Fitch: Letras de Cambio Improving Funding for Brazil's NBFIs

NEW YORK--(BUSINESS WIRE)-- Brazilian non-bank financial institutions (NBFIs) are seeing increased benefits from issuing certificates of deposit called "Letras de Cambio" (LCs), says Fitch Ratings. LCs are diversifying NBFIs' funding sources, extending the average tenor of liabilities, and improving overall asset-liability management.

LCs are being issued by medium and small commercial lenders with tenors up to five years, with average maturities of about two years and no limit on issuance amount. Among Fitch-rated NBFIs, Omni, Dacasa and Santinvest are increasingly issuing LCs, which now comprise approximately 35% of their total funding. At year-end 2014, LCs accounted for about 15% of NBFI system's total funding, versus 11% in March 2014.

For Brazil's retail investors, LC yields are attractive enough to drive the demand that is helping to fuel issuance. LC issuers are paying up to 130% of Brazil's interbank deposit certificate rate, the CDI. This is a lower cost of debt than otherwise available to many issuers. By comparison, small and midsize banks will typically pay in a range between 105% of CDI to 120% of CDI.

Other forms of funding for NBFIs, often viewed as less stable and more expensive than LCs, include time deposits covered by the Credit Guarantor Fund's insurance scheme (DPGE), loan portfolio sales and asset-backed securities (FIDCs). The first generation of DPGEs -- referred to as DPGE I -- were introduced as a temporary source of funding and are being phased out, while portfolio sales and ABSs are dependent on the continued interest of investors in the underlying assets and increase asset encumbrance.

LCs have provided meaningful improvement to many lenders' liability diversification because the retail holders of LCs represent a wider investor base relative to institutional-only funding sources. Another positive credit element of LCs has been the greater degree of transparency provided by issuers in order to meet the requirements to sell LCs to retail investors.

Despite being a relatively old instrument in the Brazilian financial system, LCs have grown rapidly over the past three years to total BRL4.8 billion. The chart available here shows outstanding LCs rising by about 25% just in the six-month period between November 2014 and May 2015.

Investors' demand for LCs was boosted after deposit insurance coverage provided by Fundo Garantidor de Credito was increased to BRL250,000 from BRL70,000 per investor in May 2013.

Securities distributors and brokerage houses have held key roles in LCs' distribution, as brokers have been the main avenue for these instruments reaching small and less sophisticated investors. Many finance companies are not well known in the market and operate regionally. LCs are still emerging in terms of public understanding, thus we expect that as investors become more comfortable with these instruments, their issuance will grow. In Fitch's opinion, LCs' spreads are affected by the lack of a secondary market, similar to other senior debt instruments issued by banks and NBFIs.

The majority of LCs are issued without an immediate redemption clause, although some are. LCs are not tax exempt and investors pay progressively lower taxes as maturity lengthens. Rates on LCs are maturity dependent, with longer maturities (over two years) presently lower.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150615006106/en/

Fitch Ratings
Jean C. Lopes
Director
+55 21 4503-2617
Rio de Janeiro, Brazil
Esin Celasun
Director
+55 21 4503-2626
or
Eduardo Ribas
Director
+ 55 11 4504-2213
Sao Paulo, Brazil
Matthew Noll, CFA
or
Senior Director
+1 212 908-0652
New York, NY
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• New Jimmy Stewart Movie to Take Center Stage at AFA’s Air, Space & Cyber Conference
• Awager and BetMGM Bring Real Casino Slot Machines Online Through New Partnership
• Ideal Siding Surpasses 100 Locations Across North America