BODB11 is an infrastructure investment fund (FI-Infra) listed on B3. It invests primarily in tax-incentivized debentures issued by infrastructure companies under Law No. 12,431.

The fund is available to the general public and is exempt from Brazilian income tax for individual investors. Its objective is to generate returns for unitholders through monthly distributions that reflect the income accrued by the portfolio (IPCA inflation adjustment plus the debentures’ coupons).

In addition to this accrued income, BODB11 seeks to capture capital gains by buying and selling assets on the secondary market, taking advantage of opportunities arising from declining yields and narrowing credit spreads.

BODB11 benefits from a key strength of Bocaina Capital: a team specializing in infrastructure, with strong proprietary origination and structuring capabilities. This provides access to infrastructure credit opportunities that are often outside the broader market’s focus, offering the potential for more attractive returns from assets of comparable credit quality.

BODB11 distributes the portfolio’s net accrued income each month, meaning the return actually generated by the debentures during that month.

This accrued income consists of the IPCA inflation component and the debentures’ coupons, with the securities marked to market daily, less the fund’s expenses for the period.

Distributions may vary over time due to factors such as the seasonality of IPCA inflation and the number of business days in each month.

For investors, there is no practical difference between receiving an income distribution or a return of capital from BODB. In both cases, the fund pays cash to unitholders, with no change in the economic effect of the investment.

BODB’s monthly distributions may be classified in two different ways: income distributions or returns of capital. This classification is directly linked to the net asset value per unit relative to a capital threshold. The distinction is purely an accounting matter under the rules governing infrastructure investment funds (FI-Infra). In either case, the amount distributed always corresponds to the IPCA inflation adjustment for the reference month plus the fund’s accrued income.

Put simply:

• When the net asset value per unit is above the capital threshold, the distribution tends to be classified as income.
• When it is below the capital threshold, the distribution tends to be classified as a return of capital.

The classification changes, but the amount received by the investor remains the same.

In infrastructure investment funds such as BODB, the net asset value per unit fluctuates daily due to mark-to-market valuation, mainly reflecting movements in the real interest rate curve and credit spreads. As a result, the fund’s net asset value may temporarily rise above or fall below the capital threshold without any change to the portfolio, solely because of market conditions. These fluctuations are a normal part of how the fund operates.

This differs from the behavior of Brazilian real estate investment funds (FIIs). In FIIs, many assets, such as real estate receivables certificates (CRIs), are less liquid and therefore do not undergo precise daily mark-to-market valuation. The result is a more stable net asset value per unit that does not reflect market fluctuations.

FI-Infra funds, by contrast, apply a more accurate mark-to-market valuation and offer a broader income tax exemption for individual investors, covering both income distributions and capital gains. They are also not required to distribute a minimum percentage of earnings. Concepts commonly used for FIIs, such as “accumulated earnings” or “retaining income for the following month”, therefore do not apply in the same way.

In summary:

For BODB, the classification as a return of capital or income distribution is simply an accounting reflection of mark-to-market valuation and the unit’s position relative to the capital threshold. A distribution classified as a return of capital does not represent a loss of value for the unitholder; it is simply how the payment is recorded at that time.

Mark-to-market (MTM) valuation of debentures can initially seem confusing, particularly because custodians have tended not to show it in individual investors’ portfolios.

In simple terms, tax-incentivized debentures are issued at a rate of IPCA inflation plus a coupon, for example, IPCA + 8%.

As debentures trade on the secondary market, their prices may change, resulting in a higher or lower yield. For example, if a debenture issued at R$1,000.00 with a rate of IPCA + 8% is purchased for R$900.00, the buyer’s yield will exceed IPCA + 8%. The extent of that increase depends on the security’s duration.

Even when no trading takes place, movements in the reference NTN-B government bond, whose duration is closest to that of the debenture, affect the debenture’s valuation. For example, if a debenture is benchmarked to the NTN-B 2030, a 0.10 percentage point increase in the NTN-B yield will imply a similar increase in the debenture’s yield.

To check the mark-to-market valuation of a specific debenture, data for most securities is available at data.anbima.com.br.

In January 2023, debentures held directly by individual investors through brokerage firms began to be shown at market value, as they are in investment funds, rather than at the historical accrual value. What does this mean?

Accrual valuation updates the debenture’s price using the yield at which it was purchased.

Under mark-to-market valuation, as explained above, debenture prices change according to their fair market value. Who determines that value? Many assets have an ANBIMA reference price, which is based on benchmark government bonds and market transactions.

For example, R$1,000 invested in a debenture with a five-year duration, purchased one year ago at IPCA + 3% but currently trading at IPCA + 4%, would have an approximate value of R$1,090 under accrual valuation (5.8% IPCA inflation + 3% yield), and approximately R$1,040 under mark-to-market valuation (a roughly 5% decline resulting from a one percentage point rise in yield over a five-year duration).

We view this change positively because it provides investors with more accurate pricing information.

One source of returns in fixed income is a decline in yields and the resulting capital gain.

At BODB11, we seek to invest in securities offering attractive credit risk premiums (spreads), drawing on our technical expertise in infrastructure and our origination and structuring capabilities.

Above-average spreads can provide attractive returns over time and may also generate capital gains if the securities are sold after spreads narrow. The size of the gain depends on the security’s duration.

A rule of thumb for estimating this potential gain is to multiply the duration by the change in the debenture’s yield.

For example, debenture A was issued at IPCA + 8% with a seven-year duration, while comparable securities trade at IPCA + 6.5% on the secondary market. If debenture A is sold at IPCA + 6.5%, the approximate capital gain would be: 1.5 percentage points (yield differential) × 7 (duration) ≈ 10.5% capital gain on sale.

BODB11 annual income tax statements are available directly from the fund administrator, BTG Pactual Serviços Financeiros, through its Investor Portal: https://portaldoinvestidor.btgpactual.com/login.

Due to regulatory restrictions, any questions should be directed to the fund administrator at ir.psf@btgpactual.com.

For returns of capital, BODB11’s treatment as an FI-Infra differs from that of other funds, such as FIIs and FI-Agros. The Brazilian income tax exemption for individual investors in FI-Infra funds is broader, covering distributions classified as income or return of capital, as well as capital gains.

Our understanding is that amounts received as a return of capital should be used to adjust the average acquisition cost. Investors should nevertheless discuss the most appropriate treatment for their circumstances with their accountant. For individual investors, gains from FI-Infra funds such as BODB11 are exempt from Brazilian income tax, including capital gains on the sale of units.