Government tries again to pass state bankruptcy law

The government presented to Chamber of Deputies President Rodrigo Maia (Democrats, DEM, of Rio de Janeiro) the new state financial recovery bill, a fundamental part of bailout efforts to Rio de Janeiro, Rio Grande do Sul and other states. The proposal was supposed to be forwarded to Congress still on Monday, 23rd February, and defines several austerity measures that states have to adopt in exchange for halting payments of their debt to the federal government, refinancing bank debts and borrowing more to balance accounts.

The so-called Fiscal Recovery Regime would allow states to halt repayment of loans from public and private-sector lenders by up to 36 months, and renegotiate them under the same terms of their debt to the federal government, if the state requests to join the program. “We are using the same concept from the bankruptcy law for the fiscal recovery of states,” an official says. It serves as a kind of warning to banks better review the financial situation of each state before extending new loans while also protecting the federal government from having to shoulder the entire bill.

The proposal includes a mandate allowing banks that lend in anticipation of privatization revenue to appoint a board member “whose role will be contributing to the divestment plan’s success.” The privatization of Rio de Janeiro’s water and sanitation company, Cedae, which will count on a guarantee from Banco do Brasil, is one example of this mechanism.

Known as the states’ bankruptcy law, the bill represents the government’s second attempt to secure a bailout for barely solvent states after failing last year to convince the Chamber to keep the austerity demands.

Regarding December’s failed proposal, whose austerity measures were removed by deputies, the new draft evolved them by referencing more explicitly the Fiscal Responsibility Law (LRF) and granting exemptions for cases when states are forbidden from taking new loans.

The bill also forces states that file for bankruptcy to prove that legislation demanded in exchange (like authorizing privatizations and raising pension dues) already is in effect, meaning the federal government will not allow new borrowing that creates high risks to the Union, which guarantees the loans, and to banks.

The new bill removed the possibility of cutting hours and pay of government workers from states that join the process. The measure was included in the December bill and remains controversial. It’s currently under review by the Federal Supreme Court (STF).

Demands on states to liquidate leftover spending and debts every six months through auctions were also removed. The new draft lets the fiscal recovery plan decide the auctions frequency. The new version also blocks withdrawing deposits in court, except those allowed by complementary law 151, of 2015, which deals with cases linked to the public sector. Even in this case, the withdrawals are not allowed until states can keep at least 30% of the amount deposited.

States also will have to lower payroll spending to join the program. The original draft mentioned three criteria: lower net current revenue than consolidated debt; current revenues lower than fixed costs; and higher spending than available cash from non-constitutionally mandated expenditures. The new draft clarifies the first and second items (including which period and the law that sets the criterion) and replaces the second item with payroll spending of at least 70% of current revenues collected before filing for bankruptcy protection. Those criteria try to prevent that all states end up joining the program, which could generate an unbearable cost to the Union.

The bill also creates a supervisory council for the program, with three fixed members and three alternates. Three new jobs will be created at the highest federal pay level (DAS 6, of R$15,500) for them. States will not participate in the council, whose members will be appointed by the ministries of Finance and Transparency.

The council members will have access to all states’ financial data and can recommend revising or even suspending contracts in case of rule violation. They will have to file monthly reports on the fiscal situation of each state and a final report on the entire process.

Source: Valor Econômico S.A.

Brazil set to keep aggressive pace of rate cuts to salvage economy

Brazil’s central bank will likely maintain its aggressive pace of interest rate cuts on February 22nd despite some calls to further step up monetary easing to rescue an economy mired in recession.

The bank’s 9-member monetary policy committee, known as Copom, will likely cut its benchmark Selic rate BRCBMP=ECI by 75 basis points to 12.25 percent, according to all but one of the 54 economist previously surveyed by Reuters.

Unions and business groups have demanded a cut of 100 basis points to reduce some of the world’s highest borrowing costs, which they say could undermine a still feeble recovery.

A rapid drop in inflation, which could end the year below the 4.5 percent official target, has strengthened the case for a bolder rate cut after the bank surprised markets by cutting more than expected at its last meeting.

