The world financial crisis and the international financing of Brazilian companies.
| Autor | Carvalhal, Andre |
| Cargo | Report |
Introduction
The world financial crisis initiated with the subprime crisis in 2007 in the United States (USA) and spread around the globe. Its outcome is still uncertain. Roubini (2009) believed that the worst was yet to come. The crisis affected capital availability and an ensuing credit crunch reached emerging markets, Brazil included, possibly affecting the mix and the terms of their domestic and international financing. Even though there was an initial perception that the effects of the crisis were minor in Brazil, the recurrence of financial crises motivates a comparative analysis of the behavior of the domestic-international mix and of the determinants of the international financing mix before and during the crisis (Bacha & Goldfajn, 2009; Dooley & Hutchison, 2009; O. Barros & Giambiagi, 2009).
We investigate, thus, the determinants of the international financing components of the capital structure of non-financial Brazilian exchange listed companies before (2004) and during the world financial crisis (2008). We present descriptive financial and capital structure company statistics, according to their sources of international financing, and an analysis of the determinants of international financing before and during the world financial crisis.
The contributions of this article are a qualitative discussion of the potential impact of the financial crisis on credit constrained firms in emerging markets, which leads to testable hypotheses, and a comparative empirical analysis of capital structure indicators and of the determinants of its international components in Brazil before and during the crisis to verify if the evidence supports them. In any case, the evidence presented is preliminary for several reasons: the crisis is still unfolding and we derive our conclusions from a comparison of two years in one specific country. General conclusions could only be drawn from the testing of a general theoretical model of the impacts of the crisis, or of credit constraints, on firms.
Our empirical analysis contemplates the domestic as well as the international portions of Brazilian corporate financing. We are interested in the dynamics of the relative importance of international financing sources and, therefore, cannot ignore the domestic financing side. It is possible that from 2004 to 2008 there were relevant changes in the proportions financed abroad and domestically. Likewise, we cannot ignore the equity portion and, thus, it is also considered. The comparative analysis of the years 2004 and 2008 considers both a domestic-international dimension as well as an equity-debt dimension. However, our emphasis is on the international components of Brazilian corporate financing.
Our preliminary analysis suggests that Brazilian non-financial listed firms suffered the impacts of the crisis. Usage of short-term debt decreased during the crisis, particularly banking loans. Larger firms were able to replace short-term financing with long-term financing, mostly using capital markets (domestic bonds, Eurobonds, and ADR issuance). Firms that access international capital markets tend to use all sources of domestic and foreign funding at their disposal. They have a more marked presence of foreign shareholders, which became a more significant determinant in 2008, and boast better corporate governance scores. Firms without international bank loans may be the most financially constrained among non-financial listed firms.
The next section presents a literature review on the credit crunch in the U.S. repurchase agreements (repo) market and of credit constraints and how this affected emerging markets and companies, the changes in regulatory paradigms after the crisis and their potential effects, as well as a review of the Brazilian related evidence and a brief comparative analysis of Brazilian Eurobond financing before and during the crisis. Third section presents the procedure and model while fourth section offers a descriptive comparative analysis of capital structure indicators of our sample and the analysis of capital structure determinants for a year prior to the global financial crisis and the crisis year of 2008. Final section concludes the article.
Background and Literature Review
The financial crisis in the US
This article will not discuss the details of the financial crisis. Those have been covered by many studies, which include the broad analyses in Acharya and Richardson (2009) and also those collected by the Organization for Economic Cooperation and Development (2009) and by Eichengreen and Baldwin (2008), among others. Bacha and Goldfajn (2009) and O. Barros and Giambiagi (2009) provide a Brazilian view of the crisis. This section will, conversely, present a financial approach to the U.S. banking crisis, placing particular emphasis on the price of assets provided as collateral in repurchase agreements and on the lack of liquidity that resulted from their price decline. Repos correspond to what is known in Brazil as the overnight or the open market and boast an average daily trading volume in the USA of several trillion dollars. This discussion will serve as a background for the analysis of the potential effects of the crisis on Brazilian companies.
Gorton (2009) and Gorton and Metrick (2012) believe that the 2008 global financial crisis was due to a loss of confidence in the U.S. financial system. When this happens, liquidity vanishes. An interesting and alternative approach regarding the dearth of liquidity in the world banking system attributes the generalized lack of confidence in banks to a loss in the value of some of the assets used as collateral in repo transactions. Even though losses have been restricted to some of the assets that served as collateral, the difficulty of identifying problematic assets and the banks that in fact held them led to a generalized run on banks. In this context, a run on banks in the repo market paralyzed the credit market, significantly reducing the ability of companies to obtain financing.
Banks use part of their cash and time deposits to buy bonds. Most of these bonds are safe and risk-free, like the central government bonds of the countries in which they operate. These bonds also included securities backed by very safe mortgages and not quite as safe mortgages, as was later revealed. According to Gorton and Metrick (2009), safe bonds are those whose value does not depend on information and that are not subject to adverse selection. Assets whose value does not depend on obtaining and correctly interpreting information are considered to be information-insensitive. These assets are very liquid and traded without the need for private information and with no losses for insiders. Gorton and Metrick (2009) define liquidity as the ability to trade something quickly, without influencing its price and without the risk of the parties involved facing adverse selection. However, what happens when assets that are information-insensitive become sensitive?
According to Gorton and Metrick (2009), a single sufficiently bad event is able to generate adverse selection. In this situation, assets that are considered to be immune to adverse information and are supposedly risk-free can no longer be regarded as safe. In this situation, it is very important to become the informed party in transactions involving these securities. When this occurs, uncertainty reduces trading volumes and market liquidity. As observed by Ivashina and Scharfstein (2010), despite the global scale of the crisis and its impact on all financial market participants, some banks were more affected than others. Yet, it was impossible for clients to know which counterparties would not honor their debts and, thus, even very safe securities lost value. Although clients could well believe that not all institutions would become insolvent, it was impossible to know which would be the most affected, and consequently a run on the banks took place. Clients withdrew their deposits before it was too late, reducing bank reserves and, consequently, the lending capacity of the financial system. Companies with repo operations backed by securities that were losing value found themselves in a worrisome situation because these securities had become unsafe and no longer provided an assurance that their end of the repo transaction would be fully honored.
Gorton and Metrick (2009) define a haircut as the discount on the price of securities provided as collateral in repo transactions. The haircut is one percent if US$99 is offered as collateral for the repurchase of a US$100 bond. The authors recall that haircuts did not exist before the subprime crisis because repo market agents priced securities based on the assumption that they were immune to information. The authors allege that the more risk-sensitive securities originated from real estate transactions began to suffer haircuts after the crisis, including high-quality mortgage-backed securities. Acharya, Gale and Yorulmazer (2011) argue that the financial amount that a security is able to provide when used as collateral depends directly on how the information regarding its quality is revealed. The haircut on some securities reached 100 percent at the end of 2008, indicating that certain assets would not be accepted as collateral at all.
Gorton and Metrick (2009) assert that the combination of a run on the banks and of a reduction in credit available for companies caused by the increase in the haircut created a financing difficulty for the banks. On the one hand, in order to provide collateral for repo operations, banks had to use securities whose total nominal value was progressively becoming greater than the deposits they guaranteed. On the other hand, as the bonds that were purchased with funds from demand and time deposits were losing value, doubts began to arise as to the actual creditworthiness of those deposits. Brunnermeier (2009) and Gorton (2009) affirm that banks had...
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