange (Bovespa), totalingBRL 30mn allocated to the construction of a bridge within the gua Espraiada operationSince then, more than BRL 609mn has been issued to finance this project, out of totalpotential funding of BRL 1.1bn until 2019 (54% of total). The Faria Lima operation raisedBRL 701mn of total potential funding of BRL 715mn (98%).
By the end of 2010, another Cepac had been registered with the CVM, with the objectiveof improving urban development in the neighborhoods around the Rio de Janeiro harboraiming to attract more residents and commerce to the area. The reurbanization projectincludes the construction of tunnels and avenues, improvement of urban transportationand power, sewage, and telephone networks; a total of BRL 2.6bn in potential funding wasissued through Cepacs.
-
5/20/2018 Bra