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The growing pains experienced by the Brazilian banking market are met with relief when compared to the sizeable losses in the US and UK. While not experiencing the total insulation from the credit crisis that some had predicted, the Brazilian market has maintained its path to maturity through timely mergers in the banking sector and its expanding influence within the region....

The growing pains experienced by the Brazilian banking market are met with relief when compared to the sizeable losses in the US and UK. While not experiencing the total insulation from the credit crisis that some had predicted, the Brazilian market has maintained its path to maturity through timely mergers in the banking sector and its expanding influence within the region.

Announced in November 2008, Banco Itaú and Unibanco's merger signifies the potential future for Brazilian financial institutions. The merger excites Brazilian lawyers because of its potentially positive repercussions in the region. "It's going to be great for the market because they are going to create this one, powerful Latin-American bank," says a partner.

The Itaú merger's example can be extrapolated to the larger market as well, with most banks who survive the present consolidation in Brazil looking to emerge with stronger market positions. "I think the crisis will be construed by them as an opportunity to grow, especially in South America, in the space that was occupied by banks like Citibank and others," suggests a partner.

Access to the capital market, however, has been considerably less promising. In contrast to peak levels in 2006-2007, debt and equity offerings were sparse as sceptical investors watched worldwide exchanges plummet in value. Partners now observe a cautious return to the market, with valuation no longer a knee-jerk reaction to the spectre of uncertainty.

Through the end of 2008, access to credit facilities was stringent in Brazil, with the most noticeable slowdown occurring in December and January 2009. "The crisis is a crisis not only of liquidity, but of trust," comments one partner. This prompted the Brazilian development bank, BNDES, to approve credit lines for infrastructure projects throughout the country, movements similar to initiatives in the US stimulus package. One lawyer predicts "the greatest deals will come from BNDES" in the coming year, noting a growing departure from capital markets to bank financing for law firms.

Despite the slowdown in overall transactional activity, domestic firms retain an optimism not afforded to some of their international colleagues. "Brazilian law firms are well capitalised, so people should be able to go through six months of less activity without major difficulty," says one lawyer.

Fallout from the economic downturn has been slower in Brazil in comparison to larger foreign markets. However, like the surge in IPOs before it, Brazilian M&A activity has been tempered in the wake of the credit crisis....

Fallout from the economic downturn has been slower in Brazil in comparison to larger foreign markets. However, like the surge in IPOs before it, Brazilian M&A activity has been tempered in the wake of the credit crisis. "It was supposed to be a record-breaking year, until October, when almost every single deal came to a halt. People just didn't know what was going to happen," recalls one partner.

Strategic acquisitions spurred by distressed scenarios have dominated the market ever since. But signs of life in the capital markets and the growing presence of private equity, offer domestic firms hope that the hurdles of valuation and uncertainty have passed.

The trend of purely domestic transactions was rooted in the consolidation of several industries as the financial downturn concentrated capital-intensive industries left overgrown from the boom years. Mid-market banks have been a favourite example of lawyers who predicted a flurry of M&A work in the sector for some time. Fuelled by IPOs in 2006-2007, the financial sector swelled, particularly in the mid-market. Now, one financial crisis later, the first mergers have begun to appear. "They thought the good days would never end. It's shopping season, basically," comments one partner.

The merger of Banco Itaú and Unibanco is the most prominent to occur in the wake of the credit crisis. Following 15 months of negotiations that began before the full effects of the recession became evident, the all-stock transaction resulted in what is now the largest financial institution based in Latin America. The Itaú-Unibanco merger, while symptomatic of difficult market conditions, reveals a shift still underway in Brazil, one that consolidates influence in a market quickly growing more sophisticated in the absence of foreign competitors.

Brazil's government has also urged several other mergers in the financial sector as a result of worsening conditions for mid-sized banks. Banco do Brasil, the country's state-owned bank, had its investments authority expanded at the height of the financial crisis, leading to it acquiring a minority stake in Banco Votorantim and a controlling stake in Nossa Caixa in early 2009.

Similarly, beef and ethanol companies have undergone significant consolidation in the past year as well. A depreciating Brazilian real has left beef companies with billions in US-denominated debt and suspended acquisitions announced during the purgatory of boom and bust cycles.

The melancholy permeating the worldwide financial markets, however, has not penetrated as deeply in Brazil as in other jurisdictions. "Even in the streets the mood is much better than in Europe and the US. Much better," says one partner. The traditionally slow months of January and February have yielded a more settled market. Private-equity funds, once almost exclusively concerned with real-estate transactions, are beginning to broaden their portfolios and seek opportunities in sectors like ethanol. Lawyers here see it as only the beginning of a growing private-equity presence in the country, one aided by a lack of sophisticated domestic funds. "Brazil is clearly their priority right now. They definitely see Brazil as having great potential compared to other Bric countries," says a partner.

With foreign investment banks reducing their project involvement in the region, it is hoped that public investments made through Brazil's development bank (BNDES) will sustain financing facilities until normalisation occurs. Brazilian lenders have also begun to embrace, and fill, the void left by foreign institutions, producing the option of pure domestic financing for some deals....

With foreign investment banks reducing their project involvement in the region, it is hoped that public investments made through Brazil's development bank (BNDES) will sustain financing facilities until normalisation occurs. Brazilian lenders have also begun to embrace, and fill, the void left by foreign institutions, producing the option of pure domestic financing for some deals. "Fortunately, the Brazilian economy, and public banks in particular, are less affected than in other jurisdictions," says one lawyer.

BNDES's high-profile activity is hardly a new phenomenon. Within the last several years the development bank has approved large financing packages for projects like the hydroelectric dams now under construction on the Madeira River. Estimates for the project's cost hover around R$13 billion ($6.7 billion), with the Jirau dam alone securing BNDES's largest loan ever at R$7.2 billion. In fact, the financial crisis has only increased the development bank's prominence in the market through the allure of government guarantees and its sizeable balance sheet.

Infrastructure has been the primary focus of the development bank in the recent past, something the financial downturn has only intensified. According to lawyers, the government hopes to fan the heat of the economy through infrastructure until other sectors become healthy again. Brazilian lawyers describe the demand for projects concerning conventional and renewable sources of energy as consistent over the last year. Similar market appetite exists for improving federal toll road systems.

Many market observers, however, concede that foreign capital must return for continued market activity. "It would be an illusion to think all of the financing needs can be supplied in Brazil," notes one lawyer. The decreased appetite for risk has forced even mid-market deals into club financing, stressing an already diminished pool of potential lenders. To date, the exception to risk aversion is export financing.

A decline in project transactions has led firms to examine their commitment to this practice going forward. Lawyers here see work concentrating between firms with established, balanced practices in banking and M&A. This mirrors similar shifts with clients in the market, as industries like steel, precious metals and ethanol saw significant consolidations throughout the downturn.