More than 60% of COEs match Brazil’s CDI yields

The Brazilian structured notes (Certificados de Operacoes Estruturadas, COEs) market exceeded expectations in its first year as returns delivered are equal or above those from interbank certificates of deposit (certificados de deposito interbancario – CDI).

The volume of OTC issues (30,052 products) by 14 banks reached R$6.2bn (US$2.2bn) at the end of January, according to the Brazilian Securities and Exchange Commission (CVM) and the Central de Custódia e de Liquidação Financeira de Títulos (Cetip), the other clearing houses authorised by the Central Bank of Brazil, expects another year of growth in the number of products on offer as investors and corporates seek protection.

Bradesco is one of the largest issuers of COEs with close to R$300m (US$105.3m) in the market and expects to double the volume of COEs issued this year, according to Paulo Eduardo Waack director of treasury at Bradesco, in a statement.

A study of the performance and annualised returns of COEs in 2014 by Cetip revealed that of the 5,100 COEs analysed of which 40 were capital at risk and the rest had protected nominal value, only three had negative returns in the first year.

The research also found that 458 COEs delivered zero yield and returned the initial investment to investors, with the remainder (91%) delivering positive yields.

Returns were good, even with products linked to the Ibovespa [index], indicating that the option to bet on the fall of the index was right, which reinforces the flexibility of the product, stated Carlos Ratto, executive director of the securities unit at Cetip in the report.

The report also found that COEs with positive annualised returns delivered 10.78% pa in the first year, which resulted in 71% of COEs delivering a performance at or above CDIs.

Almost all transactions were executed by individual investors, followed by non-financial corporate and institutional investors. Of the first year’s volume, 95.5% were COEs with protected nominal value.

The research also unveiled that 45% of COEs had investment terms of over two years; with 22% featuring terms of between one and two years; 13% between 181 and 360 days, and 18% 91 to 180 days.

There is room for greater participation in the new market by companies using COEs as a hedge, said Scapelli. Some companies prefer [to use] derivatives that need credit to avoid altering cash resources and therefore are not the target audience for COEs, he said. For those who have spare cash or do not want to compromise their credit limits, COEs are suitable as a hedge against changes of the exchange rate, for example, he added.

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More than 60% of COEs match Brazil’s CDI yields