Looking long term
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The Brazilian domestic bond market has traditionally revolved around floating rate debt, indexed to the short-term CDI rate, the average of all overnight transactions rates in the country, even for longer tenors. However, the markets are excited by a recent presidential decree and provisional measure, taking effect on January 1, aimed at increasing the level of long-term financing.
Following the changes, non-residents from low tax jurisdictions pay a zero-rate withholding tax on income from publicly-traded bonds and securities, so long as the debt is issued by private non-financial entities. However, to qualify, the securities must be indexed to pre-fixed rates linked to a pricing index or a reference rate know as TR in the local market; have an average term of at least 4 years; and cannot be repurchased by the issuer before two years of issuance.
“Perhaps the Brazilian market has clung to the floating rate CDI construct for a bit too long,” said Chris Gilfond managing director and co-head of Latin America debt markets at Citi. “The changes present a very clear message and show the desired direction of development for the market. They will help to make the Brazilian market even more dynamic.”