Capital Markets in Brazil
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Editor’s note: Capital Markets in Brazil evolved rapidly in the last two decades, recently becoming the dominant source of investment for companies in the country. In the article below, Lefosse Advogados explains this evolution and provides an overview of the latest trends and developments for companies operating the legal and regulatory framework of this increasingly sophisticated market. Lefosse Advogados has been a Band 1 firm in Capital Markets for about a decade and some of its partners, including Carlos Mello and Rodrigo Azevedo Junqueira, are prominent figures in the practice and lead some of the most innovative and high-value issuances in the country.
Capital Markets in Brazil
Since the creation of the Novo Mercado back in 2004, a number of companies have made their debut in the Brazilian stock exchange. The Brazilian capital markets have since developed considerably, undergoing constant and significant reforms in their regulatory framework, in order to simplify the rules, promote higher standards of efficiency and governance, expedite the offering registration process, and reduce registration costs, thus fostering the access of capital markets by local and foreign issuers and investors.
Hence, the Brazilian equity capital markets now have a solid regulatory framework and a more robust and experienced regulatory bodies, mainly the Brazilian Exchange Commission (CVM), which supervises and regulates publicly held corporations, financial institutions and stock exchanges, the National Monetary Council (CMN) and a self-regulatory body called the Brazilian Association of Financial and Capital Market Entities (ANBIMA), which sets forth governance rules applicable to its associates (banks, underwriters, brokerage firms, investment banks, among others). In addition, companies wishing to access the markets must also comply with the minimum corporate governance requirements and listing rules set forth by B3 S.A. – Brasil, Bolsa, Balcão (B3), the only Brazilian registered stock exchange.
The improvement of the overall conjuncture of the Brazilian capital markets has strengthen the confidence of the investors and has attracted a large number of new investors over the years, ranking at similar levels of high-profile global markets. Recently, we have observed a continuous shift in the investors’ profile in Brazil. The local investment funds are highly capitalized, looking for the maximization of their investment return, with the advantage of being more familiar with the Brazilian companies, the historical political and economic environment, as well as the trends in our Government’s policies. Therefore, the local investment funds are considerably increasing their participation in the equity capital markets. A few years ago, the allocation of international investors in an offering’s bookbuilding would range between 70% to 80% whereas the average is close to 50% nowadays.
Another recent remark is the higher liquidity in Brazilian capital markets, which proportionally increases the appetite of the investors. There is a maturation of the mid-sized investor in Brazil and there is an ongoing review in the current regulation to accommodate the allocation of equity offerings to such public. Also, the Brazilian private equity and venture capital industries are developing at a fast pace, with a significant number of invested companies’ cycles mature. Even though M&A might be an alternative for disinvestment, a public offering of shares is likely to have a better investment return. All of this gives space to a certain level of consistency in the Brazilian equity capital markets activities in contrast with the moments of sharp peaks observed in the past years.
The year 2021 in review
The year 2021 has seen a significant growth in the number of initial public offerings (IPO) and subsequent offers (follow-on) at B3. The investment in shares proved to be an attractive alternative in a context of unprecedented low interest rates in the first half of the year, allied to optimism about the heating of the economy in the face of the progressive advances in COVID-19 vaccination plans.
According to CVM data, 69 share offerings were concluded in 2021, summing more than R$127 billion, numbers significantly higher than those registered between 2011 and 2019. Among these offerings, there were 45 IPOs, a record number that has surpassed the frenzy year of 2007. The year was marked by some relevant operations in the Brazilian capital market, such as the follow-ons of Petrobras and Rede D'Or, with a total funding of R$11.3 billion and R$4.9 billion, respectively, in addition to IPOs from quite diverse issuers, including some issuers in industries without comparable players listed in B3. Also, in 2021 we have seen an increase in the interest of Brazilian companies in carrying out their IPOs in the US stock exchanges, totalling five stock offerings completed abroad, including the New York Stock Exchange listing of Brazilian fintech company Nubank in the amount of USD2.6 billion, which ranked the bank as the fourth largest Brazilian publicly held company in market value and most valuable bank in Latin America.
