Brazil’s Capital Markets - A work in progress

Much of the credit for Brazil’s phenomenal economic and capital market growth in the last

decade is due to Fernando Henrique Cardoso’s Plano Real and the country’s subsequent

drive towards macroeconomic stability. Through taming inflation, managing the stability of

the real, and sheltering the country from the harsher crosswinds of international capital

flows, aggregate government debt - the debt that dominates the country’s overall fixed

income market - has been dropping steadily through the past decade. At the same time,

the Brazilian Bolsa de Valores, Mercadorias & Futuros de São Paulo (BM&F Bovespa),

Brazil’s stock exchange, has made remarkable strides towards becoming a world-class

equity market.1 Given Brazil’s high financial intermediation rates, raising equity has

become a more attractive option given baseline interest rates can deter many firms from

entering the debt market.

But this source of strength for the Bovespa is still one of weakness for the economy at

large. These successful equity listings, which have included some of the largest global

private placements of the past several years, reinforce the difficulty of financing with debt,

and one of Brazil’s greatest financial challenges rests in the ability to strengthen local

capital markets (particularly debt markets) by bringing down the cost of financial

intermediation while keeping inflation in check. It is a dilemma and there are no

straightforward solutions, but Brazil’s steady march towards global financial integration and

world-class capital markets may soon have to face off with a rate environment reality that

constrains growth and gives the government leverage to distort the lending market. It is

fortunate for Brazil that it faces these challenges with sound regulation, deep markets, and

a respect for greater transparency and oversight as a driver of growth rather than an

inhibitor.

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1 Economist, April 14, 2007

Equities Markets

Securities Market Size and Scope

By a large margin, the BM&F Bovespa is Latin America’s largest securities market, and

was the tenth-largest in the world measured by total market capitalization at the end of

2010. Unlike in other countries in the region with relatively shallow equity markets, the

Bovespa is a crucial source of financing for local companies. Even during the turbulence of

the financial crisis, the Bovespa has hosted more than 20 initial public offerings since the

beginning of 2009 while equity issuances have dried up across the developed world. The

IPOs launched during the crisis, however, did tend to be of smaller size than those of

previous years totaling US$6.32bn in 2010, which is down from US$13.06bn in 2009 and

$4.57bn in 2008.2

Others48%

Bradesco5%

Itau Unibanco6%

Ambev7%

Vale (CVRD)10%

Petrobras12%

Bovespa Listed Companies, by % Market Cap - Chart 1

Petrobras Vale (CVRD) Ambev Itau UnibancoBradesco Banco do Brasil Santander TelefonicaItau OGX Petroleum Others

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2 Economist Intelligence Unit, Brazil: Country Finance

Source: Bovespa

Chart 2 below shows the strong growth the Bovespa has posted over the past several

years, particularly in contrast with its Latin American peers. From 2001, when the exchange

was smaller than its Argentine counterpart--comprising around 30% of the regional total

market cap--it has grown steadily to represent 60% of market cap in the region. While

much of this share gain happened in the wake of post-2001 crisis Argentina, and

stagnation in the Mexican exchange, Charts 3 and 4 on the following page show how

regional and global overall market cap has grown rapidly over the same period. It is also

notable that this growth has occurred in the context of broad capital market growth in

Emerging Markets, both in the larger markets like China and India and through most of

Latin America.

0%

15%

30%

45%

60%

75%

90%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Percentage of Total Latin American Stock Market Capitalization - Chart 2

Argentina Brazil Mexico

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Source: World Bank

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0

1750

3500

5250

7000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Stock Market Capitalization, in USD billion, BRICS Comparison - Chart 3

Brazil China India Russian Federation South Africa

0

750

1500

2250

3000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Stock Market Capitalization, in USD billion, LatAm Comparison - Chart 4

Latin America & Caribbean (all income levels) Argentina Brazil Mexico

Source: World Bank

Source: World Bank

Trading and equity volume

One of the striking features of the Bovespa is that the two largest companies traded on the

exchange, Petrobras and Vale, are respectively state-controlled or semi-state owned. That

said, even though the top ten companies make up nearly 50% of overall market cap, there

is a wide range of other equities in diverse industries - including retailers, utilities, telecom,

and consumer goods - and that comprise the remaining 48% of the index. As a contrast, in

Mexico the analogous Indice de Valores y Cotizaciones (IVC) is dominated by one

individual, Carlos Slim, whose companies represent more than 40% of the overall market

cap. Chart 5 above illustrates the relatively robust performance of the Bovespa (along with

the Merval and the Mexican IVC) compared to the S&P 500, showing the resilience of

these markets during and after the financial crisis.

