SAO PAULO, Sept 10 (Reuters) - Brazil’s state development bank, BNDES, which has grown exponentially in local credit markets, will continue to play a central role in the funding of infrastructure projects in Latin America’s largest economy, analysts at Fitch Ratings said on Wednesday.
Credit from BNDES accounts for 23 percent of the value of infrastructure projects in Brazil, according to estimates by Fitch. The bank is considered Brazil’s largest provider of long-term funding for corporations and high-risk projects such as infrastructure.
Two aspects of BNDES’s role in the segment are likely to be tracked by market participants, analysts said at a Fitch event in Sao Paulo. The first is how projects will deal with an apparent mismatch between BNDES-linked and market rate-related borrowing costs. The second is how BNDES will begin to open space for private-sector lenders and capital markets to fund projects.
“It’s hard to assess where the market’s dynamics are headed, but we see that the size of BNDES in this segment has grown too big and the question is how risk will be transferred to other players - and whether these other players will want that risk,” Claudio Gallina, director of financial institutions at Fitch, told Reuters.
The remarks highlight an aspect of BNDES’s role in the market since 2008, when it decided to step up loans to stem the impact of the global financial crisis. Since then, its growing relevance in local credit markets has inhibited other banks from taking on credit risk and has held back the development of deeper debt markets in Brazil. At present, between 12 and 17 percent of the loan books of Brazil’s top 10 commercial banks, including bonds, liens and guarantees, are allocated to infrastructure, Gallina said.
On the issue of borrowing costs, there is a “dormant risk” related to the wide gap between debt servicing expenses paid for by projects with BNDES funds and the significantly higher costs from funds stemming from notes or loans with commercial banks. That risk could climb if the government decides to raise the TJLP, the benchmark interest rate charged by the BNDES for its loans, said Glaucia Calp, Fitch’s senior director for Latin America project finance.
“There’s not a problem in the short term, relative to this issue. But if the policy management of the TJLP changes, we might have to assess the impact on projects’ ability to service their debt,” Calp noted.
At present, infrastructure companies and individual projects finance their operations by paying annual rates of about 13 percent on inflation-linked bonds they sell to investors and over 14 percent rates on loans. BNDES charges a spread that usually does not surpass 3 percentage points above the TJLP, which has remained at 5 percent since the first quarter of 2013. (Editing by Matthew Lewis)