Even with much of the developed world still struggling, Brazil's economy exudes health. But robust growth over the medium to long term is very much conditioned on advances in infrastructure, where enduring bottlenecks are bound to tighten unless investment grows and private-sector investors play a larger role.
Eyes are on ground transport in particular, with the country looking forward to playing host for the 2014 World Cup and 2016 Summer Olympics.
"There is a great deficit [and] the World Cup and Olympics is the great excuse. They will never work with the current infrastructure," said Enrico Bentivegna, a partner at Sao Paulo law firm Pinheiro Neto Advogados.
So far, securitization has registered only sporadically in the conversation about Brazilian transport. Devotees of receivable investment funds (FIDCs), the local ABS vehicle of choice, see more of an impact ahead, although regulatory obstacles may continue to make securitization something of a challenge in this area.
"FIDCs are best suited and more likely to be used for projects that have a very good sponsor, a high predictability of cash flows and low or no regulatory risk," said Daniel Sonder, a director of the alternative investments group at Credit Suisse Asset Management in Brazil. Sonder has experience in the public sector as well, having advised the executive directors of state-controlled National Bank of Economic and Social Development (BNDES) and Sao Paulo State's Secretary of Finance.
There are no firmed-up ABS deals presently making the rounds, though securitization could play a role in a high-speed train between Sao Paulo and Rio de Janeiro that is soon to be put up for bid, sources said.
Getting from Here to There
Barring an erosion of growth expectations, Brazil is going to need massive amounts of private capital to modernize its transport infrastructure.
In a November report on Brazilian infrastructure, Fitch Ratings foresaw economic growth in the country of 7% this year, 4.5% next year and 5% in 2012. Historically, BNDES, which operates as a development bank, has been the financial motor of infrastructure expansion in the country by providing relatively low-cost loans. More recently, the bank has found ways to invest in infrastructure projects side by side with the private sector, an approach that many players see as the best way forward.
However, BNDES' capabilities as a sole direct investor are far from diminished.
In order to stimulate the economy during the recent slowdown provoked by the global downturn, the government pumped up BNDES. The treasury injected R$180 billion ($105 billion) into the development bank between 2009 and 2010, a move that spiked general government debt, according to Fitch. From 2007 to 2008, BNDES assets ballooned 36.7%, then packed on another 40% between 2008 and 2009. The bank's total assets now run at about R$386.6 billion.
"Both the market and the government generally agree that such growth is not sustainable, desirable or possible and that the anti-cycle emergency actions are no longer necessary," Fitch analysts said.
The upshot: efforts to boost infrastructure funding by private-sector investors is not only a welcome sign for many, but also a critical move in slimming down BNDES.
In transport infrastructure alone, the need for financing is colossal. Under the federal government's accelerated growth program known as "PAC," about R$48.4 billion in public and private investment will be needed for roads in the 2011-2014 timeframe, according to a report by Moody's Investors Service. The figure for railroads is R$43.9 billion.
Issuing Equity, Floating Debentures
Private investment in transport infrastructure so far has come from placing equity and debentures. Operators in the sector include both state-controlled companies and private companies running a concession.
"Generally for you to win the concession you have to have a bank lined up with you. This year has been extremely active in concessions, such as in toll roads," said Johann Grieneisen, an analyst at Moody's in Brazil. "[The take-out] financings tend to be debentures."
The fact that transport concessions tend to be Brownfield, and thereby have a track record for the flows, bodes well for eventually including securitization in the mix, said sources.
In addition, the debentures that have funded these projects often are secured by usage fees such as tolls and financing deals with BNDES can include a pledge of future flows. Many see these structures as steps away from a true securitization.
"There are a number of BNDES financings, financings provided by private banks and those in the form of debentures, most of them secured by future flows," said Marcelo Fanganiello, a CEO at structured-finance boutique Horus Finance. "Notwithstanding, the FIDC with a true sale is a more robust vehicle and provides more security for the investors."