! Stranko 5

Comparison of Ibovespa Index to S&P 500, Merval and Mex ExchangeChart 5

Source: Yahoo! Finance

The Ibovespa index has been

an active mover over the past

several years, with a major dip

in index value occurring during

the onset of the credit crunch

in mid-2008. One of the most

striking consequences of the

credit crunch on Brazilian

equities was its effect on

trading volume. As seen above

in the bottom part of the

tracked Ibovespa value, volumes took a nosedive after strong, historically high volumes in

2007. They have since recovered to pre-2007 levels and have doubled over the period

2009-2011. Also, after strong outflows at the beginning of the financial crisis in 2008

shocked Brazilian markets, foreign portfolio investment in Brazil has recovered and now

accounts for a significant part of the market. From those record outflows totaling R$25bn

(US$12bn) recorded in 2008, confidence in Brazilian markets returned by 2009, posting net

inflows of R$21bn (US$13bn) in that year and R$6bn (US$4bn) in 2010. Gross inflows and

! Stranko 6

16%

55%

30%0.77%

35.69%

63.54%

Government BondsPrivate Bonds - Banking SectorPrivate Bonds - Non-financial Corporates

Share of Foreign Debt Holdings by Sector - Chart 7

Share of Debt Issuances by Sector - Chart 8

Ibovespa Index Movement and Trading Volume Chart 6

Source: Yahoo! FinanceSource: Yahoo! Finance

Source: Economist Intelligence Unit

outflows together total nearly R$1 trillion (US$600bn) and represent about 30% of all

investment in the local market.

Another consequence of the financial crisis in Europe and the United States is a Brazilian

equity “decoupling”, with Brazilian firms looking beyond traditional markets for additional

sources of funding. Traditionally, Brazilian corporates looking to list abroad looked to the

New York Stock Exchange or the London Stock Exchange, and indeed some of Brazil’s

biggest names have secondary listings on the NYSE, including: Vale, Petrobras, Itaú,

Bradesco, Telefonica do Brasil, and AmBev. Recently, however, Brazilian equity issuers

and the Bovespa have been looking towards new frontiers for pools of capital and possible

secondary-listing/cross-listing agreements. To that end, the Bovespa in the past year has

been in talks with both the Mexican Stock Exchange and the Shanghai Stock Exchange

with a view towards closer collaboration.3

The Equity Listing Process

Listing regulations are longstanding and well-established in Brazil. A long-standing

resolution, passed in its initial form in 1968, requires Brazilian companies to register with

the Banco Central do Brasil ahead of any public equity offerings. The Central Bank, in turn,

required would-be issuers to produce extensive documentation that covered off the

company’s financial health, income statements, proof of underwriting agreements, and

drafts of the material the company would use to market shares. It further stipulates that all

of this information had to be provided to interested investors on their request, and that

management must actively update the public on any agreements that would change the

value of the securities during the run-up to the IPO. The Bovespa also imposes further

auditing requirements in order for companies to list their shares there, including press

notification of preferred stock dealings and shareholder meetings. Listing costs are nominal

! Stranko 7

3 Bolsa de Valores, Mercadorias & Futuros de São Paulo - Bovespa

and range between 1/40 to 1/2 of one percent of the trade value, and the charges are tax

deductible.4

Market Segmentation

The Bovespa is characterized by a unique segmentation of its equities into classifications

based on the type of stock issued and an issuer’s overall level of disclosure. These market

classifications all sit within the Bovespa and are known as the Mercado Novo, Nivel 1,

Nivel 2, and Bovespa Mais, in addition to traditional market traded and OTC listings.

Whereby Nivel 1 and Nivel 2 represent the more traditional market mechanisms in the

Bovespa, Mercado Novo and Bovespa Mais have emerged as innovative tools to establish

international governance best practices and attract smaller issuers to the market

respectively.5 By segmenting listing standards, the Bovespa has been able to capture wider

swathes of the equity market, and the Mercado Novo rules in particular have been effective

in spurring on domestic listings. The boxes on the following page explain some of the

market characteristics and requirements of each listing category.

