Fredrik Karlsson

We present our findings on which Brazilian law firms worked on the most and highest value debt capital markets deals in 2019, according to Latin Lawyer’s research.

Latin Lawyer data shows that Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados worked on more debt capital markets transactions than any other Brazilian firm in 2019, while Pinheiro Neto Advogados had the highest combined deal value, US$21 billion.

According to our data, which is based on deals that took place in 2019 and were submitted to Latin Lawyer by law firms, Mattos Filho advised on 89 debt transactions during 2019, helping companies raise more than US$11 billion.

Machado Meyer Advogados followed on 84 deals, while Pinheiro Neto landed a place on nearly as many – 79. Stocche Forbes Advogados came in as the fourth-busiest firm in deal volume, ahead of Lefosse Advogados.

No other firm had a combined deal value as big as Pinheiro Neto, which helped Brazilian companies raise US$21 billion. Machado Meyer also scored strongly, advising on debt taps worth nearly US$19 billion, ahead of Stocche Forbes on close to US$14 billion; Lefosse on US$12 billion and Mattos Filho’s US$11 billion.

Latin Lawyer recorded 495 Brazilian debt capital markets transactions in 2019. Law firms helped companies raise a total of US$99 billion across those.

The market responded positively to policies initiated by the new Jair Bolsonaro-led administration, which took office in January 2019. Some of these policies are yet to pass congress, but a long-awaited pension reform was finally passed by the Senate in October. “This was the major movement that impacted the macroeconomic scenario in 2019, and it was seen by the government and the market in general as crucial to steadying public finances and restoring market confidence,” comments Mattos Filho partner Bruno Tuca.

The government’s push to revive infrastructure projects was clearly shown by a substantial rise in debt issuances by companies and other entities involved construction and infrastructure projects. Pinheiro Neto partner Ricardo Russo says the number of debt transactions related to infrastructure projects increased by some 50% in 2019 compared to 2018. One such example was Rumo’s US$283 million issuance to help fund a 1,500-kilometre stretch of the new north-south railway crossing through Brazil.

There were other factors impacting Brazil’s debt capital markets in 2019. Stable inflation rates kept companies and financial institutions attracted to invest in Brazil – inflation in 2019 was about 3.7%, just below the Central Bank’s target of 4.25% – while historically low interest rates played an important role in shaping the market too. Brazil began 2019 with a 6% interest rate and ended the year on 4.5% – the lowest in more than two decades.

Low interest rates had various effects on companies’ debt activity. For some companies, it posed a challenge to accessing the market, as they struggled to find investors willing to buy their debt at lower rates, says Pinheiro Neto’s Russo. Machado Meyer partner Raphael Zono notes this was particularly the case towards the end of the year. “Institutional investors started demanding higher yields in order to consider purchasing debt instruments, even from issuers enjoying good rating levels,” he says.

Zono says low rates also prompted some companies to raise capital through equity transactions instead. “Companies prepared to access equity capital markets used this moment to raise capital through IPOs and follow-ons instead of the more traditional debt capital markets,” he says, adding “at least for Brazilian companies, which are more used to operating in times of very high basic interest rates”.

But low rates also enabled first-timers to access the debt capital markets, as under this scenario investors started to look for better returns by accepting greater risks. “The appetite for risk resulted in issuances with longer durations for higher grade issuers, and capital being channelled from more traditional banking deposits and high-grade securities to high-yield securities issued by companies that usually did not have access to the Brazilian capital markets,” explains Mattos Filho’s Tuca.

Companies also took advantage of lower rates, not only to seek new funding, but to make liability management transactions and exchange offers. One entity that made several of these was state-owned oil company Petrobras. In one of its largest, the company made a five-day exchange and a tender offer to repurchase notes worth US$7 billion in September. Cleary Gottlieb Steen & Hamilton LLP in New York and São Paulo and Hogan Lovells LLP in Amsterdam helped the company on that transaction.

Several of Petrobras’ issuances were also significantly oversubscribed by investors, something Stocche Forbes Advogados partner Henrique Filizzola attributes to low interest rates, but also to a tax law that exempts individuals and foreign investors from tax obligations related to the investments.  

