October 2017 - Murray Advogados

Following IPO, Burger King plans to expand brands in Brazil

With its initial public offering on the street, fast-food chain Burger King is considering using part of the funds raised to expand its brands in Brazil, according to two people familiar with the matter.

Although the priority would be the expansion of Burger King’s own stores, which are growing at a fast pace, the company’s management is evaluating two other possibilities. One of them is to bring to Brazil the fried-chicken chain Popeyes, acquired earlier this year in the US by Restaurant Brands International (RBI), the Burger King controller owned by investor Jorge Paulo Lemann’s 3G Capital and by Warren Buffett.

Such a move would be natural, since RBI itself is a shareholder of Burger King in Brazil, with a 13.6% stake. The view is that Popeyes would have good growth potential in the country since consumption of chicken meals has grown in Brazil, as shown by figures for competitor KFC.

A less obvious option would be to import another brand of the group, the cafeteria chain Tim Hortons. Because of the brand’s name and its menu, in which donuts have a strong presence, it would be difficult to adapt the brand to the Brazilian market. In that case, one possibility would be the acquisition of a Brazilian coffee business, more palatable to the local taste, that could bear the “by Tim Hortons” signature, for example.

In that case, it could be either a cafeteria chain, such as Fran’s Café, or a well-known beverage brand, like Três Corações, two sources said. Fran’s Café and Três Corações were cited to illustrate the business models that could make sense, and not necessarily as targets of ongoing talks.

Source: Valor Econômico

31 de October de 2017/by Gelcy Bueno

Murray News

Improved governance at heart of new proposal for Oi restructuring

The Federal Attorney-General (AGU) is expected to present to President Michel Temer next week at least two proposals for a judicial restructuring of Oi. Both of them will exclude the company’s R$11.1 billion debt owed to regulator Anatel from the plan. The debt will be negotiated separately and demand a legal measure to set a 12 or 20-year repayment deadline.

Another condition of the potential plan is to solve a severe governance problem at the carrier, in which “a minority shareholder dominates decisions,” an official said. The plan will have to include legal ways to push Nelson Tanure to “follow the rules.” Mr. Tanure has 5% of Oi’s shares but close ties with Portuguese investors in Pharol, the former controlling shareholder of Portugal Telecom, who hold 22% of shares. Mr. Tanure asked for help, and Mr. Temer created a task force with several representatives from several areas of the government. They reviewed the plan proposed by Mr. Tanure and concluded it is not viable. For more information on the government’s discussion.

Hints that Oi’s board planned to dismiss the management led the command of Anatel to sound warnings of a potential intervention and show to shareholders it was ready to take the measure. Rumors started circulating behind the scenes that the regulatory agency had already called chairman José Mauro Cunha to make him “aware” of the situation.

The situation calmed early in the evening when Attorney-General Grace Mendonça and Anatel President Juarez Quadros called a press conference after holding a meeting about the issue. They said the drastic measure had been pushed aside given the stance expressed by the carrier’s board members.

“[The intervention] is not imminent anymore. The company, not officially but through electronic messages, expressed to the agency’s president that the board never considered replacing the management,” Mr. Quadros said.

Mr. Quadros told the media he had received several reports from Oi’s management that board members were pressuring them to make decisions. He said the attempts were focused on pushing them to support at certain moments measures that risked the company’s cash and long-term maintenance of its services.

According to sources, what triggered Anatel concerns about the crisis of Oi was the pressure from a group of creditors allied with Mr. Tanure to approve a debt deal that in addition to placing a burden on the company had clauses not previously discussed.

Mr. Tanure allied with some bondholders in an attempt to develop a restructuring plan that would dilute his stake the least possible. The investor has told people familiar with the situation that he also holds Oi debts, a position he had never stated publicly.

Oi has been under bankruptcy protection on a R$64 billion debt for over a year. The deal proposed would ensure the support of Mr. Tanure’s allies to the restructuring plan, which included a commitment to inject R$3.5 billion in the company. But Mr. Tanure’s bondholders, which are owed only R$2.4 billion and have been dubbed “G6,” want to ensure a return of at least R$560 million, according to calculations conducted by Laplace, Oi’s financial advisory in the bankruptcy protection process.

The plan includes several conditions that could mean years until the money arrives – if it ever does – while G6 would still get paid. Each year until the funds come, the return would increase by R$280 million to R$320 million. The plan even included a clause that ensures payment despite an Anatel intervention.

While tensions between Anatel and Mr. Tanure’s board push became public on Thursday, internal disagreements and discussions began last weekend. The board, over which Mr. Tanure holds significant clout, tried on Saturday to call a meeting to approve the G6 agreement on Monday. After some board members rejected the proposal, the meeting was maintained on Wednesday, as it has been happening for the last few months.

What G6 called “updated versions of documents that were discussed extensively with certain representatives of Oi” contained the unexpected mandatory returns even with a regulatory intervention. After the legal counsel warned the company about the last-minute addition, the decision about the deal and the meeting itself were suspended. The management and board would review the proposal terms in a new gathering on Friday.