The recent appreciation of the real currency BRBY has analysts betting on more aggressive rate cuts ahead.

“We think there is a growing case for a bolder cut of 100 basis points– if not now, then at the next policy meeting,” economists with BNP Paribas wrote in a note to clients.

Central bank chief Ilan Goldfajn has signaled policymakers would maintain the current pace of rate cuts, but that future monetary easing would hinge on the approval of austerity reforms to ease inflationary pressures.

Brazil’s recession, the worst in its history, has left millions unemployed and bankrupted hundreds of companies, raising pressure on Goldfajn to lower rates.

Facing a grueling fiscal crisis President Michel Temer is relying on falling interest rates to exit a recession that threatens to stretch into a third year.

However, the sharp drop in inflation has sparked a debate inside his administration over whether the government’s 2019 inflation target, decided in June, should be set at a lower level. That could slow the pace of monetary easing.

Brazil introduced an inflation rate target in 1999. The current 4.5 percent goal was first adopted for 2005, originally with a tolerance margin of plus or minus 2.5 percentage points. In 2015, the government narrowed the range to plus or minus 1.5 percentage points.

Source: Reuters Brazil

Brazil’s inflation likely to drop below 5 percent in mid-February -poll

Brazil’s inflation rate probably eased below 5 percent in mid-February for the first time since 2012, a poll showed, putting the central bank very close to its long-missed target and keeping the door wide open for interest rate cuts.

Consumer prices as measured by the IPCA-15 inflation index probably rose 4.99 percent in the 12 months through mid-February, down nearly 1 percentage point from mid-January, according to the median of 25 estimates.

Prices probably rose 0.50 percent from mid-January, up from an increase of 0.31 percent in the previous month, according to the median of 29 forecasts in the poll.

The numbers will be released on February 22nd, the same day the central bank is expected to slash interest rates by another 75 basis points to a two-year low of 12.25 percent, according to a separate poll.

Falling inflation and interest rates are expected to help the economy pull through its two-year-long recession. That would bring relief for President Michel Temer, who is working to garner support for austerity measures in Congress.

The central bank’s inflation target is 4.5 percent. With consumer prices slowing more rapidly than expected, most economists expect the government to reduce the goal for 2019, according to a Reuters poll last week.

Source: Reuters Brazil

Heineken takes battle to AB InBev in Brazil with $1 billion Kirin deal

Heineken NV (HEIN.AS), the world’s second-largest brewer, agreed on February 13th to buy the loss-making Brazilian breweries of Japan’s Kirin Holdings Co Ltd (2503.T), boosting its presence in the world’s No. 3 beer market.

The Dutch brewer will become the second largest beermaker in Brazil, with a share of about 19 percent, behind market leader Anheuser Busch InBev SA (ABI.BR). Including debt, Heineken said it would pay 1.025 billion euros ($1.09 billion) for Brasil Kirin.

For Kirin it marks a departure from the Brazilian market, having paid some $3.9 billion in 2011 for 12 breweries, a business which has subsequently lost market share and seen raw materials costs rise due to a weak currency and rampant cost inflation.

Kirin said that Brazil’s economic risks and a stagnant and competitive beer and soft drink market meant there were “limitations” to making Brasil Kirin profitable. Kirin said the unit made an operating loss of 284 million reais in 2016.

Brazil’s economy is set to enter a third year of recession in 2017, but Heineken said that the nation’s beer market was attractive in the longer term, with a premium segment growing faster than the market as a whole.

The acquisition will increase Heineken’s presence in the north and northeast of Brazil, allow it to boost sales of the premium lagers Heineken and Sol and yield cost savings.

It already has five breweries in Brazil from its 2010 acquisition of the beer business of Mexico’s FEMSA (FMSAUBD.MX).

“None of the normal ratios work because it’s loss-making, but it’s a very attractive price,” said Trevor Stirling, beverage analyst at Bernstein Research.

COMPETITION

Credit Suisse Group AG advised Heineken on the deal.

Some analysts have also said the deal is important as it makes Heineken a stronger rival in a heartland of global beer leader AB InBev just as the latter has pushed into Heineken’s markets elsewhere through its takeover of SABMiller.