Although the year started with a positive perspective in relation to public offerings of shares, from the second half of the year onwards, we have observed several companies putting their offerings on hold in light of a new global economic scenario, with a range of uncertainties still related to the pandemic, the potential increase in interest rates in the United States and the economic impacts on world economies, combined with factors inherent to the local markets such as a high domestic inflation, depreciation of the Brazilian Real, and rising of the local interest rate, all of which resulted in a significant downturn in the Brazilian economy in the year 2021. In the opposite direction of the offerings, during this period merger and acquisition deals have raised significantly due to the difficulties for companies to access capital markets.
In the regulatory framework, in 2021 the Brazilian Corporations Law was amended to reduce corporate bureaucracy and procedural acts, such as the reduction of the publication term of first call notices to shareholders meetings from 30 to 21 days, to provide more protection to minority shareholders, enhance governance standards, including the prohibition of the accumulation of positions of Chairman of the Board of Directors and Chief Executive Officer by the same person, and to create the plural vote, which consists of the assignment of more than one vote per share of a certain class of shares. Also, the CVM enacted new resolutions to simplify the disclosure requirements of publicly held companies, including new provisions regarding digital documents and storing information and to simplify some of the formalities applicable to share capital increases.
A look ahead
The year 2022 in Brazil is likely to be heavily influenced by the presidential elections in October. Historically, in the months preceding the election period the markets are highly volatile, making issuers and investors very cautious in their decision making. In our view, the most part of the potential equity offerings will be postponed to market windows post-elections, with a slowdown in the number of operations. Nevertheless, we believe that the listed companies which are familiar to investors, with business in consolidated sectors of the economy, or companies in sectors with expected growth potential that manage to perform well in spite of the adversities, may continue to be able to access the capital market and price their offerings in 2022.
In addition, the current Government is trying to implement important changes as President Jair Bolsonaro bids for re-election, including a reform in the constitutional limit of Governmental expenditures mainly to honour federal judicial public debt (PEC dos Precatórios) and release space in the Government budget for 2022 for investments in federal Government programs, and privatization of the Union post offices company (Empresa Brasileira de Correios e Telégrafos), which will promote market competition and eliminate entry barrier to new players. The approval or rejection of these and other measures currently in review by Congress might affect the capital markets, especially because a significant proportion of Brazilian stock market indexes relates to government-controlled companies. Also, in case Congress approves pro-market measures in the first half of the year, the situation may improve, as experienced under similar circumstances.
Another proposal of the current Brazilian government is to carry out a substantial tax reform, which will be applicable to investment funds, natural persons, and market agents, aiming at simplifying the Brazilian tax regime and making it more distributive. The main change concerning the taxation of capital markets is related to the simplification of the tax regime applicable to variable income transactions. In this case, the most recent version of the tax reform has established a general tax rate to most variable income transactions carried out in the Brazilian stock exchange, including day trading transactions (which are currently subject to a specific and separate tax regime), and has proposed a quarterly period for the calculation of the gains or losses in transactions on capital markets (currently, they are calculated monthly). If the Brazilian tax reform is approved in 2022, it will give a positive sign to markets, but any changes would only come into force from January 2023. However, discussions are still ongoing and there is no assurance that the proposal will not have to undergo changes until its approval (or rejection) by Congress.
In addition, the CVM is undergoing important review in the public offering rules aiming at harmonizing the current regulatory framework. In this review the CVM might amplify the range of automatic registration (not preceded by a full registration process) to access a larger number of investors with less requirements, eliminate the use of a prospectus in case of offering to qualified investors and its simplification case of the others, reduction of the quiet period from 60 to 30 days prior to the registration first filing, among other potential changes.
Also, in light of the considerable growth of the number of investors – according to B3 data, the number of investors in the B3 has risen 350% since 2018 – the B3 is currently reviewing the minimum free-float percentage requirement and has already indicated that the 25% of the total capital stock is higher than the international average of stock exchanges worldwide. If a reduction is approved, it will probably attract more companies to access the markets, especially companies with relevant controlling shareholders.
Finally, it is important to point out that the Brazilian capital markets are highly volatile, so it is still too early to have a sense of how the markets will actually respond to all of the uncertainties of the year 2022. However, we have optimistic views and thoroughly believe there is a solid demand of companies, investment funds and other market agents to access the Brazilian equity capital markets. Hence, any improvement in the economic and political conjuncture might have positive effects in the markets overall.