Accessing the capital markets is crucial to the future development of Latin America's projects, but what is deterring companies from issuing project bonds? Claude Serfilippi, a corporate partner at Winston & Strawn, recently spoke on this topic at GFC Media's Project Finance and Capital Markets Latin America.

Q: BENDES was in the news in June when its president resigned after being publicly criticized by President Bolsonaro. Even before this, markets were focused on BENDES retrenchment and what impact that might have on other financing sources in Brazil. Is there any way to quantify this retrenchment and comment on its impact on the bond and loan market to date and its expected impact in the future?

Per Claude, a confluence of a number of events has helped project bonds to become more competitive with BENDES

1. Overall downward trend in interest rates in Brazil. Brazilian Central Bank started this downward trajectory in 2016. The SELIC rate was just cut to 4.5% in December and many people expect the SELIC Rate to continue to decrease and perhaps go negative.

There are two separate effects from the decrease in interest rates:

  1. It has a direct effect in so far as financing costs are lowered
  2. It also has an indirect effect as it releases capital that would have previously invested in treasury bonds. When treasury bonds aren’t that appealing, investors start looking for yield and are more apt to make investments in project bonds and infrastructure debentures.

2. Policy measures to end subsided interest rates with BENDES. BENDES has long benefitted from subsidized interest rates. This all changed in 2017 when the government enacted legislation to phase that out. So this change has certainly had a significant impact on making other forms of financing more competitive with BENDES. There is still some “dry powder” left as the reduction of BENDES' subsidized interest rate has not been fully implemented

3. Implementation of pre-payment rules. Traditionally BENDES did not have clear rules to determine the calculation of prepayment penalties and this fostered a lot of confusion in terms of prepayment. In October last year, the BENDES approved new rules clarifying these calculations for both existing and new loans.

4. Tax incentives for individuals investing in infrastructure debentures.

Claude's conclusion is that project bonds and other lenders will be able to continue to provide competitive financing alternatives to BENDES.

Q: What are the main benefits of the Private Placement market vs the 144A market?

Claude noted three main benefits of the Private Placement market vs the 144A market on the panel.

1. Resource Advantage U.S. Insurance Companies and other private placement investors have the resources to digest and understand complicated projects and are willing to spend the time to get comfortable with a complex project. The structure of a private placement transaction allows for this. Investors get involved early and do significant diligence themselves. Because private placement investors are largely buy and hold investors, they are willing to invest the resources and time necessary to get comfortable with a complex project financing.

When you look at a 144A it is much different.

The structure of a 144A transaction doesn’t really lend itself to having investors do significant diligence themselves. The diligence is largely done by the underwriters who, along with the issuer, draft the OM. They send the OM out to investors and then have a quick roadshow meeting. Not optimal for a complicated project financing.

144 A investors (mostly mutual funds who aren’t buy and hold investors) aren’t willing to devote the time and resources necessary to get comfortable with a complex project financing.

2. Structural Advantage The PP market has the ability to accommodate variable funding and is willing to accept construction risk, whereas one can’t really do that in the 144A market. Economically that provides the private placement market with a very efficient model with minimal negative carry.

3. Post-Closing Advantage Project financings are very complex, especially if there’s construction risk. The deals are dynamic and fluid with a need to be able to make changes to project documents and get consents and amendments. In the PP market after funding changes are fairly straight forward to implement. Making changes post-financial close in a 144 A deal is much more challenging as bonds are held in street name and more likely to be traded.