Brazil’s Temer signs infrastructure concessions measure

Brazil’s President Michel Temer signed a temporary decree on November 23rd laying the rules for private concessions to build and operate infrastructure, a key part of his plan to revive economic growth.

The measure, which has to be approved by Congress in 90 days, allows Temer’s government to immediately start granting and renewing concessions for roads, railways, ports and airports under rules modified to attract new investment in Latin America’s largest economy.

The decree, will be published in the official Federal Register on November 24th.

Aging and underdeveloped infrastructure has held back exports from Brazil, one of the world’s main suppliers of iron ore, soybeans, sugar, coffee and meats.

The bill sketches out rules that will allow Temer’s government to strip concession contracts granted during the previous government from investors that have failed to meet the minimum terms of their contracts.

Many engineering companies that are currently involved in infrastructure projects have been entangled in Brazil’s biggest corruption scandal in history, known as Operation Car Wash, and have been pushed to the brink of bankruptcy. Some may not be able to meet the terms of their concessions or put up new investments.

The rules of the new decree also lay out how future infrastructure investors will be able to assume the debt of previous concession holders.

It lays out arbitration rules for disputes with concession holders and allows the government to renew concession terms early in exchange for new investments by operators that have completed the bulk of the construction work in the contract.

The framework legislation also defines how investors can negotiate the return of concession contracts that have turned out to be problematic for investors due to environmental or technical challenges in their execution.

The Temer government in recent weeks has launched sweeping plans to auction off licenses to operate oil and gas, electricity and infrastructure projects to try to boost investment and pull Brazil out of its deepest recession since the 1930s.

Source: Reuters Brazil

Brazil Senate votes to extend asset repatriation amnesty

Brazil’s Senate has approved an extension of a program allowing Brazilians to repatriate undeclared off-shore assets that collected 46.8 billion reais ($13.8 billion) in taxes and fines for the country’s cash-strapped government.

The bill passed by the Senate late on November 23rd would reopen the repatriation window for another 120 days next year and is expected to win approval from the lower chamber before the end of the year as it would give debt-ridden state and local governments a larger share of the revenues.

The bill raises the tax on repatriated assets to 17.5 percent from 15 percent, and hikes the fine similarly, for a total 35 percent penalty.

President Michel Temer’s government is hoping to collect a further 30 billion reais in taxes and fines from Brazilians wanting to declare some of the billions of dollars they are estimated to hold off shore.

The proceeds would help Temer’s effort to balance Brazil’s budget and restore fiscal discipline to Latin America’s largest economy, which is caught in its worst recession since the 1930s.

The government collected more than it expected in the first phase of the program this year. It has promised to share $5 billion of the funds gathered in fines with Brazil’s state governments, several of which are close to insolvency.

A final decision depends on whether the central government can meet its primary deficit goal of 163.9 billion reais this year, a presidential aide told on an interview.

The government raised its revenues estimate for 2016 thanks to the hefty proceeds collected from the asset amnesty program and plans to use part of them to pay down accrued obligations that total about 180 billion reais.

Federal prosecutors investigating millions of dollars in bribes and kickbacks stashed in off-shore accounts in Brazil’s biggest ever corruption scandal have opposed the repatriation amnesty.

“The repatriation bill is a money laundering bill. It is shameful because it fosters impunity from serious crimes,” federal prosecutor Douglas Fischer told the Estado de S.Paulo newspaper.

Source: Reuters Brazil

U.S. Treasury reassures Brazil banks trade with Iran OK

The U.S. Treasury has reassured Brazilian banks they can finance trade with Iran without fear of sanctions, opening the way to billions of dollars in potential exports of jet planes, buses and equipment, a senior Brazilian official said on November 23rd.

Sanctions on non-U.S. entities doing business with Iranian companies were lifted with implementation in January of the nuclear accord with Iran, but Brazilian banks remained worried they could still face repercussions, said Rodrigo Azeredo, Brazil’s top diplomat for trade.

“They feared U.S. and European banks could react by cancelling their credit lines,” Azeredo said.

That is expected to change after Treasury officials explained to executives of Brazil’s largest banks in Sao Paulo last week that they can deal with Iranian banks as long as the transactions – in dollars or any other currency – do not go through the U.S. banking system and do not involve blacklisted Iranian companies.

