BRAZIL: An Introduction to Capital Markets

Since the early 2000s, the Brazilian capital markets have developed considerably, there have been constant and significant reform to the regulatory framework to promote higher standards of transparency and corporate governance, expedite the offering registration process, simplify rules, and reduce registration costs.

The Brazilian equity capital markets are mainly regulated by the Brazilian Securities and Exchange Commission (CVM), jointly with the National Monetary Council (CMN), the Brazilian Association of Financial and Capital Market Entities (ANBIMA) and B3 S.A. – Brasil, Bolsa, Balcão (B3), the Brazilian stock exchange. The CVM is also responsible for supervising public companies, underwriters, investment funds, portfolio managers, investors in general and other capital markets participants.

The improvement of the overall state of the Brazilian capital markets has bolstered investor confidence and attracted many new investors in recent years.

The Year 2023 in Review  

From a regulatory perspective, the year 2023 was marked by a significant review of the existing regulations applicable to the registration of public offerings, public companies, Brazilian depositary receipts (BDRs) and investment funds.

In February 2023, Casino Guichard-Perrachon sold its shares in Sendas Distribuidora (Assaí), in a BRL4 billion debut secondary public offering. The markets interpreted the follow-on offering as a good sign, since demand exceeded supply.

Since then, a number of significant follow-on offerings have been priced, of which the largest was BRF, which raised BRL5.4 billion. In the second largest public offering of the year, Companhia Paranaense de Energia – Copel raised BR5.2 billion in its privatisation follow-on offering. This was the first privatisation of a state-owned company owned by a federal state in Brazil (Paraná) and it may have opened space for other Brazilian state-owned companies (at both state and federal level) aiming to access the markets. This offering was also the first public offering addressed to the general public (ie, not restricted to professional investors and existing shareholders) under the new offering regulations.

By mid-October 2023, no IPO had been registered with the CVM and 18 follow-on offerings had been concluded, totalling BRL29.8 billion. Financial experts expect that the successful pricing of the follow-on deals, combined with improvements in the macroeconomic scenario, may lead to a more favourable environment for IPO debuts in 2024.

From an economic standpoint, the year has been marked by overall instability, as result of continuous increases in interest rates domestically and abroad intended to reduce inflation. In Brazil, a new government took office and there is still uncertainty with respect to the approval of its proposed tax reform and discipline over public expenditure. Also, earlier in 2023, allegations of accounting irregularities involving Lojas Americanas, one of the largest Brazilian retailers listed on the stock exchange, affected the availability of local credit and investors’ appetite, which resulted in a decrease in capital markets deals in the first semester.

In July, the Brazilian Federal Congress approved the first phase of a tax reform, which, according to tax experts, has been generally well received. The proposed reform includes a new unified value added tax, and important changes to income tax – such as taxation of offshore investments, exclusive investment funds and the distribution of interest on share capital (JCP) – are currently under discussion.

In early October 2023, the Brazilian Central Bank decreased interest rate for the first time in several months; an indication that domestic inflation might be decelerating, which could support further reductions in local interest rates.

A Look Ahead  

After a sluggish year for IPOs, investment banks project that capital markets will accelerate again in the first semester of 2024, mainly in consideration of the expected recovery of the global economy, further decreases in domestic interest rates and the fact that companies often resume plans to raise money through the Brazilian stock market early in the year.

In the next year, follow-on deals are expected to be smaller than the ones targeted in 2023, which ranged from BRL3 billion to BRL5 billion and mainly involved companies with operations above BRL1.5 billion. For IPOs, investment bankers affirmed that the next IPO season will not be like 2020 and 2021 (years which saw approximately 80 initial offerings annually), but they estimate a range from 10 to 20 offerings from diverse sectors including health, education, agriculture, infrastructure, energy and sewage, and typically in larger offerings to allow investors liquidity in the secondary market.

Brazil also stands to receive greater investment due to investors increasingly seeking to replace offshoring in other emerging economies, selecting politically aligned or neutral partners to do business with. The ongoing shift in Brazil’s environmental policies towards preservation is likely to continue to attract ESG-conscious investors. Furthermore, bankers are expecting the return of foreign strategic investors looking for long-term investments in the local markets. Such investors have made a significant contribution to the Brazilian markets in the past, but they have ceased to invest in Brazil in the last three years.

According to the Organization for Economic Co-operation and Development (OECD), Brazil was the second largest recipient of foreign direct investment in the first quarter of 2023, behind only the United States. Compared to other markets, the macroeconomic picture for Brazil in 2024 is positive, with more controlled inflation rates, a cycle of interest rate reduction and growth of economic activities. If the tax reform is fully approved, it is likely to foster economic growth and promote monetary stability, which may help ease tensions in the local market.

In conclusion, although it is too early to have a definitive sense of how the markets will behave in 2024, there are reasons to take an optimistic view and believe the year might present great opportunities for companies wanting to access the capital markets.