Brazil is seeking to raise about $2bn from its first sustainable sovereign bond, in a test of international investor enthusiasm for the green agenda of President Luiz Inácio Lula da Silva.
The South American nation hopes to finalise the inaugural debt issuance before the end of 2023, according to its finance ministry, with the proceeds earmarked for ecological and social purposes.
Lula’s leftwing administration is looking to rehabilitate the country’s environmental credentials on the global stage, following isolationist policies and a rise in deforestation of the Amazon rainforest under predecessor Jair Bolsonaro.
Finance minister Fernando Haddad said at an event in New York this week that while the size of the bond had yet to be determined, there was an expectation of raising about R$10bn ($2bn).
“It’s an important development that puts sustainability into the everyday thinking of the bureaucracy,” said Viktor Szabo, emerging market portfolio manager at asset manager Abrdn. “It’s part of Lula’s ambitious agenda and a moment we’ve been waiting for following the reluctance of the previous administration.”
Brazil has been relatively slow to enter the burgeoning sustainable bond market compared with regional peers. It will become the eighth country in Latin America to issue a bond with a sustainability label after similar deals by Chile, Colombia, Uruguay, Ecuador, Guatemala, Mexico and Peru.
Brasília has mandated investment banks and held roadshows in London, New York and Boston in recent days to outline the proposals and gauge interest.
Exact terms such as interest rate and maturity have yet to be confirmed, but final adjustments are likely in the coming days, national treasury secretary Rogério Ceron told the Financial Times. An eventual aim is the creation of a reference yield curve to stimulate further sustainable debt sales by private sector borrowers, he added.
“The first major objective is to help bring competitive funding to enable the ecological transition in Brazil,” said Ceron. “We are fully ready to issue as soon as a suitable market window arises . . . there are good conditions for it to happen this year”.
Carlos Carranza, an emerging markets debt portfolio manager at Allianz Global Investors, said he thought “appetite will be high”.
“Brazil is very important for investors, particularly on the environmental side when you think about the Amazon,” Carranza said. “The concerns relate to execution risk in the medium term — investors will be watching this very closely. But they are off to a very good start.”
During the first eight months of Lula’s mandate beginning on January 1, deforestation rates in the Amazon fell 48 per cent, according to official data, as authorities clamped down on illegal loggers and miners.
Another attraction was the low proportion of Brazilian debt available in foreign currency, Carranza added. Most of the country’s outstanding public borrowing of R$6.1tn is funded by domestic savers in reais.
Brasília recently outlined a framework for sustainable bonds tied to UN development goals, with the aim of financing areas ranging from pollution control and food security to clean transport and renewable energy.
The environment will be the main focus, and specific projects could include reforestation, anti-deforestation and green hydrogen initiatives, said Ceron. Beneficiaries of the first fundraising are due to be selected shortly.
Graham Stock, senior emerging market sovereign strategist at RBC BlueBay Asset Management, said a 10-year maturity was likely for the initial bond sale: “The very explicit goal here is to create a benchmark for corporate issuers [so] that’s the most sensible.”
Given the usual new issue premium, he estimated that the yield would be slightly above Brazil’s existing dollar bonds, coming in around 6.7 or 6.8 per cent for a 10-year term.
“We hope to see allocation [of proceeds] to the environmental agency for its efforts to tackle deforestation, but the pricing of the bond is not likely to be materially affected by what projects the government sets out,” added Stock.
Latin America’s largest economy has performed better than expected so far this year and as inflation has dropped, the central bank has begun to cut interest rates.
However, investors and analysts point out macroeconomic risks. These include potential hawkish moves by the US Federal Reserve putting pressure on emerging market interest rates, deceleration in Chinese growth and the implementation of new rules for the public accounts under Lula allowing greater public spending.
“The new green issuance needs to come with an attractive premium over current [hard currency] bonds to stimulate investor appetite, especially given the focus on the new fiscal framework in Brazil,” said Liam Spillane, head of emerging markets debt at Aviva Investors.
The proportion of debt in Latin America and the Caribbean that carried a sustainable label rose from 8 per cent to 21 per cent in the three years to 2022, according to the non-profit Climate Bonds Initiative. Chile and Mexico are the largest cumulative issuers in the category.
Brazil meanwhile ranks first regionally for both corporate green bonds, which raise money for climate and biodiversity projects, and sustainability-linked bonds, which tie the interest rate to hitting certain targets, according to CBI. Companies there sold $7.2bn of sustainable debt in 2022.
Chile’s government, which has issued more than $30bn in sustainable debt, became the first country in the world to tie the interest rate on its debt to climate goals last year, including cutting carbon emissions by 2030.