The Development of the Brazilian Bond Market

Abstract

The bond market represents a large proportion of the GDP in developed countries but it seems to be underdeveloped in emerging markets. In the particular case of Brazil, it is widely known that firms do not have access to enough credit at a reasonable cost. Our goal is to provide a better understanding of the current state of the Brazilian bond market and provide suggestions to promote its development. We focus on the main types of corporate debt, especially domestic bonds, bank loans, international bonds, suppliers, and asset-backed securities. Most domestic bonds are non-convertible, subordinated, and have floating or inflation-indexed coupon rates. Except for international bonds and foreign banks, most financial liabilities are not denominated in foreign currency. Bond financing is positively related to the tangibility of assets and to firm size and negatively associated with the ROA. Firms that have bank loans tend to issue fewer domestic bonds, indicating that domestic bonds are used as an alternative to bank loans. However, firms issuing international bonds also use domestic bonds more often. Furthermore, international bonds are used as an alternative to asset-backed securities. In the case of exporters, they are able to finance through asset-backed securities using the export flow as collateral. There is also evidence that firms with good corporate governance practices issue more international bonds. Our survey results indicate that the greatest problem are the low liquidity of the secondary market, low market capitalization, low quality of legal recourse in the event of default and the absence of a complete benchmark yield curve. The main problems to finance in the domestic market are high interest rates, short maturities, and collateral requirements. We present a wealth of information on the Brazilian bond market, its development, characteristics, legal background, and structure and discuss many of the problems pointed out in our survey results along with recent initiatives to address them as well as our own suggestions for improvement.