The assurances from the Treasury’s Office of Foreign Assets Control (OFAC) should remove a financial hurdle to Brazil’s plan to expand trade with Iran to $5 billion in a few years from $1.6 billion last year, the Brazilian foreign ministry official said.

“The potential for trade with Iran is great, but we need the engagement of Brazil’s private commercial banks, and they were very worried,” Azeredo said. “The U.S. government felt almost obliged to update its partners on the sanctions on Iran.”

U.S. President-elect Donald Trump threatened to scrap the nuclear agreement with Iran during his campaign for not being tough enough, which could bring back secondary sanctions on non-U.S. entities.

The OFAC team’s briefing coincided with a visit to Brazil by an Iranian mission headed by Finance Minister Ali Tayebnia seeking to advance trade deals.

Brazil’s Embraer (EMBR3.SA), the world’s third largest maker of commercial planes, is in talks to sell Iran at least 20 of its E-195 jets worth over $1 billion as the Middle Eastern country moves to renew its aging airline fleets.

Embraer still requires a U.S. license for the sale to Iran of sensitive jet engine technology in its planes.

An Embraer spokesman said the company was hopeful it will get the go-ahead following similar licenses granted recently to European planemaker Airbus (AIR.PA) to sell commercial planes to Iran.

Brazilian bus maker Marcopolo SA (POMO4.SA) is also looking to sell hundreds of vehicles to Iran. The company declined to comment.

Azeredo said Iranian companies were seeking Brazilian equipment ranging from tractors and electrical generators to hospital and dental equipment.

Source: Reuters Brazil

“Heat map” of Itaú shows manufacturing activity stabilizing

Recent data show manufacturing activity is no longer cooling but has also not yet shown signs of heating up, according to a “heat map” prepared by Itaú Unibanco. According to the new indicator, manufacturing output has been stabilizing in the last few months after a cycle of decline seen in 2015 and so far this year. During the third quarter, 70% of manufacturing segments had performance classified as “neutral.”

In order to analyze the sectoral evolution of manufacturing, Itaú Unibanco analysts built a “heat map” showing output performance from several segments in colors ranging from very weak (dark blue) to dark orange (very strong), including weak (light blue), neutral (yellow) and strong (light orange).

In the third quarter, 16 out of 23 sectors reviewed had a neutral result, including automotive vehicles, other chemicals, machines and equipment, pulp and paper, and electrical material and equipment. One segment (equivalent to 4% of the sample), metalwork, had a strong performance while 13% showed a weak performance (beverages, tobacco, and construction material) and another 13% were very weak (food, oil products, biofuels and non-metallic minerals).

“The idea is to draw a map that monitors the evolution of manufacturing production in several sectors. Data from the Monthly Industrial Survey of the IBGE [Brazilian Institute of Geography and Statistics] allow a view of the performance of subcategories,” Itaú Unibanco economist Laura Pitta says. According to the report, the most recent results show a clear stabilization trend, although there aren’t evident signs of recovery.

Economist Felipe Salles says manufacturing is reaching a turning point. “It still isn’t growing, but it stopped shrinking,” he says. “It’s what is called a turning point. From now on, we will probably see some growth where there was decline before.”

At this point in the cycle data naturally fluctuates a bit more, Mr. Salles says. “Output grows, then disappoints, falls, then it improves again,” he says. Summing it up, manufacturing is in a stage of stabilization and soon a recovery phase will start, he says. “Looking a bit further, it’s safe to say that: manufacturing has tended to stabilize since March.”

By discussing manufacturing prospects, the study says that “cyclical inventory adjustments, which were ongoing in the last few months, should continue since demand remains above output.” Together with the expectations of continuity in the monetary-easing cycle, this picture “indicates a scenario of manufacturing growth from now on.” Itaú Unibanco predicts a reduction of 0.25 percentage points at the Monetary Policy Committee (Copom) meeting scheduled for the end of November, taking the Selica policy rate to 13.75%. Rates could fall more steeply throughout 2017 and reach 10% later in the year, the bank says.

The “heat map” index seeks to measure the most recent behavior of each sector, providing a score for each month’s variation. The score ranges from -2 to 2 “depending on the magnitude of the movement in comparison to historical performance.” To eliminate volatility, the model uses quarterly fluctuations for each manufacturing sector to try and “capture the trend.” The August indicator, for instance, compared the June-August output with the February-May period.

