Brazil announces first issuance of sustainable bonds

It’s the first time that Brazil has issued this type of bond –– and it achieved 6.5% per year. This means an implicit spread of 180 points. Why is this relevant? Because this spread is generally paid for investment grade countries. So it is relevant, because it means the international market is recognizing Brazil as an investment grade country"

Minister of Finance Fernando Haddad

In a note this Monday, November 13, Brazil’s National Treasury informed that it has issued its first dollar sustainable bond on the international market: a 7-year benchmark called GLOBAL 2031 ESG that will mature in 2031. The goal of the operation is to reaffirm Brazil's commitment to sustainable policies, thus converging with the growing interest of non-resident investors and the expansion of the global thematic securities market.

The GLOBAL 2031 ESG sustainable bond matures on March 18, 2031, and its issuance added up to a total US$2.0 billion –– a 6.50% p.a. rate of return for investors. This corresponds to a spread of 181.9 points-base above the benchmark Treasury (the US Treasury bond), the lowest for new issuances in almost a decade. The sustainable bond’s interest coupon is 6.25% p.a. –– payment of which occurs on March 18 and September 18 each year. The issuance was carried out at a price that corresponds to 98.572% of its face value.

According to Brazil’s Minister of Finance Fernando Haddad, the result is quite significant. “It’s the first time that Brazil has issued this type of bond –– and it achieved 6.5% per year. This means an implicit spread of 180 points. Why is this relevant? Because this spread is generally paid for investment grade countries. So it is relevant, because it means the international market is recognizing Brazil as an investment grade country," stated Haddad.

It also represents a new milestone in the management of Brazil’s Federal Public Debt by reiterating the country’s commitment to sustainable policies –– and converges, in this way, with increasing interest from non-resident investors, and with the expansion of the global thematic bond market. Following the announcement of Brazil’s Sovereign Sustainable Bond Framework (Arcabouço Brasileiro para Títulos Soberanos Sustentáveis), the country’s National Treasury continues to implement a strategy in which it commits to allocate the equivalent to funds raised in actions that boost sustainability and contribute to climate change mitigation; to conservation of natural resources; and to social development, as shown in Table 1, below:

Table 1. Indicative Interval for Resource Allocation following Issuance
Spending Topic                                                Lower Limit                 Upper Limit
Environmental                                                  50%                               60%
Social                                                                 40%                               50%

With regard to the timeframe for resource allocation, the indicative composition is that at least 75% are for financing new expenses, and a maximum 25% for refinancing expenses that have already occurred or are in progress. So as to provide transparency to these allocation categories, Brazil presented –– in its pre-issuance report –– an indicative list of categories that may be considered for green and social expenses[1].

The issuance reiterates the important role of external debt in extending terms and diversifying indexes and investor bases. Moreover, it corroborates the role of Brazil’s external Federal Public Debt in promoting a reference for the corporate sector –– which is why the National Treasury chose a 7-year benchmark where private issues are concentrated.

The Brazilian National Treasury's first sustainable bond issuance attracted significant interest from investors –– a fact that is measurable in the over 240 orders at the top of the order book. The demand far exceeded what was issued: the order book added up to almost US$6.0 billion. Final allocation included a significant number of non-resident investors: around 75% from Europe and North America; and 25% from Latin America, including Brazil. The issuance was mostly taken up by long-term investors –– asset managers acquired around 60% of the bonds –– and there was a significant demand from ESG accounts from the ‘non-deal roadshow’ held by Brazil at the beginning of September.

The operation was led by banks Itaú, J.P. Morgan and Santander. Financial settlement will take place on November 20, 2023.

The corresponding note from the National Treasury reads: ‘This report is for information only and not an offer to purchase or sell or a solicitation for selling or purchasing bonds. There will be no offer or selling of bonds in any country or jurisdiction in which such an offer, solicitation or selling is considered illegal if carried out prior to respective registration or qualification under the securities laws of the respective country or jurisdiction’.

‘The issuer has filed a registration statement, including a prospectus, with the U.S. Securities and Exchange Commission ("SEC") for the offering in this report. For more information about the issuer and this offering, please read the prospectus in the registration statement and other documents the issuer has filed with the SEC before investing. You can find these documents at EDGAR on the SEC website: www.sec.gov. Alternatively, the issuer, underwriters or distributors participating in the offering will send you the prospectus if you so request by contacting Banco Itaú BBA USA Securities Inc. at +1-212-710-6749, J.P. Morgan Securities LLC at +1-212-834-4533 and Santander US Capital Markets LLC at +1-855-403-3636’.

[1] Available at: https://sisweb.tesouro.gov.br/apex/f?p=2501:9::::9:P9_ID_PUBLICACAO_ANEXO:21267