Foreign Investor Rules

Rules on foreigners that can operate in the Brazilian market are strict, and explicitly

designate the types of investors welcome in Brazilian equities, including:

• Commercial and investment banks

• Savings and loan associations

• Insurance companies and pension funds with US$5m plus in assets;

• Non-profit organizations (trusts or endowments, among others) with US$5m plus in

assets; or global fund managers that work with high net worth individuals 6

! Stranko 8

4 Going Public 2010, a legal guide, Trench, Rossi e Wantanabe Advogados, Baker & McKenzie International

5 Economist Intelligence Unit: Country Finance

6 Commissão de Valores Mobiliários

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Bovespa MaisBovespa Mais was created in 2005 to attract small and mid-sized companies to market. It was designed after broad consultation with small-cap companies, domestic and international investors and law firms with the view of creating an over-the-counter market for smaller companies that will need access to broader capital markets as they grow. Investors, in turn, receive higher returns for the more limited liquidity characteristic of OTC markets.

The Bovespa Mais market allows qualifying issues to build up a sort of “credit history”, while giving them broader exposure to investors and strategic partners that can help them along the growth curve and obtain additional resources in the market. Bovespa Mais requires nearly the same stringent listing procedures as the Novo Mercado, with obvious exceptions and limitations due to the smaller size of these market participants. Part of the rationale for these rules is the expectation that companies will be able to gradually move towards listing in the Novo Mercado.

Nivel (Level) 1 and Nivel 2The Bovespa has established conduct standards and best practices for companies, shareholders and managers that are key to the market designation as a Nivel 1 (Level 1) or Nivel 2 (Level 2) listing.

The Bovespa has established conduct standards and best practices for companies, shareholders and managers that are key to the market designation as a Nivel 1 (Level 1) or Nivel 2 (Level 2) listing.

Level 1 and 2 Requirements

• Maintenance of a free-float of at least 25% of the capital;• Public offerings have to use mechanisms to favor capital

dispersion;• Improvement in quarterly reports, including the disclosure

of consolidated financial statements and special audit revision;

• Monthly disclosure of trades involving equities issued by the company on the part of the controlling shareholders;• Disclosure of an annual calendar of corporate events.

Level 2 Requirements

• Establishment of a two-year unified mandate for the entire Board of Directors, which must have five members at least, of which at least 20% (twenty percent) shall be Independent Members;

• Disclosure of annual balance sheet according to standards of the US GAAP or IFRS;• In case majority shareholders sell their stake, same conditions granted to them must be extended to common

shareholders, while preferred shareholders must get, at least, 80% of the value/conditions;• Voting rights granted to preferred shares in circumstances such as incorporation, spin-off and merger and approval of

contracts between the company and other firms of the same holding group, when deliberated at general meeting.• Obligation to hold a tender offer by the economic value criteria, in case of delisting or de-registration process;• Admission to the Market Arbitration Panel for resolution of corporate disputes.

Novo MercadoThe Novo Mercado was created in 2000 to attract Brazilian companies back to domestic listings by creating corporate governance requirements matching international best practice. A company desiring to list on the Novo Mercado must meet basic Bovespa requirements plus certain additional demands, such as:

• public share offerings have to use mechanisms to favor capital dispersion and broader retail access

• the maintenance of a minimum free float, equivalent to 25% of the capital

• the same conditions provided to majority shareholders in the disposal of the Company’s Control will have to be extended to all shareholders

• establishment of a two-year unified mandate for the entire Board of Directors, which must have five members at least, of which at least 20% have to be independent members

• the disclosure of annual balance sheet, according to standards of the US GAAP or IFRS

• improvements in quarterly reports, including quarterly consolidated financial statements and special audit revision

• an obligation to hold a tender offer in case of delisting or cancellation of registration as publicly-held company

• compliance with disclosure rules in trades involving securities issued by the company in the name of controlling shareholders

• regular General Shareholders Meetings and ingrained corporate bylaws that can enforce these requirements from within

5 Chart information from Bovespa Listing Rules

Finally, International investors may not buy stakes in non-publicly-traded companies. This,

barring several exceptions, effectively shifts all equity activity to the stock market and to

transactions that can be recorded and monitored.

