Brazil to rein in lending by BNDES

Fibria, the world’s largest pulp producer, and other Brazilian companies could come under pressure as Brazil withdraws state lending in an effort to rein in inflation and attract private investment, according to Fitch Ratings agency.

BNDES, Brazil’s state development bank, has played a pivotal role in Brazil’s recent economic boom, lending three times more than the World Bank last year and providing cheap loans to more than half of the 82 companies rated by Fitch.

However, the government has promised to scale down the role of BNDES, both in response to rising inflation and the need to attract private investment as the country prepares to host the World Cup in 2014 and the Olympics two years later.

For Brazilian companies which are heavily reliant on BNDES lending, this could have “negative credit implications”, according to a report by Fitch due to be released on Wednesday.

“The amount that BNDES has been lending during the last two years is unsustainable,” said Jay Djemal, an analyst at Fitch and the author of the report. “Over the next few years BNDES may not be able to fund or provide loans at the scale it has been.”

However, for companies such as Fibria and Suzano, another paper and pulp producer, the support of BNDES has been fundamental to their existing credit ratings.

As well as financing 15 per cent of Fibria’s debt, BNDES also owns almost a third of the company’s equity.

According to the report, only 8 per cent of Brazilian companies funded by BNDES have suffered downgrades since 2005, compared with 22 per cent of companies which were not supported by the state.

Brazil’s government has been particularly active in sectors such as paper and pulp, bolstering companies with state credit in an effort to create ‘national champions’ capable of taking on global competitors.

But it is likely to be the smaller companies which rely on state lending rather than these national champions that are in the most danger of possible downgrades, Mr Djemal said.

“In the case of Vale, if BNDES lending got smaller they are in a very strong position to go to the capital markets, they are very cash generative,” he said, referring to the Brazilian mining group. “Vale wouldn’t even pause for thought; they would proceed with any investment.”

Smaller companies such as Essencis Soluções Ambientais, which offers environmental services such as waste treatment, and transport group Ouro Verde Transporte e Locação could be more vulnerable, according to the report.

A reduction in BNDES lending could also prompt companies to change the way they do business, Mr Djemal said.

“This will likely impact a company which has ambitious capital expenditure plans resulting in a change of strategy or increase in the length of time that they were planning to carry out a project,” he said.

BNDES loaned more than $96bn in 2010 but state lending dipped in the first quarter of this year to R$24.9bn ($15.7bn).