Thiago Giantomassi, Denise Okimura and Eduardo Campos of Demarest Advogados assess agribusiness and capital markets in Brazil
Although the Brazilian economy is struggling, the agribusiness sector shows prospects of growth and has been increasing its participation in Brazilian exports.
From January to July 2015, the sector was accountable for 46% of the revenues from exports, compared to 43% during the same period in 2014.
According to "Centro de Estudos Avançados em Economia Aplicada - ESALQ/USP" (a center of advanced studies on applied economy linked to the University of São Paulo), the agribusiness sector represented, in 2014, 23% of Brazil's GDP and was responsible for 40% of Brazil's exports sales; further, it is greatly responsible for the country's commercial surplus. On the other hand, the Ministry of Agriculture, Livestock and Food Supply (“MAPA”, in the Portuguese acronym) estimates that the Brazilian agribusiness production will reach 200 million of tons of grains this year.
Additionally, the 2014/2015 Agricultural and Livestock Plan of the Ministry of Agriculture, Livestock and Food Supply demonstrates that the favorable conditions Brazil has for the agricultural and livestock production – abundant natural resources, advanced technology, management capacity and appropriate agricultural policy – secure a competitive edge to the country and its capacity to extend the offer, thereby qualifying the country as one of the major suppliers of the global demand for food and agricultural raw materials.
As far as projections of the sector's production growth are concerned, MAPA issued the report "Agribusiness Projections - Brazil 2013/2014 to 2023/2024 ("Projeções do Agronegócio - Brasil 2013/2014 a 2023/2024"), estimating an increase in production of grains from the current 193.6 millions of tons to 252.4 millions of tons in the crop projected for 2023/2024, representing an increase of 30.4% and 52.3%. In the same sense, the production of meat (beef, pork and poultry) is expected to increase by 7.9 millions of tons by 2023/2024, representing an increase of 30.3% compared to the meat production in 2013/2014.
So, how this growth of agribusiness will be funded considering the competitive edge the country enjoys?
Historically, agribusiness is largely financed in Brazil by public funding, including through state-owned banks. So, alternative forms for financing have not generally followed growth of agribusiness. However, this funding is being reduced – firstly to comply with public debt-related metrics, and secondly because private financing really needs to step in to respond to the required growth. Accordingly, there is a strong need to narrow the gap between agribusiness and private financing, especially through capital markets.
An example on how to narrow this gap is the Agribusiness Asset-Backed Security ("CRA", in the Portuguese acronym). The structure is pretty straightforward: a securitization company in Brazil acquires agribusiness receivables, publicly offering the CRA to be acquired by investors.
Although established more than ten years ago, the CRA started to really show its potential in the last three years. One of the main drivers is the appetite of investors for securities entitling a beneficial tax regime – the CRA, for example, grants local individuals an exemption on income tax for interests and capital gains.
Does this means we should then wait for new transactions to be developed, or is there room for improvements?
The question already leads to an answer: there are plenty of opportunities to improve the CRA and consolidate its importance as a definitive “go-to” option of agribusiness financing.
A step towards this improvement would be the adoption by the CVM (the Brazilian Securities and Exchange Commission) of a specific regulation for CRA. So far, the framework applicable to Certificate of Real Estate Receivables (“CRI”, in the Portuguese acronym) applies to the CRA, since both securities (CRI and CRA) share similar legal provisions and principles, although associated with the financing of different businesses.
Until now, the use of CRI-related regulation to CRA offerings, as construed by the CVM, has worked properly. But the next stage for the CRA requires a proactive and responsible, focused approach by regulators, aiming to develop such an important sector of our economy.
Here we outline as a proposal some of the topics to be covered by this new regulation.
Real estate transactions are generally not subject to exchange variations. Agribusiness stands on an opposite side: commodities are mostly traded worldwide, and pricing follows a reality in which one or two currencies prevail. As a result, receivables are priced not in a local currency.
On the other hand, Brazilian investors are eager to acquire assets priced either in U.S. dollars or Euros.
This scenario makes then the perfect match: investors willing to invest in foreign currency, while agribusiness assets are priced likewise. Regulation should thus recognize this reality and allow the issuance of CRA in foreign currency whenever the underlying receivable entails a similar pricing mechanism.
Another topic to be properly addressed refers to revolving structures. Traditionally, real estate receivables are subject to a long-term arrangement. The agribusiness sector is, on the other hand, subject to an annual pattern due to the periodicity of crops.
The CVM already authorized specific revolving structures in CRA. And they are being replicated and well accepted by the investors. However, those structures are far from representing the plurality of options available. Regulation should thus provide general principles to be followed by CRA backed by revolving receivables, allowing market agents to develop creative, sounding structures to be adapted to the necessities of each transaction. The purpose is to create a framework allowing CRA to be used as a financing facility to mirror the annual pattern referred to above.
A final topic to be addressed: physically settled receivables. Those receivables are particularly important for intermediaries and providers of inputs (such as seeds, fertilizers and other), since they are generally entitled to physically settled receivables (e.g. products), which are sold by them to third parties, providing liquidity for their activities.
The CRA is in our view a great option for financing to those owning physically settled receivables, provided there is an off-taker to provide liquidity for payment of the investors’ return. Regulation does not restrict a structure involving physically settled receivables, but some guidelines are welcomed – market would be greatly benefited if regulation described general principles to be followed by CRA backed by those receivables.
In a nutshell, opportunity is the trend in agribusiness, especially mergers and acquisitions, and financing through capital markets. The CRA is a strong asset for financing, and market agents would welcome a new regulation reflecting all the range of opportunities the agribusiness offers to the country.