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Surging Capital Markets: Outlook and Review Breakfast Seminar organized by the Brazilian-American Chamber of Commerce New York City, October 30, 2009. Short History of the Brazilian Capital Markets.
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Surging Capital Markets: Outlook and ReviewBreakfast Seminar organized by theBrazilian-American Chamber of CommerceNew York City, October 30, 2009
Short History of the Brazilian Capital Markets • Key features (actual or perceived) of the Brazilian capital markets during the early to mid-1990’s included: • Low levels of liquidity in most markets and regulatory impediments preventing many kinds of transactions • Poor corporate governance practices of Brazilian listed companies • Frequent opportunistic behavior of controlling shareholders • Poor policing of fiduciary duties of management • Inability of capital markets to provide funding alternatives for Brazilian companies • Distracted by failure of major banks caused by end of inflation (PROER) • Trading environments prone to failure, manipulation or insider trading • Poor reputation of clearing and settlement systems (e.g., Rio stock exchange debacle) • Limited impetus for reform among market players • Key exception is Annex IV, created in 1991
Short History: A Reaction and Some Preparation • From late 1990’s to 2002, windows of market opportunities compel a regulatory reaction that would prepare the Brazilian capital market for a new era of growth and development. Key elements include: • Large number of privatization-related capital markets transactions prompt • the acquisition of soft skills by relevant professionals • initial efforts at self-regulation to protect market from abuse • renewed attention to corporate governance issues • Growing appreciation for stable monetary policies, self-insurance against sudden stops, risks caused by currency mismatches • Creation of more user-friendly, tax-favorable status for non-resident investors in financial markets (Resolution 2689) • Consolidation of stock exchanges • Revamping of the payment systems, including clearing systems
Short History : A Reaction and Some Preparation • Change in foreign exchange regulations begin to allow Brazilian investors to invest abroad and greater movement of capital • Creation of special segments for companies adopting higher corporate governance standard as a self-regulatory initiative (Novo Mercado) • Reforms reveal new, heightened standards and provide basic legal infrastructure • Corporate and capital markets laws amended in 1997, 2001 and 2002 • CVM rules react to market events (CVM Rules 319, 323, others) • Anbid Self-regulatory Code for Public Offerings (incorporated by CVM Rule 400) • Insider trading regulations (CVM Rule 358) • Tender offer regulations (CVM Rule 409) • Financial markets in 2002 demonstrated the need for robust and sophisticated financial management
Short History: A Tailwind • Beginning in 2003, Brazilian capital markets began to enjoy some of the benefits of initial reform • International liquidity fueled even greater increase in scale • Novo Mercado listing replaced U.S. listing as a bonding mechanism • Opened markets to smaller issuers • Shifted center of gravity of deal-making to São Paulo • Feedback loop of success • Surge in IPOs from 2003 to early 2008 • Wide variety of issuers (with large number of real estate companies) • Growing interest from individual investors, which is a political boon • Increasing attractiveness to private equity investors • Trend towards greater formality in business • Success radiates out to other markets • Securitization market segment
Short History: A Tailwind • Success radiates out to other markets • Asset management industry adopts self-regulatory code (also in reaction to 2002) and grows vertiginously • Domestic private equity market matures • São Paulo acts as a regional financial center • Decrease in interest rates throughout period • Investment grade awarded in 2008 • Valuations reach very high levels
Short History: the Crisis • Beginning in 2008, the equity markets essentially closed • Ibovespa lost more than 60% in value from peak in May 2008 to trough in late 2008 • Liquidity concerns at mid-size banks, but banking supervision largely worked • Surprise OTC derivative losses at major listed (and unlisted) companies • No interruption in trading or settlement • Very few allegations of significant fraud • No overall loss of credibility of management or markets • Macroeconomic policies mitigated damage • Self-insurance against sudden stops because of large reserves and effective liability management • Fiscal and monetary flexibility to provide stimulus • Ability to extend credit upon withdrawal of money center banks
Short History: the Recovery • From March 2009, market activity has increased steadily • Valuations have recovered significantly (Ibovespa at 60,000 plus) • Innovative transactions have resumed • Concerns about a frothy market have returned • Key outcomes are: • Markets (not prices) proved to be robust • Overall credibility of issuers was confirmed • Capital markets shown to be viable financing mechanism
Short History: Looking Forward • Emboldened by success, regulators have become proactive and bold • Key features of future regulatory action are: • focus on surveillance and monitoring, based on new organization at CVM • settlement procedures • insider trading • a few fundamental improvements • proxy rules published for comment • integrated disclosure system (including shelf-registration) • second round of comments ended on October 9 • disclosure of compensation • management certification • continuing self-regulatory initiatives • Anbid, BSM, Novo Mercado
Short History: Looking Forward • Key features of future regulatory action are (cont.): • Ancor, Abrasca, others • Novo Mercado • Review of listing requirements is under way • Ambitious revamping of listing requirements, includes • ban on poison pills • Coordinated with CVM regulatory action • advisory opinion on validity of provisions preventing removal of poison pills from by-laws • expected rules regarding tender offer upon creeping takeover
Short History: Looking Forward • Key features of future regulatory action are (cont.): • Convergence of accounting standards with IFRS • Herculean effort led by Eliseu Martins, with issuance of dozens of CVM accounting rules beginning in 2007, to conclude in 2010 • Suitability • Abandoned initiative in May 2007 • Renewed and reactive rule-making in 2009, subject to expected self-regulation or standard-setting • Disclosure of derivatives liability • Effort to ensure greater availability of information, including derivatives registered with CETIP • Greater variety of offering templates • Public offerings with limited selling efforts • Offerings of investment funds
Short History: Looking Forward • Key features of future regulatory action are (cont.): • Continuing increase in variety of investment funds • FIPs, FIPs Infraestrutura, Real Estate Funds, others • Improvements at the margin in regulation and supervision of: • Mergers and other major corporate events
Short History: Looking Forward • Key trends in the Brazilian capital markets include: • increasingly open access to international markets by Brazilian investors (including regulated entities, such as banks and pension funds) • development of service industry (research, advisory, market-making, brokerage services, etc.) • development of market for corporate control as poison pills are removed • testing of going-private provisions (as soon as valuations allow) • experiment with Novo Mercado rule-making model • substantial increase in liquidity and number of listed companies • increased use of equity markets as an exit strategy by private equity • Recent changes in taxation of capital markets • IOF • Other changes
Further inquiries If you have any questions regarding this presentation, please contact: In New York City In São Paulo Daniel Calhman de Miranda José Eduardo Carneiro Queiroz 135 East 57th Street 12th Floor Al. Joaquim Eugênio de Lima, 447 New York, NY, USA São Paulo, SP, Brazil Tel.: 1-646-695-1100 Tel.:55-11-3147-7634 Fax: 1-646-695-1110 Fax: 55-11-3147-7770