Innovative export support is landing in Brazil, writes Luis Waldmann, with the likes of DEG and Darby Overseas targeting the export and infrastructure sectors.
DEG, a subsidiary of Germany’s KfW, has intensified efforts in Brazil by investing in equity stakes and offering mezzanine finance, amid high liquidity and longer tenors in the local debt markets.
“We are now getting more and more into products like mezzanine finance and equity in Brazil, where we see lots of opportunities,” says Bertram Dreyer, head of DEG’s Mercosur office in So Paulo. Mezzanine finance is a product between senior debt and equity, which entitles the lender to higher returns compared to traditional senior debt.
Dreyer adds: “Of course we like to finance exporters, however the Brazilian market has become more developed and there are increasingly funds available for them on a mid and long-term basis. In such cases, DEG is complementary, offering longer tenors and ensuring adequate asset/liability match.” Conversely, DEG’s US$80mn portfolio in Argentina is made up almost entirely by loans to exporters. Standard & Poor’s rates Argentina B+, three notches below Brazil’s BB+.
Exposure in Brazil equals roughly US$160mn spread in 15 companies and DEG expects to boost it by US$70mn yearly. Equity accounts for 20% of the Brazil portfolio. DEG loans can be as long as 15 years for infrastructure.
The Cologne-headquartered institution specialises in long-term finance to private sector companies in emerging markets. In Brazil, DEG focuses on companies with revenues between R60mn (US$31mn) and R600mn, purchasing minority stakes as well as offering them mezzanine finance and traditional loans, Dreyer says. Second-tier banks and infrastructure projects, especially concerning renewable energy, are also targeted.
The KfW subsidiary, Europe’s largest private sector development finance institution, is aiming at mid-market firms and banks to make up for lower demand from the top-tier names, Dreyer concedes.
Before 2002, DEG clientele included leading Brazilian companies from manufacturing sector as well as leading private banks, he says. But as large Brazilian companies gained easier access to international capital markets, DEG started offering more sophisticated products to different clients.
As for the rest of the region, Dreyer is seeing strong demand for long-term finance from Argentina and Uruguay. Moreover, DEG started to evaluate business opportunities in Paraguay, where there are increasing foreign investor activities.
DEG, which was founded in 1962, has offices in So Paulo and Mexico City, and is opening another one in Lima, Peru. Its total project portfolio amounted to €3.05bn at the end of 2006. KfW, Germany’s state development bank, is based in Frankfurt.
Brazil infrastructure fund
Likewise, Darby Overseas Investments, a US-based emerging markets investment firm, is on the final stage of raising a mezzanine fund that will amount to around R400mn (US$215mn). The resources will come from Brazilian pension funds, says Pedro Batalla, managing director at Darby in Washington, DC.
The new fund’s focus will be Brazilian infrastructure. Darby will run the fund in partnership with Stratus, an eight-year-old firm that is based in So Paulo.
Darby hopes to make investments in roads, ports and other infrastructure to address export-related bottlenecks, clearing the way for greater exports, Batalla says. Bad infrastructure is among the three worst problems hindering Brazilian exports, he says.
Batalla says: “When a country grows too quickly and investments in infrastructure are not enough, after two or three years the system presents a host of problems such as the electric system years ago, and now the airports and air traffic control.”
Provided investors will be Brazilian pension funds, any currency mismatch will be eliminated as assets and liabilities will be in the same currency. Darby has three funds with investments in Brazil, one of them being a mezzanine fund aimed at the whole of Latin America. Investments stemming from the new R400mn mezzanine fund will not be limited to export-oriented infrastructure.