Bond Markets

Overview

Although the Brazilian corporate bond market is expanding rapidly, the overall market in

Brazil is dominated by government debt. Of the total debt issued that has yet to mature,

government bonds account for 64% of

the total market. The rest are by

a large margin financial

institutions (35%) and the rest of

the corporate market accounts

for less than one percent.

Private sector issuance

For a Brazilian company to

issue a bond, it must meet certain

requirements set by the Central Bank of Brazil. The two main requirements are that the

balance of all outstanding bonds must not be higher than the net worth of the issuer and

that total liabilities have to remain below 1.5x the net worth of the issuer. Once this is

assured, the issuer has to register with the CVM (Comissão de Valores Mobiliários--Brazil’s

SEC) for approval of the underwriter, dealer and overall issuer. Once this is completed, this

must then be announced in a printed public forum like a newspaper. International investors

have focused on Brazil’s financial sector, holding 54.7% of the outstanding US$175.4bn

debt to foreign holders at the end of 2010. Non-financial private sector firms and

government bonds accounted for the rest of the smaller foreign holdings.

! Stranko 10

19

Brazil’s improved economic foundations and public debt management

It is axiomatic that the absence of sound foundations limits the scope of public debt management and improvements in the debt structure for which it is responsible. Hardly a theoretical argument, the Brazilian experience demonstrates the close connection. Thus, since the mid 1990s, its improved debt management coincided with successive institutional and macroeconomic advances. This combination, i.e., sounder foundations and qualified debt management, was the backdrop against which Brazil’s public credit practices achieved greater credibility and scored high ratings.

A review of the recent evolution of public debt structure and its relation to advances in macroeconomic policies illustrates this lesson, which is further explored in Part I, Chapter 2 and Part III, Chapter 1.5 Graphs 1 and 2 show the evolution in the profile and stock of Brazil’s Federal Public Debt (FPD)6 since December 1994.

Graph 1. Federal Public Debt profile by index

Source: National Treasury

Graph 2. Federal Public Debt profile by index - GDP %

Source: National Treasury

Composition of Brazilian Debt as pct of GDP - Chart 9

Source: Tesouro Nacional do Brasil (Treasury)

Still, the numbers show a broad appetite

for Brazilian corporate bonds,

particularly among foreign

investors. Private sector concerns

around government-lending

crowding out, particularly in the

context of the country’s major

infrastructure needs ahead of the

2014 World Cup and 2016 Summer

Olympics, have begun to reach a

point where the government is responding

with less-conventional financing solutions. As a response to these concerns, and billed as a

way for the government to spur private long-term investment, the Brazilian Ministry of

Finance decided late last year to shelter certain bonds from a 15% withholding tax.7 The

exemption, which applies to corporate bonds with maturities of at least four years and fixed

or index-linked rates, only applies to bonds issued to finance government-approved

infrastructure projects. So while giving private actors a financial incentive to lend long-term,

the Brazilian government is subjecting projects approved under the scheme to government

approval--a double-edged sword for developers and lenders.

Government issuance

The government has a long history of issuing sovereign debt, and throughout the 1970s

and 1980s was an emerging markets pioneer in taking on too much debt to finance

unsustainable spending.8 After a series of debt crises, several failed debt-management

plans, and the successful Real Plan of 1994, Brazil’s sovereign debt rating has been

steadily improving--reaching investment-grade (BBB-) in 2008.9 Net public debt is low (37%

! Stranko 11

7 FT Article, December 16, 2010

8 Dívida Pública: A experiência brasileira, World Bank and Brazilian National Treasury

9 Brazil Sovereign Rating, Fitch Ratings

22 Public debt: the Brazilian experience

Such economic gains ensured an environment conducive to good debt management. Under a carefully developed strategy disseminated through annual borrowing plans, the National Treasury consistently improved the structure of public debt by greatly reducing exchange-rate liability and gradually increasing the share of fixed-rate and inflation-linked debt.10

These improvements are also part of the Treasury’s proactive debt management strategy, which includes swap and-buyback operations that help improve the debt profile and reduce the economy’s vulnerability to shocks.

The combination of sound macroeconomic foundations linked to efficient Federal public debt management scored significant gains, as shown by the risk indicators (see Graph 6) and the sound (BBB-) investment grade established by Standard & Poor’s, on April 30, 2008, which also noted that pragmatic fiscal policies and debt management11 had allowed Brazil to earn that rating for the first time in its history.

