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Capital Market Volumes Improve – but CRA Issuances Set New Records

As Brazil continues to navigate itself out of one of the worst recessions in the country’s history, record volumes of agribusiness receivables certificates – or CRAs, as they are known colloquially – were issued in 2016. Investors and analysts believe the trend could continue in 2017 – especially with the industry’s first cross-border dollar denominated CRA in the offing.

Feb 14, 2017 // 5:21PM

Recent figures released by ANBIMA, Brazil’s capital markets association, attest to the surge. Brazilian companies excluding leasing organisations raised BRL178.5bn through a variety of capital markets instruments in 2016, a 27.5% increase on 2015. Debentures continued to lead domestic market offerings, with BRL57bn, but were down 11.6% from the previous year. However, issuance of real estate and agribusiness‐backed securities, CRI and CRA, increased 72.7% and 193% respectively, and combined these instruments now account for over a quarter of all debt financing in Brazil.

Since the recession hit two years ago, CRAs became a hit with retail investors, particularly due to the income tax breaks applicable to them, while local companies loved them because they offer cheap financing at a time when other funding sources like syndicated loans, local debentures and foreign bond sales dried up or were considered too expensive.

These real-denominated notes are backed by receivables on crops that have been forward-sold, which also makes them relatively safe in today’s emerging-market selloff, and resilient to commodity-price swings.

Agriculture was one of the few industries that expanded as the rest of Brazil’s economy contracted 2.6% in the second quarter of 2016. The value of the country’s crop output increased 1.8% in 2016. Analysts suspect this is one of the factors that made CRAs more attractive for retail investors when compared to similar securities like CRIs (real estate debentures), particularly with real estate growth remaining so subdued.

Felipe Ribeiro, a finance manager at securitization company Grupo Gaia, said the reason why these markets have shined at a time of crisis is mainly because demand has massively exceeded supply, leading to significant price compression.

This was demonstrated repeatedly in 2016, when pulp producers Fibria Celulose SA and Suzano Papel e Celulose SA, wood-panel manufacturer Duratex SA, and processed-food maker BRF SA raised almost BRL3.3bn through CRAs. These local companies paid an average 119.9% when fundraising through ordinary debentures, but often paid between 96% to 98% of the benchmark CDI rate – a huge discount.

The Cross-Border CRA: Will it Finally Happen?

While domestic retail investors have ploughed into these assets, international fund managers have long talked about the possibility of a “cross-border” CRA denominated in US dollars. Without a clear indication of how the tax incentives currently applied to CRAs denominated in reals would work on cross-border CRA trades, and until larger institutional investors and hedge funds get bought into the asset class, there is unlikely to be much progress on this front.

“When a foreign investor comes to invest in Brazil, bonds have tax exemptions-but this doesn´t include CRAs,” Ribeiro explained.

Ribeiro nevertheless believes that 2017 will finally be the year we see a cross-border CRAs, and his group is currently trying to partner with a large “foreign sponsor” in the hopes of developing the asset class. A source also disclosed to Bonds & Loans that EcoAgro, another Brazilian securitisation company, is working with a number of agribusinesses and foreign investors – and could launch the first US dollar-denominated CRA as early as May 2017.

The main hurdle for these securitisation firms has been to find ways of compensating for the up to 15% in tax exemptions granted to local investors buying into CRAs. With the Brazilian Exchange Commission (CVM) looking to pass new rules on CRAs that could among other things claw-back some of the tax incentives investors enjoy, time could be of the essence.

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