Financing Brazil's future: The new infrastructure bond regulation

Approved in late 2023 by congress and signed off by President Luiz Inácio Lula da Silva earlier this year, Brazil's new regulation for infrastructure debentures published last week impacts not only the infrastructure sector but also renewable energy, water, and oil and gas.

There are two classes of debentures that carry tax breaks and are used for projects: infrastructure debentures, approved by congress last year; and incentivized debentures, in existence since 2011. Incentivized debentures have tax exemptions for investors who acquire them, while infrastructure debentures offer tax incentives for the companies that issue these bonds. 

Celso Contin, a partner at the Vieira Rezende law firm focused on structured finance and infrastructure, speaks with BNamericas about the impact and key aspects of the new regulation.

BNamericas: What will the effects be now that the new regulation for infrastructure debentures has been published?

Contin: The law had already been approved and many companies were waiting for the regulations to be published before moving forward.

So in the very short term we'll see a series of debenture issues that were planned, but that were awaiting the regulation. In the long term, the effects will vary depending on the sector.

The law removes [tax] benefits for the fossil fuel segment and favors projects linked to renewable energy sources.

BNamericas: In relation to the most benefited sectors, are there any details pending?

Contin: The renewable energy sector will benefit. We saw a long-term request related to the suitability issue of distributed generation projects that appears to have been met in this decree.

I use the word appears because in the decree there’s a paragraph that says that additional ministerial ordinances will be published with details on the rules governing each sector. So only after the publication of these ordinances will we have greater clarity.

BNamericas: What are the negative aspects of the regulation?

Contin: The regulation excluded the possibility of using proceeds from debenture issues to pay for [auction] fees.

I see this as a contradiction because for an investor, when he evaluates a project he always looks at the entire cost, both the investments to be made and the expenses related to fees.

In my view, the use of debenture proceeds to pay fees should have been maintained. Even for the government it would have been attractive, as it would be in its interest to obtain the highest possible fee at auctions and not limit the possibility of companies paying the fees.

BNamericas: How about the positive aspects?

Contin: I see it as positive the inclusion of foreign exchange rate protection mechanisms in the regulation, which will likely attract more foreign investors to the issues.

However, we have to evaluate the market mechanisms that will be used in this exchange rate protection. Debenture issues with a very long maturity may have difficulty finding equivalent long-term hedging mechanisms in the local market. This is an aspect that the market will have to study carefully.

BNamericas: The regulation doesn’t benefit projects in the oil sector. Does this represent a challenge for financing projects in the sector?

Contin: This is a sector that was excluded from the tax benefit rules. However, it’s a major sector for the economy and one with revenues in US dollars that will not face difficulties in obtaining international financing. It's a sector that can access international credit easily.

BNamericas: Sanitation companies have used debenture issues to finance their projects. How do you see the effects of the new regulation on this sector?

Contin: The regulation makes it more attractive for pension funds and international investors to invest in debentures issued by the sector. On the other hand, there’s a negative aspect in terms of the ban on using debenture proceeds to pay fees.

BNamericas: What has limited the number of bidders in the country’s recent auctions?

Contin: I see several factors, but I think that over the years the Brazilian government has learned to better communicate with the market, to understand the market's needs.

Looking ahead, as a positive factor I see the scenario of lower interest rates. When we have a high interest rate environment, it makes any type of financing more difficult and strongly limits the participation of the number of companies in the auctions.