“The idea is to simply anticipate revenue that would be granted anyway,” said Brazilian Senator Paulo Bauer, who’s sponsoring a bill in parliament that’d pave the way for such securitizations. “This is a very good project because the debtor will still owe to the states or the federal government. The debtors will not be paying banks, they will be paying the Treasury. Then the Treasury will pay the banks.”
Despite some buyer-beware warnings from investors, the Brazil plan has the backing of the Temer’s new administration. Given the hole facing the nation, you can hardly blame them. Estimates on the size of Brazil’s outstanding tax debt vary wildly, with Budget Minister Dyogo Oliveira placing the pot at more than 1 trillion reais. Still, gaps in tax data, records and systems mean that a large chunk of that is effectively noncollectable.
“For the government it makes total sense, but from an investor point of view and me personally, I would look at those bonds, but I would be very careful,” said Simon Nocera, chief investment officer at Lumen Advisors LLC, which advises on about $1.6 billion in assets.
Brazil is far from the only country that struggles to collect taxes. Similar efforts by countries like Portugal, Belgium, Italy and Greece were limited mostly to one-offs due to European Union national-budget restrictions once it was determined the securities would be considered new sovereign debt, according to Moody’s Investors Service.
From the Mediterranean to Southeast Asia, and in many places in between, revenue collection — or lack thereof — poses a constant challenge, and makes Brazil’s experiment worth watching. Italy, plagued by low tax collection, has been been told by experts its system needs an urgent fix. Mexican authorities recently got new audit powers and credit card use plunged as citizens turned to cash to avoid paper trails. Greek deadbeats owe billions of euros to their cash-strapped government.
“I definitely think this is something that could replicated to other places, as long as the legal framework” is there, said Ricardo Leoni, the head of debt capital markets in Brazil for JPMorgan Chase & Co.
Brazil’s federal government would sell about 120 billion reais of uncollected tax debts and state governments would sell about 100 billion reais, receiving the cash upfront from investors, Bauer, the senator, said. Investors such as banks and credit managers would buy the debt at a discount of about 40 percent, while the government would still be responsible for collecting it, then paying investors. It would include debts of companies that have agreed to repayment programs.
The structure of a securitization would likely resemble those done previously at a state level, according to Daniela Jayesuria, a senior analyst and vice president at Moody’s in Sao Paulo. In 2012, the agency rated a transaction by the state of Minas Gerais, in which a company controlled by the state issued senior debentures guaranteed by the rights to receive a portion of collections on renegotiated taxes.
“They’re obviously trying to find other ways to advance on these future revenues,” said Jayesuria. “There’s been a lot of debate and question, especially whether those securitizations and those sales of receivables wouldn’t be considered as debt of the government.”
Brazil’s Senate may vote as early as this week on the bill authorizing the tax-debt sales.
“The revenue from the securitization wouldn’t solve the fiscal problem, but would give a breather for public finances,” said Felipe Salto, a Brasilia-based economist specialized in public finances who helped draft the legislation while working for then-Senator Jose Serra, now the Foreign Minister, who oversaw a similar program while serving as governor of Sao Paulo state.
Belgium’s Aaa Sale
Separately, about a decade ago, Moody’s rated notes from Belgium tied to personal income tax, corporate income tax and penalties. Moody’s listed Belgium’s ability to collect when giving a follow-on tranche of the debt its highest Aaa rating in 2007.
Brazil isn’t Belgium, though, and the challenges of collecting unpaid taxes for proven deadbeats in the South American country could be daunting for investors. Given that risk, the government is unlikely to be able to get investors to pay more than the equivalent of 20 cents on the dollar for any tax debt it’s able to securitize, according to Robert Rauch, a money manager who helps oversee $5.8 Billion at Gramercy Funds Management LLC.
“I’m guessing that you don’t raise a lot of cash by doing this,” said Rauch, explaining that the cash-strapped government may not be able get as much as they think given the risk. “But, maybe that’s okay” given Brazil’s immediate need for money, he said.