NEW YORK--(BUSINESS WIRE)--Private local banks and investors are expected to assume larger roles in financing Brazil's growing infrastructure needs as government-sponsored lending sources may face limitations under any newly elected government, according to Fitch Ratings. Higher exposure to infrastructure poses manageable risks to Brazil's private banks, so long as special attention is paid to individual project/sponsor concentrations, industry exposure and monitoring of the evolution of projects.
The shift toward more private bank and capital markets financing comes as Brazil's government-sponsored Banco Nacional de Desenvolvimento Economico e Social (BNDES) reduces the speed of financing infrastructure projects. BNDES has long been a key competitor to Brazil's private banks, which have not been able to compete with BNDES's below-market rates for infrastructure projects.
Tackling government spending is expected to be a key agenda item for new leaders following Brazil's elections. We believe that a scenario of lower government expenditures could eventually lead BNDES to expand its infrastructure credit at a slower pace in the long term. Market estimates for infrastructure funding needs over the next three to four years are vast, reaching upwards of BRL 1 trillion, primarily in energy, telecommunications, railways and roads. In addition, BNDES's low returns - due to its development role - and consequent tighter capitalization levels (notably measured by Fitch's Core Capital of 12.1%, as of June 2014) indicate a more contained credit appetite over the medium to long term.
Among the challenges facing private banks as they assume a larger role in infrastructure financing is achieving a longer term funding mix. Fitch believes that supplementing project funding with domestic capital market issuances would be more favorable for bank credit quality. This would lead to lower on-balance sheet concentrations of infrastructure-related loans as, over the medium-term, these transactions may be structured to attract market participants such as pension funds and asset managers.
Private banks may also seek cross-border funding to support long term infrastructure financing. Bilateral loans from development agencies and multilateral funds are other funding alternatives. The impediment so far has been heavy hedging costs, particularly for the long tenors associated with infrastructure projects, a barrier that is not expected to be resolved in the short to medium term.
For many of Brazil's private banks, infrastructure financing exposure has typically represented about 12%-17% of the total loan portfolio. However, little of the exposure has been direct lending, rather in the form of letters of credit, guarantees, and bridge-loans that are ultimately taken out by BNDES.
Additional information is available on www.fitchratings.com.
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