Brazil boosting debentures to drive sanitation, infrastructure projects

The Brazilian government is taking steps to increase the use of local bonds, specifically debentures, to finance projects in key infrastructure sectors such as sanitation, ports and airports.

The cities ministry is preparing a framework that will enable private sector firms to increase the proportion of debentures used to finance tender fees in the sanitation sector.

Currently, companies that win concessions or PPP contracts in auctions – based on the highest bid – are allowed to finance up to 50% of the amount offered with debentures. The government now aims to increase this to 70%, according to an official consulted by BNamericas.

This measure has been communicated to market participants and is generating positive feedback.

"Increasing the share of concession fees that can be financed through debentures is not a game-changer, but it is a positive step. This is yet another adjustment that is likely to attract more participants to upcoming auctions," Percy Soares Neto, founder of water and waste consultancy Ikigai, told BNamericas.

Earlier this month, Piauí state was forced to postpone the auction of a 9.57 billion-real (US$1.74bn) water concession scheduled for August 14, as interested companies requested contract revisions, including improved financing conditions.

Meanwhile, amid reports of the new government measures circulating in the sector, four firms submitted proposals for the upcoming water and sewerage concession tender in Sergipe state, including a new entrant to the sector.

Water companies BRK Ambiental, Aegea Saneamento and Iguá Saneamento, along with investment firm Pátria Investimentos, submitted proposals and guarantees, according to a person familiar with the process who spoke on condition of anonymity.

The 35-year contract in Sergipe involves investments of 6.3bn reais, and the auction is scheduled for September 4.

"This will be the first sanitation auction where we see Pátria Investimentos competing for a contract in the sector," Soares said.

According to sources with knowledge of the matter, Pátria Investimentos will participate in the Sergipe auction jointly with local construction firms Heca Construtora and Torre.

The water sector has seen increasing participation from private companies following a regulatory change in 2020 that opened up the market, which was previously dominated by state-owned companies.

Amid a series of upcoming auctions and significant investment needs, debentures have become one of the preferred financing mechanisms for sector participants, as in other infrastructure sectors.

There are two types of debentures commonly used in infrastructure: incentive debentures, which offer a tax break to investors and have been available since 2011, and infrastructure debentures, which provide a tax exemption to the issuing company.

The latter mechanism was authorized at the start of this year, but companies in certain sectors have yet to utilize them due to the lack of specific frameworks for issuance – a situation that is now changing.

Recently, the ports and airports ministry announced rules for sector participants to use infrastructure debentures in their projects.

"The ministry is introducing infrastructure debentures to strengthen Brazil's port and airport sectors. Our agenda focuses on reducing bureaucracy, accelerating investment portfolios and providing predictability to the sector. I am confident this will significantly bolster the credit agenda for ports, aviation, and waterways. If we time it right, we could sign more than 20bn reais in debentures over the next 24 months," minister Silvio Costa Filho said in a statement.

One measure announced by the ministry is to allow the issuance of debentures to finance investments in port and airport infrastructure without requiring prior authorization from the ministry, which speeds up the process. Currently, this authorization takes two to three months.

The ministry has created a link with step-by-step instructions for companies interested in using debentures to finance their projects in the sector under the new regulations. The process can be seen here.

Despite some ministries in Brazil still finalizing guidelines for the use of these bonds in their respective sectors, the use of debentures has surged.

In the first half of the year, tax-exempt debentures raised a total of 64.5bn reais, more than 95% of the total volume raised through such bonds in full-year 2023, according to the Brazilian financial and capital markets association (Anbima).

The sectors that issued the most debentures during this period were electric energy, transportation and logistics, and sanitation, which raised 29.9bn reais, 9bn reais and 7.8bn reais, respectively, according to Anbima.