Treasury prepares first issue of sustainable bonds – 06/05/2023 – Market

Brazil will make the first issue of Brazilian bonds with the ESG seal (acronym in English for good environmental, social and governance practices) in the second half of 2023, he told the Sheet the secretary of the National Treasury, Rogério Ceron.

The resources will help finance a series of actions focused on environmental preservation and the promotion of social and governance policies, on which the country will have to report to international investors in the coming years.

The design has not yet been finalized, but one possibility is to issue papers with a ten-year term. “If it is a ten-year issue, for ten years we will have to report periodically on the progress of the process”, he says.

The expectation is that the measure not only serves as a showcase for Brazil, but also contributes to expanding internal engagement in favor of measures aimed at sustainability — under penalty of the country losing credibility and sources of funding.

Upon assuming his third term, in January 2023, President Luiz Inácio Lula da Silva (PT) elected the environmental agenda as one of the focuses of his management, but suffered important defeats, such as the emptying of the Ministry of the Environment in the MP vote (provisional measure) of the structure of government.

The government also manages the dispute between the Environment and Petrobras over the license for the company to explore oil in the pre-salt layer in the basin at the mouth of the Amazon.

The issuance of sustainable bonds will place Brazil within an expanding market in the face of growing concern with issues related to the ESG agenda.

The Treasury began studies in early 2021, still under the government of Jair Bolsonaro (PL) – whose administration was marked by an increase in the rates of fires and deforestation, arousing international criticism.

In May of this year, Lula edited a decree that created the Sovereign Sustainable Finance Committee, formed by the Secretary of the National Treasury and by representatives of ten ministries, including Finance, Environment, Mines and Energy, Agriculture, Agrarian Development and others.

The collegiate will be responsible for defining the issuance strategy, choosing the shares to be financed by the funds and periodically reporting to the investors who purchased the bonds.

According to Ceron, the government has already mapped actions and programs that can attract money from investors under the ESG seal, at a lower cost for the country. The list includes actions to combat deforestation, sustainable agriculture, preservation of native areas, sustainable irrigation and support for technological development programs related to the energy transition.

The committee may also include some action from the social or governance area (such as policies related to the gender agenda), but the secretary points out that the greatest appetite today is for the green theme. “The environmental part is the most expensive agenda for foreign investors at the moment”, he says.

The so-called “framework” for the issuance —a kind of letter of introduction to investors and that has nothing to do with the fiscal framework under discussion in the National Congress— should be completed in June. Afterwards, the Treasury should start a roadshow to potential bond buyers.

“We will be ready to prepare and find the best window in the second half to carry out the issuance”, says Ceron.

“It is a very important milestone. We are going to take the most consistent and concrete step before the world that this path of support for the ecological and energy transition agenda is effective. We are trying to tie the action document well to be able to guarantee this.”

The Brazilian government usually makes at least one international issue per year. The most recent was held on April 5 of this year, when the Lula government raised US$ 2.25 billion, in an auction with high demand and higher interest rates, following the rest of the world.

In an auction for securities with the ESG brand, the fees charged by investors are usually lower, a kind of premium given to the country in view of its commitment to sustainable guidelines.

There are two types of bonds in this market. The first is sustainable issuance, focused on financing a set of actions listed by the government, but without necessarily stamping the money —which gives more flexibility in resource management.

“There is no direct bridge, that money from the issue will pay for that. But it has to have an equivalence. I am making a set of actions that will represent X billion. Then, there is accountability until the total redemption of these issues on compliance that commitment”, explains Ceron.

According to him, this will be the model of the first Brazilian issue in this market. It is the format also used by Colombia, which, in September 2021, raised the equivalent of around US$ 200 million in local currency through a green bond with a 10-year term, to finance sustainable projects. The interest rate was 7% per annum.

But that will not prevent the National Treasury from adhering to the second existing model in the future, which ties the funds raised to the realization of a specific project.

In this case, the reduction in interest rates is even greater compared to a regular issuance of foreign bonds, but the country is subject to a penalty on the rate itself, in case the project is late or does not get off the ground.

The model was used by Uruguay, which, in October 2022, issued a paper linked to specific targets linked to the ESG agenda. The Uruguayan government raised US$ 1.5 billion through a bond with a 12-year term and interest at 5.75% per annum — a rate that may rise or fall depending on whether targets are met.

The Treasury is still analyzing which is the best window to launch the sustainable bond, as well as assessing the currency in which to issue it. Global funding carried out by Brazil has been mostly in dollars, but the ESG market has registered significant demand in euros.

“Of course, the more developed market is always referenced in dollars, but this specific market in euros is also relevant. This decision we will take throughout the roadshow process”, says Ceron.

“We are going to build a market. The idea is for it to be a program. It will not stop at one issue. And we are diversifying, to create possibilities. For some national groups it may make more sense to raise money in euros, so it is important to build a curve that is also referenced in euros.”

The secretary also points out that, in addition to representing a milestone for the country, the ESG issue should expand the access of Brazilian companies to this market.

“It doesn’t matter what amount we make in this issuance, but it should leverage multiples of that in private issuances. It has a symbolic part, it has an important value, even geopolitical, to mark Brazil’s presence abroad in a concrete way. another is you really, from the economic-financial point of view of the sector, open funding [fonte de financiamento] competitive for national groups to invest in the ecological transition, in industry, replacing machinery, doing wind power projects, green hydrogen”, he says.

Members of the Sustainable Sovereign Finance Committee

• Secretary of the National Treasury of the Ministry of Finance (president of the collegiate)
• Ministry of Agriculture and Livestock
• Ministry of Science, Technology and Innovation
• Ministry of Agrarian Development and Family Agriculture
• Ministry of Development and Social Assistance, Family and Fight against Hunger
• Ministry of Development, Industry, Commerce and Services
• Secretariat of Economic Policy of the Ministry of Finance
• Ministry of Integration and Regional Development
• Ministry of Environment and Climate Change
• Ministry of Mines and Energy
• Federal Budget Secretariat of the Ministry of Planning and Budget