A recent high-profile example is Rota das Bandeiras, a toll road concession operated by Brazil's Odebrecht Group. This project issued a R$1.1 billion, 12-year debenture in July 2010. Moody's rated the transaction 'Aa2.br' and Standard & Poor's, 'brAA-'. The deal was secured by a collateral package shared between BNDES and the debenture holders. That package included a pledge of the concessionaire's stock, future receivables of toll revenue and indemnification rights over the concession assets. The collateral was initially pledged to short-term debt that the debenture took out.
"The government agreed to have private investors. It was very much like a securitization, because it's an SPV and only has the project," said a market source.
What is more, receivables pledged to older BNDES loans are freeing up as the debt matures, making them attractive and available collateral for new deals in the private sector, including FIDCs.
But the fact remains that even with these advantages, FIDCs have yet to make a mark in transportation finance or, indeed, in any area of infrastructure.
CPTM : Beacon or Outlier?
There is one transaction in the public arena, FIDC CPTM, which for a variety of reasons was not followed by any other after its March 2007 closing. Its strong performance over the past few years, however, has served to show the market that ABS in this area can work.
The originator of the deal is Companhia Paulista de Trens Metropolitanos (CPTM), a state-run company that operates a train network spanning Sao Paulo's metropolitan area. Its FIDC securitizes the future collections of ticket sales generated at 21 stations. The term of the deal is seven years, a maturity not unusual in the years prior to the global crisis, although FIDCs nowadays tend to be shorter. The fund was split into R$150 million of senior shares and $50 million of subordinated shares, with the former holding a 'Aa3.br' rating from Moody's. Rio Bravo Investimentos was the structurer, Standard Bank, the manager, and Pinheiro Neto, legal counsel.
BNDES purchased 50% of the senior shares in CPTM FIDC, just the sort of support that securitization pros would like to see for future FIDCs and that would help draw more private investors into deals. Under its own rules, BNDES would not be able to lend directly to CPTM as a state-run company. The transaction served as the perfect way for the development bank to work around this restriction. "In the BNDES budget, the FIDC was treated as an investment and not as a loan," said Pinheiro Neto's Bentivegna.
To be sure, there had been hope at the time that CPTM would spawn knockoffs, not least because sub-national governments in Brazil face tight restrictions on borrowing, as set out by the country's Law of Fiscal Responsibility. The FIDC enabled fixed-income investors to gobble up a slice of CPTM risk, something they would not have been able to do in the regular bond market.
"The CPTM securitization can be a model for future transactions in that it used a broad pool of very predictable revenues to give support to a market financing transaction in the public mass transportation sector," said Sonder. "On the other hand, some aspects of this transaction were quite unique, in particular the fact that it was driven by a situation where the company (CPTM) needed to complete a project, and [Sao Paulo] state at that time was not in a position to provide them with additional funding from the budget."
Sources also pointed out that while CPTM went a long way in testing legal and transactional aspects of executing a transport-related securitization, the deal involved a state-run operator and not a concession, which would present its own set of challenges for a securitization. In addition, the use of funds would typically be different.
"In the case of CPTM, the train is operated by the state itself - there is a budget for investment and transportation and you know what the risk is at that level, which is the risk of the state," said Moody's Grieneisen. "In the case of a concessionaire, they need money upfront to make a concession payment."
Following the CPTM transaction, a seven-year FIDC was attempted for Supervia, the operators of a train concession serving Rio de Janeiro. The deal, slated for 2008, was never formally issued and S&P withdrew it's 'brAAf' on the $150 million in senior shares, with sources citing the global crisis as the main culprit in bringing down the transaction. Fanganiello, who was at arranger Standard Bank at the time, declined to comment on the deal's fate.
At any rate, apart from CPTM and Supervia, no other FIDC financing has been attempted for transport infrastructure, and while a year ago players could have argued that the crisis discouraged innovation, the general outlook climate is far more auspicious now.
