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27 May 2010
New York, May 27, 2010 -- Moody's Investors Service assigned a local currency issuer ratings
of A1 on the global scale and Aaa.br on the Brazilian national
scale to BM&FBOVESPA S.A. (BM&FBOVESPA), the
Brazilian futures and stock exchange. The outlook on the ratings
The rating reflects BM&FBOVESPA's dominant market share as Brazil's
only major domestic cash equities and futures exchange and clearinghouse.
The current lack of serious competitive threats affords BM&FB significant
pricing power, which, together with its business model's
high operating leverage, translates into very strong profit margins
and cash flow generation. This, combined with the exchange's
limited financial leverage, contributes to the firm's key
credit strength of good financial flexibility, which can be preserved
even with some long-term debt in the capital structure.
In 2009, BM&FBOVESPA generated R$975 million in EBITDA
with a 65% EBITDA margin. Looking ahead, two additional
factors support the sustainability of BM&FBOVESPA's operating
cash flow: first, a reasonable degree of diversification of
trading revenue and, second, the likelihood that, in
the long-term, Brazil's financial and capital markets
will continue to follow their current growth trajectory. Partnerships
with global exchanges, such as the one with CME Group in 2008,
are reinforcing franchise strength as are upcoming strategic joint-ventures;
these should enhance BM&FBOVESPA's earnings diversification
and business position in the global market place. These factors
also reduce the exchange's vulnerability to cyclical declines in
trading levels in any or all traded assets.
BM&FBOVESPA's key credit challenges include: 1) the credit,
market, operational, and liquidity risks of each of the four
individual clearinghouses (equities, derivatives, government
bonds, and foreign exchange), 2) its heavy reliance on technology,
which requires persistently high levels of investment to avoid obsolescence,
and 3) competitive threats that could erode the company's market
share and pricing power.
With respect to the clearinghouses, Moody's believes that
BM&FBOVESPA's risk management approach is both sophisticated
and conservative. BM&FBOVESPA's primary (though not only)
method of minimizing the potential credit and market risks stemming from
its role as a central counterparty is to impose very conservative initial
margin requirements and to actively update them as market conditions warrant.
As a recent example, the company's risk management and operational
processes proved highly effective throughout the market turmoil of 2008
and Moody's expects them to continue to do so going forward.
Moody's notes that like all modern exchanges, BM&FBOVESPA
relies heavily on technology. While this contributes positively
to its operating leverage, it also means that the company must continually
invest in technology to ensure that its systems are both fast and reliable.
This is especially critical as end-users become more sensitive
to network latency, and transaction volumes grow, placing
greater demands on the platform's throughput capacity. In
preparation, BM&FBOVESPA is engaged in a large-scale
upgrade of both its physical infrastructure and matching engine technology.
This critical project poses potential execution risks for BM&FBOVESPA.
The company, however, has a track record of successfully integrating
operations, including when it merged its equities and derivatives
Finally, although BM&FBOVESPA is highly integrated into Brazil's
payments and trading infrastructure -- a reflection of its dominant
market share, it is potentially vulnerable to competition.
Competition could come from local upstarts or foreign entrants enticed
by the profitability and growth prospects of BM&FBOVESPA's business
model. In an extreme case, such competition could reduce
the company's pricing power and erode its market share. However,
any material competitive threat appears unlikely in the near-term
and is therefore not weighing down on the A1 rating, particularly
given BM&FBOVESPA's considerable financial flexibility.
The strong regulatory framework -- both on the part of the
financial system and local capital markets authorities ---
is a positive driver for the A1 rating.
The principal methodology used in rating this issuer was the "Global Securities
Industry Methodology", (published December 2006) which can be found
at www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Credit Policy & Methodologies
Incorporated in Brazil and based in São Paulo, BM&FBOVESPA
S.A. had total consolidated assets of R$22 billion
(US$ 12.2 billion) as of March 2010.
The following ratings were assigned to BM&FBOVESPA:
Global local currency issuer rating of A1, stable outlook
Brazilian National Scale Rating of Aaa.br, stable outlook
VP - Senior Credit Officer
Financial Institutions Group
Moody's America Latina Ltda.
Moody's rates BM&FBOVESPA A1
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
No Related Data.
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