Debt capital markets transactions remain the most popular source of funding for Brazilian companies; according to Brazil’s securities and exchange commission (CVM), debt issuances accounted for some 63% of all funding in Brazil in 2019. “This evidences the importance that the debt capital markets is gaining in Brazil,” says Tuca.

The use of debt capital markets instruments allows companies to diversify their creditor base, comments Lefosse's Ricardo Prado. “These are relevant as financing lines available by commercial banks always have limits and debt capital market deals allow companies to keep some banking lines available as a backstop facility,” he says.

Stocche Forbes’ Filizzola credits the substantial increase in Brazil’s debt capital market activity over the past few years in part to the Brazilian Central Bank's enforcement of the Basel III capital requirement in 2013. The regulation was developed after the global financial crisis in 2008 to mitigate risk in the banking sector by requiring banks to maintain proper leverage ratios and keep certain levels of reserve capital on hand. Subsequently, this limited banks to provide conventional loans, prompting companies to look for alternative financing.  

Machado Meyer’s Zono attributes companies’ willingness to raise capital through dept taps to certain tax exemptions outlined in the rules regulating debt issuances. “Banking loans or other forms of alternative financing are used in certain scenarios, such as subsidised loans by governmental entities, including the national development bank (BNDES), or specific loans designed for certain companies, including export loans,” he says. “Debt capital markets remains one of the best and most used sources of financing for Brazilian companies.”

According to CVM, the value of Brazilian debt and equity capital markets transactions in 2019 increased by 62% from 2018 levels.

While debt instruments remain companies’ first solid choice to raise capital, Zono highlights that crowdfunding transactions have grown exponentially. The CVM created a regulatory framework for crowdfunding in 2017. “The number of transactions and their sizes are not comparable to ordinary debt capital markets deals, but this entry-level market has experienced considerable growth,” he says.

Looking ahead, Brazil’s economy and debt capital markets scenario are facing an uncertain outlook, just as any other Latin American country, due to the covid-19 pandemic. The IMF is expecting GDP to drop more than 5% in 2020; by comparison, the country saw 1.1% growth in 2019.

The pandemic has reduced companies’ willingness to invest. Zono believes that future debt transactions could be concentrated in sectors that face severe economic difficulties, such as the aviation industry, in an attempt by the government and the market to keep important industries alive. “We also anticipate many debt restructurings that may be structured using the debt capital markets,” Zono concludes.

Mattos Filho’s Tuca says there has lately been increasing activity in the secondary market, with debt securities being traded with high discounts as investors are moving towards more conservative positions and investments. More activity in the secondary market creates a barrier for transactions in the primary market. Tuca believes there are indications that market volatility will decrease in the third quarter of 2020, with the secondary market trading at more normal levels. “That would again create demand for newly issued debt securities. If this perspective materialises, debt securities related to real estate projects or assets will be first in line,” he says.

Compared to other financial crises, such as the US subprime mortgage crisis which led to the global financial crisis in 2008, Lefosse's Roberto Zarour expects a rapid return of the debt capital market once the pandemic is under control and lockdown restrictions are lifted.

Our findings show three Brazilian firms advised on one multijurisdictional deal each during July and December 2019. To see all multijurisdictional deals from July to December, click here. 

To see all Brazilian debt capital markets deals that took place between July and December in 2019 and submitted to Latin Lawyer, click here. To find information about deals that occurred during the first half of 2019, follow links here for January-February; March-April and May-June. To read our methodology for Latin Lawyer’s transactional league tables, click here.

Latin Lawyer has already published debt capital markets league table for Argentina, Chile, Colombia and Mexico. To view debt capital markets deals that took place in 2019 outside the region's larger jurisdictions, click here. We will continue reporting on debt capital markets activity in upcoming briefings as well as on Brazilian equity capital market deals.

Top Brazilian firms for debt capital markets by total volume:

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Top Brazilian firms for debt capital markets by total value:

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(Latin Lawyer  –  28.05.2020)

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