In fact, the “heat map” for the three months ending in August showed a picture with more sectors improving. There was 13% of sectors with a performance classified as very strong, 22% as very strong and 48% as neutral, in addition to 9% classified as weak and another 9% as very weak.

But wouldn’t the three-month result to September indicate that manufacturing is weakening? “This volatility of results is characteristic of cycle turning points and doesn’t mean a change of trend,” Ms. Pitta says.

Manufacturing production rose in all months between March and June in comparison to the previous month, after seasonal adjustments. It dropped slightly in June, at 0.1%, and fell further in August with a 3.5% drop. Manufacturing started rising again in September, growing 0.5%. But such indicators as vehicle output, heavy vehicle traffic on toll roads and cement output fell again in October. Itaú Unibanco forecasts a 1.2% drop from September in the seasonally adjusted series.

The bank forecasts a 6.7% decline in manufacturing this year, and 5% growth in 2017.

Source: Valor Econômico S.A.

Geneseas and DellMare merge into stronger seafood player

With an eye to the consolidation of the fragmented fishing industry in Brazil, private-equity fund Acqua Capital is expected to announce on November 21th the merger of Geneseas, one of the largest processors of tilapias in the country, and shrimp distributor DellMare.

From the combination of the two companies emerges a “new” Geneseas, with about R$250 million in projected sales in 2017. The fund aims to have the fishing business reach R$1 billion in revenues within five years.

The combined company will continue being controlled by Acqua Capital, Geneseas CEO Breno Davis told on an interview. “Acqua continues with over 50% in the Geneseas equity, but will be a little diluted,” he said. He declined to disclose the deal’s value.

Fabrício Ribeiro, founder of Ceará-based DellMare, will be a minority shareholder in Geneseas and also member of its management, handling relations with big clients.

Mr. Davis said that Geneseas and DellMare are complementary. Whereas the former serves mainly the food-service business (restaurants), the latter is stronger in retail. In addition to the two companies’ leading products, tilapia and shrimp, they both also distribute other types of seafood, such as salmon and squid.

DellMare is not focused on having its own production in fishing farms, but in distributing. Mr. Davis said the company originates 3,000 tonnes of the crustacean per year, especially in Ceará and Rio Grande do Norte. An outsourced company based in Aracati, Ceará, processes the shrimp.

Founded in 2001, Geneseas owns a tilapia-processing unit in Aparecida do Taboado, Mato Grosso do Sul, on the border with the São Paulo state. In the region, specifically in the reservoir of the Ilha Solteira hydropower dam, the company has four farms for creation of tilapia.

Geneseas currently produces 12,000 tonnes of tilapia per year, the equivalent of 5% of the Brazilian output. In 2015, Brazil produced 219,300 tonnes of the fish, according to the Brazilian Institute of Geography and Statistics (IBGE). Main fish of the Brazilian aquaculture, tilapia is likely to lead — together with Amazon fishes — the growth in fisheries production in the country, Rabobank estimates.

“There are plenty of fish in the sea. Tilapia has a fantastic potential,” Mr. Davis said. He added that São Paulo state began in October a move that may address what may be the biggest hurdle to aquaculture. By simplifying the environmental licensing process for production in dam reservoirs, São Paulo may serve as example to the rest of Brazil. “We believe that several other states may follow this move.”

In addition to Geneseas, Acqua Capital controls Rural Brasil, a chain that distributes farm inputs, fertilizer companies Aminoagro and Dimicom, wine retailer Gran Cru and Yes, a producer of additives for animal feed.

Source: Valor Econômico S.A.

Proposed law would help Rio advance oil royalties

The Chamber of Deputies could vote next week on a bill that removes an important hurdle to the proposal of pushing forward oil royalty revenues for Rio de Janeiro, part of the package being considered to alleviate the state’s severe financial crisis. Proposed on November 17th by Federal Deputy Hugo Legal (Brazilian Socialist Party, PSB, of Rio de Janeiro), the bill allows directly depositing the royalties in the account of creditors who purchase the royalty-backed bonds.

An executive with a bank involved in the talks says banks had pointed out in recent negotiations that isolating the state’s credit risk from the bonds was indispensable to ensure their viability. “If approved, this tool eliminates the need to win federal clearance for new borrowing by Rio. The federal government had already stated its rejection, and it couldn’t even provide it in the first place due to the risk of creating a precedent for other states,” the executive tells on an interview. “Investors feared running Rio’s credit risks. Without them, the transaction tends to become much cheaper. The only risk left is of oil price fluctuations.”