The acquisition, dependent on approval by Brazil’s antitrust agency, is expected to close in the first half of the year.

Shares of AB Inbev’s local unit, Ambev SA, gained 0.5 percent to 17.22 reais in São Paulo, a sign the transaction allayed concerns of an imminent price war in the short run.

In the long term, however, “the reading of this news could be negative, because Ambev will have to cope with a stronger competitor,” a client note by Banco BTG Pactual’s trading desk said.

Separately, Kirin said it would take a 51 percent stake in a beer company in Myanmar. The company, Mandalay Brewery Ltd, will be 49 percent owned by Myanmar Economic Holdings. Kirin and Myanmar Economic Holdings already run already another beer joint venture, Myanmar Brewery Ltd.

Kirin also said it had ended capital alliance talks with Coca-Cola Group (KO.N), though the two companies would continue to discuss a potential operational partnership.

($1 = 3.1145 reais)

($1 = 0.9386 euros)

Source: Reuters Brazil

Exclusive: Carlyle’s Brazil developer battles mounting client, creditor lawsuits

A Brazilian land developer controlled by Carlyle Group LP (CG.O) investment vehicles is buckling under mounting client and creditor lawsuits and an unsustainable debt load, highlighting legal risks facing global buyout giants in Latin America’s No. 1 economy.

The survival of Urbplan Desenvolvimento Urbano SA increasingly depends on creditors’ willingness to restructure 450 million reais ($145 million) of asset-backed securities, and the unlikely reversal of hundreds of rulings allowing clients to cancel land purchases.

Urbplan, which develops residential lots by laying out basic infrastructure, is the target of more than 2,000 lawsuits nationwide, half of them in São Paulo state. Most of them come from clients who want their land purchases annulled, saying Urbplan halted work during a two-year shareholder dispute.

As creditors question a three-year, Carlyle-led turnaround that has prepared about 70 delayed projects for delivery, bankruptcy protection could be the only solution for Urbplan to cope with Brazil’s harshest recession ever and onerous debt servicing, two people familiar with the matter said.

The situation highlights how global private-equity firms have struggled to navigate Brazil’s complex legal and business environment. Courts tend to hold executives and shareholders personally responsible for corporate tax and labor claims.

In recent months, at least one creditor has asked a São Paulo judge to declare the developer insolvent due to alleged fraud, while another has sought to publish the names of Urbplan and Carlyle’s Brazil executives in newspapers, as a way to expose their links to Urbplan’s woes, documents reviewed by Reuters showed.

A spokesman for Washington, D.C.-based Carlyle told Reuters the fraud accusations “are false, baseless and reckless” and would be disputed and defeated if pursued in court. Urbplan and Carlyle declined to comment on a possible creditor protection filing.

PROMINENT PLAYER

The recession has magnified the risks facing investments by private equity funds. Reuters reported in October that KKR & Co Inc’s (KKR.N) first-ever investment in Brazil has turned into a battle over mismanagement allegations.

Perhaps the most prominent among the buyout titans that planted flags during Brazil’s boom a decade ago, Carlyle has had setbacks too. Reuters reported in July that it sold lingerie maker Scalina SA after a failed debt restructuring effort.

A web of Carlyle-run real estate investment funds bought Urbplan when valuations were stretched, the currency was overvalued and interest rates were falling.

The buyout giant paid Brazil’s Scopel family about $100 million for a 60 percent stake of Scopel Desenvolvimento Urbano Ltda in 2007 in its first foray into the country. Five years later, Carlyle took full control of Scopel and renamed it Urbplan, following a $100 million capital injection.

Under Carlyle, Urbplan embarked on an ambitious debt-fueled expansion, often running afoul of complex local urban development rules, two former employees told Reuters. Between 2007 and 2012, Urbplan raised about 700 million reais from the sale of real estate receivable-backed bonds.

The rift between Carlyle and Urbplan creditors has escalated since then, even after the Carlyle investment vehicles, clients and co-investors injected $160 million in fresh equity, lent the developer about $91 million and advanced more than $110 million in additional funding, one of the people said.

