NEW YORK & RIO DE JANEIRO--(BUSINESS WIRE)--The Brazilian Development Bank's (Banco Nacional de Desenvolvimento Economico e Social [BNDES]) planned prepayment of BRL100bn (USD29bn) in debt owed to the Brazilian federal government will reduce lending capacity and contribute to a decline in BNDES's market share over the longer term, says Fitch Ratings.
The repayment is a government initiative to help with public debt reduction, with the amount equating to 20% of BNDES's debt to the national treasury (TN) and 12% of total BNDES funding. Excluding hybrid capital, TN funds totaled 61% of BNDES's funding, while the Workers' Assistance Fund - a public entity - accounted for a further 28% as of June 2016.
The planned repayment was approved by the Tribunal de Contas da Uniao (Federal Court of Accounts) last week, and recent media statements from BNDES leadership indicate that it will be fast-tracked and occur before the end of 2016, compared to an initial plan for payment across three installments over several years.
The repayment is of sufficient magnitude to affect BNDES's business strategy and is in line with Fitch's expectation for market share to decline over the long term, particularly since Fitch does not expect TN to provide any new funding to the bank at preferential rates.
The new strategy will likely see BNDES reduce its participation in long-term preferential financing and focus more on certain priority sectors. These could include infrastructure, renewable energy, public administration, environmental projects, corporate social investments and micro, small and medium-sized enterprises.
This will also mean an increased role for the private sector in long-term corporate and project financing, which may lead to an increase in long-term lending rates. This could be a challenge for the government, unless alternative sources of funding are found as companies' demand for loans is likely to dampen as subsidized loans decline, exacerbating the infrastructure bottlenecks in the country.
BNDES lending has already fallen in line with the overall contraction in the economy and severe deterioration in the Brazilian operating environment since 2015. Outstanding loans fell by 6.3% in 1H2016 following 7% growth in 2015 and 16% average annual increases from 2011-2014. Loan disbursements had fallen even more dramatically, declining by 28% in 2015 and down by 34% yoy according to latest figures for September.
In terms of funding, Fitch believes that BNDES will rely more on direct bond issuance as a result. Domestic and international market issuance accounted for only 2% and 5%, respectively, of total BNDES liabilities as of June 2016.
Despite the scale of the repayment, Fitch believes that it should be manageable with respect to the bank's liquidity position. The bank had about BRL160 billion of liquid government bonds and BRL66 billion of loans maturing by year-end, as of June 2016. The repayment has no effect on capitalization.
Fitch maintains that BNDES will continue to play a key policy role and that the changes do not reflect any shift in the government's propensity for support.
BNDES is rated 'BB' with a Negative Outlook with its rating aligned with Brazil's sovereign rating.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Banco Nacional de Desenvolvimento Economico e Social
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