The source says there’s still another problem aside from the backing issue. Most of Rio’s royalties flow is already committed to two bond issues by Rioprevidência, the state’s pension fund, in 2014 and maturing in 2024 and 2027. According to credit-rating firm Fitch, 100% of future oil royalties have been ceded by the state to its pension fund. “They need to evaluate the room for a new issue within the royalty flow,” the executive says.

One potential solution, albeit very difficult to achieve, would be proposing a migration to new debt from Rio to Rioprevidência’s bondholders, which include US bond giant Pimco. This way the entire royalty flow would be cleared for securitization under new terms.

Negotiating this new deal would not be simple because the securities already had to be renegotiated after the steep drop in oil prices, which drastically shrank royalty collection. The revenue now can only cover debt service costs, whose coupon was revised to 9.25% from 6.25% in the renegotiation. The proposed law would ensure that royalties are deposited in creditor accounts, which, in turn, would allow new negotiations to lower the rate and encourage bondholders of Rioprevidência to migrate to the new debt issue.

Banco do Brasil has been tasked with coordinating the efforts for the bond swap and has already approached some banks for the swap. BB helped structure the Rioprevidência bonds, along with French bank BNP.

Source: Valor Econômico S.A.

Cemig seeks foreign investor to maintain hydropower plants

Companhia Energética de Minas Gerais (Cemig), the state’s power utility, is seeking a private-sector partner to try to maintain the control over three hydroelectric dams that are at the center of a strife already lasting four years between the company and the federal government. The power company has been holding talks with foreign groups, including from Italy and China, the state’s secretary of Planning, Helvécio Magalhães, also a Cemig board director, told Valor.

On another front, Cemig is also advancing in talks to get rid of the problem of put option for Light shareholders.

Regarding the hydropower plants, the Minas company intends, together with a partner, to pay Brasília the value related to their licenses. “It would be R$10 billion. And this would be done through an agreement with the federal government,” Mr. Magalhães said. The deal would have the Federal Supreme Court (STF) blessing and end the disputes for the dams’ concession. The fight is being under consideration at the STF, with Justice Dias Toffoli, who demanded the parties seek an agreement.

Mr. Magalhães said the greatest expectations were of a partnership with a foreign players. A Cemig source told Valor that the company wouldn’t be able to pay such a high value alone. That is why it is seeking a partner. Talks with the federal government are being held every week. The company reckons that foreign capital started to see Brazil again as a more attractive destination for investments, especially after the government change.

Since 2012, when provisional measure (MP) 579 was published, the government has been saying that it intends to auction the three dams: Jaguara, Miranda and São Simão.

With an agreement at the STF, Cemig would avoid an auction, ensure the maintenance of these assets and also secure an expected injection of funds from Brasília. The company considers crucial to hold the plants’ concession for 20 more years. They account for 40% (or 3.2 gigawatts/hour) of Cemig’s generation capacity — not counting the capacity of companies in which it has stakes.

Source: Valor Econômico S.A.

Footwear industry manages to create jobs amid recession

The footwear industry is one of the few in manufacturing that has been creating jobs in 2016. From January to September, it formally hired 20,400 more workers than it dismissed, according to the General Register of Employed and Unemployed Workers (Caged), against 4,300 net hires a year earlier.

The balance raised the number of workers in the sector, which was 283,100 in 2015, to close to what it had in 2014, when it formally employed 309,300 people — thus contributing to reduce the negative balance in 12 months (9,100 as of September).

This performance owes in part to the growth in exports, which compensates some of the domestic contraction, and also to the substitution of imports, which have gotten more expensive as the Brazilian currency, the real, devalued. One of the cities that had more new jobs, in fact, is devoted almost exclusively to the domestic market.

Shoe manufacturers in Nova Serrana, Minas Gerais, created 4,794 jobs in the period, nearly 70% of the total in the state and more than twice as many as the 2,000 jobs created between January and September 2015.

Only Franca, in São Paulo, hired more in the footwear industry: 5,042. Only 2% of the shoe production in Nova Serrana, which reached 105 million pairs in 2015, is exported, says Pedro Gomes, president of the Inter-Municipal Union of the Footwear Industry of Nova Serrana (Sindinova).