The money has proved insufficient to revive Urbplan, which remains mired in high debt and litigation costs, the same person added.

The Carlyle spokesman said Urbplan has “substantially completed its pending projects and fulfilled these obligations” largely thanks to investment from the private equity firm.

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RECESSION

As of the end of last year, about 50 percent of client receivables that Urbplan had packaged into debt were more than 90 days overdue, the first person said.

Creditors, who earn annual returns of around 30 percent on some of Urbplan debt, claim the company’s woes are due to mismanagement, fraud and embezzlement, according to some of the lawsuits to which Reuters had access.

One of the lawsuits demanding that Urbplan be declared insolvent alleges the Carlyle-backed management shakeup prevented the developer from staying current on payments to bondholders.

Another claims that Urbplan’s management sold a pool of property receivables to several Carlyle-controlled distressed debt funds at below-market prices.

Carlyle denies the accusations.

According to José Luiz Bayeux Neto, an attorney representing creditors led by securitization firm Gaia Securitizadora SA in the lawsuits, “related-party transactions between Urbplan and vehicles controlled by Carlyle Group in the past couple of years need to be thoroughly explained.”

($1 = 3.1200 reais)

Source: Reuters Brazil

Brazil’s busiest week for IPOs in years marked by mixed fortunes

Brazil’s busiest week for initial public offerings in nearly four years ended on February 10th with mixed results for issuers, faced with wariness among foreign investors toward Latin America’s largest equity market amid fallout from political turmoil.

Rent-a-car company Movida Participações SA and medical laboratory Instituto Hermes Pardini SA launched their IPOs despite pressure for lower prices. But tough market conditions led Movida’s rival Unidas SA to scrap its own listing on February 10th.

Aside from overlapping IPOs between the rental car rivals, the pricing of a large 4.1 billion real ($1.32 billion) follow-on offering by CCR SA (CCRO3.SA), Brazil’s No. 1 toll road operator, might have hampered demand for the IPOs, four people familiar with the deals said.

Investors stung by a string of deals in recent years that failed to deliver promised returns are wary of IPOs in Brazil. Just over a third of the 138 IPOs priced in the past decade yielded returns above Brazil’s interbank lending rate, Thomson Reuters data showed, with the remainder losing part or all of the amount initially invested.

This week was the busiest for local equity offerings since April 2013. Movida’s shares, which plunged on February 8th – their first day of trading – have since recovered and booked a 2.7 percent gain on the week.

Extending the current wave of offerings hinges on President Michel Temer’s ability to push ahead with ambitious reforms to lower the country’s risk perception, bankers said.

“This week showed we are still in a buyers’ market and investors still feel more comfortable taking existing risk than new one,” said one of the people, who asked for anonymity to speak about the transactions.

BALANCING ACT

Stronger equity markets and companies’ need to fund growth or reduce debt are the “fundamental catalysts in place” sustaining IPO activity in Brazil and Latin America this year, according to Pedro Martins, chief Latin America equity strategist for JPMorgan Securities.

However, companies seeking to tap the local equity markets face a balancing act: how to offer acceptable risk and return as Brazil enters a third straight year of economic recession and global market turmoil escalates under U.S. President Donald Trump’s trade protectionist stance, bankers said.

Such uncertainty is keeping foreign investors – traditionally the main buyers of Brazilian IPOs – on the sidelines. Foreigners snapped up only 15 percent of the Pardini deal, a fraction of the 67 percent participation ratio they had about a decade ago, the people said.

The mixed results of this week’s IPOs may shed light on how a list of long-awaited listings should come to market. Those companies include airline Azul Linhas Aéreas Brasileiras SA, securities firm XP Investimentos SA and the Brazilian unit of France’s Carrefour SA.

The companies declined to comment.

A new wave of IPO requests should resume in late March or early April and stretch for longer should market conditions prove favorable, bankers at Itaú BBA SA and Banco Bradesco BBI SA, the country’s largest equity underwriters, recently told on an interview.

Movida’s IPO on February 6th raised a smaller-than-expected 645 million reais, after controlling shareholder JSL SA was forced to lower the deal’s pricetag. A member of JSL’s controlling family subscribed about 15 percent of the deal to ensure its completion, Reuters reported, citing sources.