Some point to regulations as a culprit in turning potential issuers off to FIDCs in the field of transport. The argument is that while players can work around them for the occasional deal, a more viable market would come about with changes.
"A number of issues must be addressed before it can become a useful reality in Brazil," said Henrique Ferreira, managing director of Horus Finance and formerly head of products at HSBC Investments, where he oversaw FIDCs, among other instruments. "In our view, rules and laws applicable to each type of transportation market must be made very clear, especially in regard to the public bidding process, in order to put the possibility of true sale of the receivables involved beyond doubt."
Sources also raised the issue of what happens to an FIDC funding a concessionaire that down the road loses its concession. Can the rights in the FIDC be clawed back for a new operator? A concession contract could cover this, but players would like to see more standardization.
As Horus Finance's Fanganiello pointed out, there is no federal framework that establishes certain rules for all concessions. "This is determined by the concession agreement and changes from state to state," he said. Securitization would benefit tremendously from nationwide criteria. "[That] could help show that concessionaires can't operate differently," Fanganiello added.
In addition, this regulation could establish which services are essential and could therefore not be shut down. While this can be intuitive - a train that shuttles more than a million passengers a day in a major urban center would obviously be treated as a vital service - having the federal government spell this out would help legally buttress potential securitizations, sources said.
Fanganiello said that in the Supervia deal, S&P had reached the conclusion that the service would not be shut down if Supervia itself shut its doors. "But that conclusion was based on the construction of the concession agreement itself and not on regulation," he added.
Sources said energy regulations in Brazil would be a good model, as different facets of the sector - such as the generation, transmission and distribution of electricity - all need to speak to each other in order for the overall system to run smoothly. This is overseen by a national regulator.
Battling Discrimination Against Future Flows
Another regulatory irritant for players is the fact that future flow deals run the risk of being classified by the local regulatory agency CVM as "non-standardized," which signals more risk to investors. "Very few investors are allowed to buy into these securitization funds, as the rules in effect restrict investment in non-standardized funds to very wealthy individuals (either directly or through mutual funds) and allow neither retail nor upper-retail funds to invest in them," Ferreira said.
In the case of potential deals from state-controlled companies, there is also competition from bigger budgets. CPTM's struggle to find a funding source is more uncommon in today's environment, sources said.
"Brazil is doing well economically and therefore public budget allocations for infrastructure projects have increased significantly," said Sonder. "In the state of Sao Paulo, for example, the proportion of funds from the state budget going into new infrastructure has recently been much larger than in the past."
But even with these deterrents, there have been developments that prefigure securitization.
"Over the past few years, the CVM as well as ANBIMA [the National Association of Financial Institutions]have been clarifying the rules, while financial intermediaries and law firms have equipped themselves to be able to arrange these deals," Sonder said. "An increasing number of investors have also become more familiar and comfortable with how the securitization vehicles work."
While a negligible presence in infrastructure financing, the FIDC has become a fixture in other asset classes, giving local investors plenty of opportunities to become acquainted with the concept of securitization. And players are hopeful that in its desire to stimulate investment in infrastructure, the government will respond to the needs of the securitization sector.
"I think there's going to be a lot happening on this front," said Grieneisen "Basically the need is there. Expect to see things - new laws, new measures, new decrees."
Working with a Short-Term Bias.
But no matter how enticing the government makes investing in infrastructure, issuers still have to deal with a market unwilling to lend at the maturities that match their projects, and this holds true whether the financing is structured or vanilla. Deals are expressed as a percentage or spread to the overnight CDI rate, and terming out beyond 10 years can mean paying returns that are uneconomical.
"If you structure a 12-year infrastructure bond, the spread investors will need because it's an illiquid instrument vis-Ã -vis government bonds will not always be compatible with cash flows from a project," Sonder said. "But if you look at the trend of the past few years, the profile of government bonds has moved longer term, which provides a benchmark. It's going in the positive direction of supporting more securitization for the long term."