That, he says, is a result of the productive reorganization that the sector has been undergoing in the region for the past three years. Traditional manufacturer of sports shoes, Nova Serrana has been increasingly dedicating itself to low-cost women’s shoes made of synthetic fabric, which already account for 65% of its output. “Four years ago, sports shoes were 80% of the total,” Mr. Gomes says.

The shift, Mr. Gomes says, was facilitated by the region’s productive structure, made up mainly of small and medium-sized firms, which would have an easier time adapting their facilities. The growth in hiring, however, is not yet an effect of growing production, since that is close to the level of 2015, but of improvements that lowered the manufacturers’ cost.

Source: Valor Econômico S.A

Bracher, future Itaú CEO, promises continuity

Itaú Unibanco announced on November 9th the end of the 23-year management of Roberto Setubal ahead of the largest private-sector bank in the country. From April 2017, the bank will be headed by Candido Bracher, from wholesale and investment unit Itaú BBA. Mr. Setubal will become co-chair of Itaú Unibanco’s board of directors along with Pedro Moreira Salles, the current chairman.

When announced for the post, Mr. Bracher’s first message was that few changes would come. “The work will be essentially of continuity,” he said during a news conference held on November 9th at the bank’s headquarters. Soon to turn 58, Mr. Bracher will have four years ahead of the bank, which sets at 62 years the maximum age for the CEO post.

The bank ruled out raising that ceiling. “It’s important to keep that age to open spaces and give opportunities in the bank,” said Itaú chairman, Pedro Moreira Salles. Also on November 9th, an executive familiar with the bank said that Márcio Schettini, 52, one of the two executives left out in the succession process, remains a candidate for the job four years from now.

One of the challenges for Mr. Bracher ahead of the bank will be to keep the strong expansion pace from the Setubal management. In the period, Itaú posted annual growth of 20%, driven by a series of acquisitions, including that of Unibanco in 2008, which placed the lender as the top Brazilian private-sector bank, overtaking Bradesco. Itaú ended the third quarter with R$1.4 trillion in assets. Mr. Bracher signaled that the growth strategy for acquisitions would be maintained.

Itaú’s change of command was widely expected, since Mr. Setubal turned 62 in October. The process leading to the choice of Mr. Bracher began in 2013, when the bank announced the age limit for the CEO position and reshaped its management organization.

Mr. Setubal, also present in the press conference, said Mr. Bracher was the “natural candidate” to succeed him and was chosen by consensus.

Mr. Bracher, who has built his entire career in wholesale and investment banking, will take over Itaú Unibanco at a time of great transformation in retail banking, with customers migrating to digital service channels and the shutdown of branches. Mr. Setubal said any executive who were chosen to succeed him would have some sort of “gap” in relation to the bank’s business. “We will have a transition period of six months, when Candido [Bracher] will have the opportunity to experience the day to day with me,” he said.

Source: Valor Econômico S.A.

Shell plans $10bn investment in Brazil

Already the foreign company with the most investments in Brazil, Shell will spend an additional $10 billion in the country over the next five years. The money will come from the Anglo-Dutch oil major’s investment budget and doesn’t require any new funding effort. CEO Ben van Beurden says the amount isn’t related to projects Shell already is participating of, including giant fields Lula and Libra of the pre-salt layer in the Santos Basin. The budget also excludes potential bids on the 2017 auctions and fuel distribution investments, since Shell is already a Cosan partner in Raízen. Shell intends to end 2016 with $29 billion in investments, amount that is likely to decline to $25 billion in 2017.

Regarding new projects, Shell’s president in Brazil, Andre Araújo, says the plans depend on regulatory changes like defining the unitization of already surveyed prospects whose reserves overlap with nearby areas still held by the federal government, as well as local-content rules. Shell already operates the Gato do Mato field in the pre-salt, which needs a unitization agreement and should be auctioned in 2017.

Mr. Van Beurden doesn’t rule out participating in that one and other auctions slated for 2017 but says ongoing projects are more important because, in addition to any bonuses won in upcoming auctions, more significant investments on auctioned areas will take place in the next six to eight years.

“Investments in existing projects will be $10 billion in the next five years. They will come from projects started together with Petrobras and other partners a few years back. We need to focus on the future, in the projects coming in the next decade, but we also need to focus on what we are doing now. It will make a difference for the country, much more than the next auctions.”

Source: Valor Econômico S.A.