On February 9th, Hermes Pardini clinched about 878 million reais at a price slightly above the floor of the suggested price range.

At the floor of the price range, investors bid the equivalent of three times the amount of shares on offer, Reuters reported earlier in the day, citing sources.

In the case of Unidas, shareholders Gávea Investimentos Ltda, Vinci Partners and Kinea Investimentos Ltda shunned a suggestion from bankers to cut the price and secure demand for the IPO. They are working on ways to help the shareholders exit their combined 45 percent stake in Unidas, the people said.

Source: Reuters Brazil.

Brazil, Argentina push for closer trade with Mexico in Trump era

The leaders of Brazil and Argentina said on February 7th they would pursue closer ties with Mexico and other Latin American nations alarmed by U.S. President Donald Trump’s promises to tear apart trade deals and build a wall to protect American jobs.

The leaders of Brazil and Argentina said on February 7th they would pursue closer ties with Mexico and other Latin American nations alarmed by U.S. President Donald Trump’s promises to tear apart trade deals and build a wall to protect American jobs.

In a state visit to Brasilia, Argentina President Mauricio Macri said that South American regional trade bloc Mercosur would focus on strengthening its relationship with Mexico, Latin America’s second-largest economy after Brazil.

Trump has abandoned the Trans-Pacific Partnership deal that aimed to bolster trade between 12 Pacific Rim nations, including Mexico, Chile and Peru.

In his campaign to keep manufacturing jobs in the United States, Trump has also threatened to slap higher taxes on U.S. companies opening new plants abroad and promised to rework the North American Free Trade Agreement with Canada and Mexico.

Tensions are running particularly high with Mexico after Trump ordered the construction of a wall along its 2,000-mile (3,200-km) border with the United States to stop illegal immigration.

Those moves were hailed by Macri, who came to power in 2015 on a business-friendly program, and his Brazilian counterpart Michel Temer as an opportunity to deepen trade ties within Latin America, long overshadowed by Washington’s economic might.

“This change in scenario will make Mexico turn to the South with more conviction,” Macri said in a statement, after inking a series of small deals with Temer, a centrist who assumed the presidency last year after the impeachment of Dilma Rousseff.

Macri said he spoke with Mexican President Enrique Pena Nieto on February 6th to discuss deepening cooperation between Mexico and Mercosur and wished him good luck in his dealings with the United States.

DITCHING PROTECTIONISM?

Both Macri and Temer are seeking to open their countries – for decades considered among the most closed economies in the Western Hemisphere – in an effort to revive activity after years of recession.

Some local trade experts say a potential rift between the United States and Mexico could open up space for Latin American nations.

“Mexico represents a great opportunity for Brazil and the region,” said Welber Barral, the former international trade secretary for Brazil from 2007 to 2011. “Mexico is a huge importer of agricultural products and its car industry could complement that of Brazil.”

Since 2015, Brazil, a major exporter of corn and soy, has been in bilateral negotiations with Mexico to increase commercial ties under a regional trade agreement.

The trade flow between Latin America’s biggest economies has dropped nearly 10 percent between 2012 and 2016 to $7.3 billion, roughly the size of commerce between Brazil and the much-smaller Chile.

Both Macri and Temer also hope that the Mercosur can take advantage of the apparent change in the U.S. trade posture to close a free trade deal with the European Union in talks that have dragged on for more than a decade.

After suspending socialist-led Venezuela from Mercosur last year following Caracas’ persistent failure to meet entry requirements, Argentina and Brazil are gearing up to extend trade ties. Smaller neighbors Paraguay and Uruguay are also members of Mercosur.

Tensions over market access, however, continue to dog the regional trade bloc. Although Buenos Aires is willing to discuss the entry of Brazilian sugar into its market, its move to increase tax benefits to local auto parts manufacturers has infuriated Brazilian rivals.

In an interview with Brazilian newspapers published on February 07th, Macri complained about his country’s $4.3 billion trade deficit with Brazil.