8 For more information on the Fiscal Responsibility Law, see the chapters on budget and audits (Part II, Chapter 4 and Chapter 5).9 This is an important indicator, for it shows that foreign currency funds deposited in the Central Bank would be sufficient to pay the country’s external, public and private debt. To illustrate the relevance of the present level, the external debt (public and private)-to-international reserves (1952-2008)-ratio started at 1.3 and reached 20 during the crisis of the early 1980s and then dropped gradually to as low as 0.96 in December 2008 - the lowest value in the series. For details, see the Statistical Annex at the end of the book.10 According to studies, these securities are ideal to make up most of the outstanding debt, with due regard for cost and risk criteria. For details,see Part II, Chapter 3.11 See Standard & Poor’s report “Brazil’s long-term foreign currency rating raised to investment grade BBB- Outlook Stable,” April 30 2008.

Book organization and summary

The book is organized into three parts: Part I – Understanding the Brazilian Public Debt; Part II – Managing the Brazilian Public Debt; and Part III – The Public Debt Market in Brazil.

Graph 6. Spread performance – Brazil and emerging countries

Source: Bloomberg

Changes in Debt Spreads - Brazil vs. Major EMs - Chart 10

Source: Tesouro Nacional do Brasil (Treasury)

of GDP) and has been declining steadily throughout the decade. Brazil has also been

successful in issuing liquid, local-currency public debt (nearly 90% of the public total is

denominated in reais). On top of this, Brazil maintains a strong reserves position, which

has served its anti-inflation goals, and diversified its debt profile between fixed, inflation-

linked, and floating rate profiles. In addition, the average maturity of public debt is nearly

six years, longer than most similarly-rated sovereigns.

Some of the lingering concerns with the Brazilian sovereign debt market include continuing

budget deficits after debt repayments despite strong primary surpluses, which at the end of

September 2011 (on a 12-month rolling basis) was equal to 2.6% of GDP. Also

transparency concerns plague Brazilian public finances, particularly in relation to

government contributions to the BNDES. The BNDES balance sheet can be considered as

an off-book balance sheet for the government to underwrite infrastructure projects. Also,

interest payments eat up more 15% of Brazil’s already-high tax take. Spreads, however,

have been narrowing continually, even in the context of the financial crisis (as seen in

Chart 10 above) and this has driven down borrowing costs in relation to other major

emerging-market sovereign issuers.

Foreign Investor Rules

In the bond market, Brazilian law that prohibits local institutional investors from investing in

foreign corporate bonds limit the participation of foreign-owned firms in local bond markets.

Institutional investors that are not resident in Brazil can, however, invest in Brazilian-

marketed corporate debt without limitation. Also, foreign companies that operate in Brazil

can raise funds via private placements, which are less restricted by law. In addition, this

route can also prove more economical, as it does not incur the burdens of disclosure

regulation including prospectus publication and bank intermediation.10

! Stranko 12

10 Economist Intelligence Unit

Additional topics in capital markets operation and regulation

Government involvement in long-term financing

Given the paucity of affordable, long-term financing available to Brazilian corporates, the

country’s principal lender for major infrastructure projects is the Brazilian National

Development Bank (BNDES). As in my first essay’s discussion of high financial

intermediation rates and their effect on Brazil’s lending market, the bank has played an

increasingly controversial role in determining the success or failure of major projects. In

2009 and 2010, the bank was one of the largest lenders in the Western Hemisphere, and

although it operates at an arm’s length from the government, the BNDES’s oversight

remains with the Brazilian Minister for Development, Industry and Foreign Trade.

Financial Transactions Tax

One of the more controversial measures that Brazil has taken to limit the amount of foreign

speculation in the local market is a financial transactions tax. This tax, locally called the

IOF for imposto sobre operações financeiras, applies only to foreign exchange

transactions. This tax is variable depending on the nature of the capital flow, and the

govenrment has been particularly aggressive on fixed income portfolio investments

(bonds), raising the rate steadily from the initial 2% to a current high of 8%. Other rates

include a 6% rate on investments in ADRs issued by Brazilian companies on stock

exchanges abroad--the rate, however, drops to 2% when investors repatriate their ADRs to

purchase Bovespa/Brazilian-issued shares.11

Much of this goes back to the root problem of strong real appreciation, and the higher

financial intermediation rate which makes portfolio investment in Brazil particularly

attractive. Particularly in turbulent world markets, with developed country base interest

rates at record lows, Brazil’s double digit SELIC rate makes it an attractive target for those

looking for a high rate safe haven or a destination of carry trade investments.

! Stranko 13

11 Brazil to Tax ADRs of Brazilian Companies, Mantega says, Bloomberg, November 18, 2009

Derivatives regulation

One of the most notable contrasts between Brazilian financial regulation and Anglo-

American regulation is the country’s long-standing resistance to derivatives transactions.

The effects of this were borne out during the global financial crisis, when contagion and

capital flight failed to wreck Brazil’s financial markets the way they would have in crises

past. In fact, there are striking similarities to Brazil’s derivatives (and other) regulation in the

new U.S. Dodd-Frank financial oversight bill. Brazil has long required that derivatives

transactions be registered and cleared through systems that the Brazilian SEC equivalent

has vetted and approved. The rationale behind doing so is making OTC trading less

opaque, and while there is not full marketization of derivatives, the laws make transactions

much more transparent.12

As an additional protective measure, public companies must give sensitivity analyses

which give details on the potential effects of 25 and 50% losses on derivatives contracts.

On the risk management side, all originators need to make sure borrowers meet

institutional risk criteria and cannot rely on credit ratings alone to make judgments on credit

quality. The strict derivatives regulation mainly aims to stem speculation rather than

eliminate the function of derivatives transactions in the Brazilian financial system. 13

Guido Mantega, Brazil’s Finance Minister, has been particularly active in promoting the

IOF. The IOF, as previously mentioned, is applied to a number of transactions including

equity sales, and Mantega earlier this year instituted an IOF charge ranging from 1% to

25% on dollar-based position sales in Brazil. In the same legislation, the government raised

the IOF for Brazilian short-term corporate borrowing abroad in order to promote local

lending and discourage currency mismatches in short-term lending agreements that could

put pressure on the real. In fact, much of the new regulation aims at stemming futures

markets in currency and halting speculative pressure on the Brazilian real. At the same

! Stranko 14

12 Learning from Emerging Markets - A Brazilian Perspective, Allen and Overy Insights

13 Brazil Country Commerce: Economist Intelligence Unit

time, with a view towards not distorting markets too much, Mantega has made it clear that

the tax would not be levied on legitimate hedges without speculative intent.14

And despite these tough regulations, Brazil remains the sixth-largest market in the world for

derivatives transactions. The demand for derivates contracts and structured products

stems mainly from the relatively high level of capital controls and taxation that have

resulted from government attempts to control inflation and real appreciation. Foreign

entities, companies or investors, looking to repatriate funds thus have a need to take out

options and futures contracts to guarantee rate stability.

Summary and Conclusion

In brief, Brazil has made significant progress in sheltering its capital markets from the

speculative and destabilizing effects that wrecked the economy repeatedly in the 1980s

and 1990s. Through effective legislation and institutionalized central bank independence

that have established strong requirements for capital markets transactions and corporate

governance, the state has been able to gather the large amounts of information necessary

to regulate even the most complex of transactions. Also through strong regulation of

derivatives before they presented macro-level problems to the economy as in the United

States, Brazil has emerged as a pioneer in this type of oversight. Finally, through the smart

application of variable financial transactions taxes, the country has managed to cool down

speculative investment from abroad while cooling off its hot currency.

At the same time, the financialization of the economy and growth in the equity market

belies the serious constraints imposed by continued high costs of lending and the parallel

market that has been created by the government through BNDES-linked long-term lending.

For the private sector to be the truly efficient allocator of capital, the benchmark SELIC and

the TJLP (long-term BNDES lending rate that is nearly half that of the market SELIC rate)

! Stranko 15

14 Year in review Brazilian Real Estate Finance and Securitization 2011, Uqbar Financial Knowledge Company

need to converge. High base rates drive up lending rates across the economy, including in

the corporate bond market. Given the sophisticated profile of Brazilian investors and the

growing need of local companies for more long-term financing, the relative sluggishness of

corporate bond market development remains a major hurdle to further Brazilian financial

development.

! Stranko 16