Source: Reuters Brazil

Brazil raises income limits for subsidized mortgage program

Brazil’s government said on February 6th it was raising income limits for a subsidized mortgage program in an effort to spur the country’s struggling construction industry and spark a long-awaited recovery from the worst economic recession on record.

The government’s MCMV mortgage program, which finances new home purchases at below-market interest rates, will now cover households with monthly incomes as high as 9,000 reais ($2,900), among the most affluent 5 percent of Brazilian families.

The program, first conceived as a stimulus for low-income home ownership, has been progressively expanded in recent years to cover families earning up to 6,500 reais per month last year.

A report from February 9th revealed details of the new policy aimed at shoring up the construction industry after homebuilders suffered a wave of canceled sales due to high unemployment and borrowing costs were.

Income limits for more modest MCMV segments are also being adjusted from 2016 levels to compensate for consumer inflation. Brazil aims to finance 610,000 new homes with the mortgage program this year, which stalled last year amid political turmoil and a severe budget crisis.

In a ceremony in Brasília, President Michel Temer said civil construction is a key sector to revive the Brazilian economy, which he said will return to growth in 2017.

($1 = 3.12 reais)

Source: Reuters Brazil

Brazil and Argentina to discuss sugar status in trade bloc

The status of sugar in the Mercosur trade bloc is likely to be discussed by the presidents of Brazil and Argentina when they meet on Tuesday, Brazil’s Agriculture Minister Blairo Maggi said on February 6th.

Sugar is not included on the list of goods and products subject to free trade within Mercosur, the South American bloc that includes Uruguay, Paraguay and Venezuela.

Argentine farmers fear a deluge of cheaper Brazilian sugar in the country if current levies are withdrawn.

Presidents Michel Temer of Brazil and Mauricio Macri of Argentina will meet in Brasilia as part of an official visit by the Argentine leader.

“We assured them (Argentina) that we are not going to dump our sugar in their market,” Maggi told reporters during a meeting with industrial leaders in Sao Paulo.

Brazil is the world’s largest producer and exporter of sugar and arguably the most competitive one, thanks to favorable conditions for cane cultivation and a large sugar producing industry.

Sugar was never a product on the list of products that can be imported and exported between countries free of taxes and tariffs within Mercosur and Argentine sugar producers do not expect changes in the current status of the sweetener in the bloc.

“It might be that Brazilian officials present a request (for the product’s inclusion). But we do not expect any changes,” said Enrique Nogues, head of Argentina’s sugar industry association Centro Azucarero.

Argentina’s Agriculture Ministry said Brazil could raise the issue in the talks between Temer and Macri, however.

Brazil’s Maggi said on Monday that Brazil would try to include sugar in negotiations between Mercosur and the European Union.

Source: Reuters Brazil

Brazil’s inflation seen falling to 2012 low in January

Brazil’s inflation probably fell to its lowest annual rate since September 2012 in January, a poll showed on February 6th, adding to investors’ confidence about steep interest rate cuts by the central bank this year.

Consumer prices probably rose 5.41 percent in the 12 months through January, slowing from an increase of 6.29 percent in 2016, according to the median of 33 forecasts for the IPCA price index due out on Wednesday at 9 a.m. local time (1100 GMT).

The monthly inflation rate is expected to be 0.44 percent, the slowest for the month of January since 2007, according to the median of 35 estimates in the poll.

Brazil’s inflation has come in below market forecasts in the past four months. The surprisingly fast slowdown in price rises has prompted the central bank to cut interest rates closer to single digits, boosting confidence among consumers and business after two years of a deep recession. BRCBMP=ECI

“With the fiscal reforms, the central bank acting to re-anchor inflation expectations and weather conditions allowing food prices to fall, fundamentals are finally prevailing,” UBS economists led by Rafael de la Fuente wrote in a note.

Economists expect the annual inflation rate to fall below 4.5 percent, the center of the inflation target, in the second quarter. Most economists believe that will prompt policymakers to lower their inflation goal for the years ahead.

Estimates for the monthly inflation rate ranged between 0.37 and 0.58 percent, while forecasts for the 12-month rate varied between 5.34 and 5.56 percent.

Source: Reuters Brazil