Amid those talks, Mr. Tanure sent emissaries to Brasília in attempt to fire Oi CEO Marco Schroeder, who was already hinting he would not sign any deal until negotiations searching for an agreement with a majority of creditors were ongoing. Mr. Tanure’s press representatives called the talk that Mr. Schroeder would be removed “rumors” to “create turbulence” in the process and stated he has “great respect” for the executive and other management members.

Source: Valor Econômico

31 de October de 2017/by Gelcy Bueno

Murray News

Fractured PSDB prepares to hold contentious convention

Poised to celebrate its 30th anniversary, the Brazilian Social Democracy Party (PSDB) is so divided that, for the first time in its short history, the election for the party chair – to be held in December – could turn out to be a competitive race. Toucans, as PSDB members are known, usually come to a consensus on who will head the party through negotiations. Goiás Governor Marconi Perillo confirmed to Valor that he would run. Ceará Senator Tasso Jereissati, a party stalwart, is expected to announce this week his bid with support from the rebellious “black hair” faction of deputies, who are calling for the party to abandon the government immediately. The backdrop for this dispute is next year’s looming presidential race.

Mr. Jereissati has support from former president Fernando Henrique Cardoso. But Mr. Perillo fits the profile sought by São Paulo Governor Geraldo Alckmin, widely expected to run for the Planalto Palace next year: someone who can discreetly, and with great flexibility, coordinate the multiparty alliance that will be expected to fall into line behind Mr. Alckmin’s candidacy. Mr. Alckmin encouraged Mr. Perillo to join the race, even though the São Paulo governor hoped he would not have to mediate any dispute.

The São Paulo Governor wants to run for president in 2018 backed by a far-reaching political alliance. Mr. Alckmin doesn’t want to rely solely on the PSDB brand. He believes it is tarnished and “the PSDB alone doesn’t hold enough appeal to compete in an election,” as he has said to close allies. “The candidate has to be bigger than the PSDB, going beyond the PSDB,” Mr. Alckmin has been arguing during talks with people working to launch his candidacy.

The scenario even offers solace to the Brazilian Democratic Movement Party (PMDB) of President Michel Temer, since Mr. Alckmin doesn’t want to ditch Brazil’s most wide-reaching party. Mr. Jereissati, meanwhile, has opposed Mr. Temer from the start: he supported the challenge from younger PSDB deputies – known as “cabeças pretas,” loosely translated as “black hairs” – who voted to accept the second set of charges against the president. The party caucus fractured during the vote: the president won 23-21. “He was supposed to offer a balanced solution, but instead of trying to unify the party he encouraged divisions,” said an older “whitehair” toucan who supported Mr. Jereissati’s nomination to replace Minas Gerais Senator Aécio Neves as interim chairman, but who now opposes his bid.

Mr. Neves and Mr. Jereissati have a bitter relationship. Among the most recent examples is Mr. Jereissati’s support for reinstating Mr. Neves to the Senate after the Federal Supreme Court (STF) put him under nightly house arrest. Mr. Neves wanted to take a leave from the party after that, but early the next day Mr. Jereissati, as interim chairman, demanded his resignation. Mr. Neves decided to stay. “Away from the party’s day-to-day,” Mr. Jereissati’s aides said.

The Ceará Senator’s spokesperson confirmed he is “considering [a bid], will talk about it and decide,” maybe as soon as this week. He believes that PSDB deputies, whether people like it or not, have decided to keep their distance from the Temer government – with Wednesday’s vote bringing the message home. Mr. Jereissati has been interim chairman since May, when Mr. Neves suffered a blow with the plea bargain of executives and owners of J&F Investimentos and had to excuse himself from the role. Now Mr. Jereissati is even considering resigning to run for the full-time chairman post in December. The PSDB had never seen such attrition before.

Mr. Perillo said he was encouraged to run by “several” party members. “I’m leaving the government and want to help devise the new proposals the party is discussing.” The governor said “the PSDB chairman should take the leading role” to better coordinate the “range of alliances” for 2018. Mr. Perillo believes the December convention should be split into two stages: the national leadership election and a vote on whether to support the government. He advocates forfeiting all cabinet posts and government appointments but aligning the PSDB “with the reforms, supporting ideas we have always defended.”

The December 9 convention will also decide on the model for presidential primaries planned for February. At least three formats were proposed, with Deputy Marcus Pestana (Minas Gerais) espousing the favored one: open primaries with all municipal and state chapters, city council members, state and federal deputies, senators and governors – an electoral college estimated at between 20,000 and 25,000 voters, but only if the nomination is contested. So far Mr. Alckmin and Manaus Mayor Arthur Virgílio have come forward. São Paulo Mayor João Doria is now a more remote possibility.

The convention kickstarts the party’s decision-making process for the presidential race, but if Mr. Alckmin confirms his expected lead, the primaries will not be held. Amid such a fractured environment, it’s still too early to make any bets on the party’s future.

Source: Valor Econômico

31 de October de 2017/by Gelcy Bueno

Murray News

Central Bank reform would end balance transfers to Treasury

Central Bank (BC) balances from its transactions with foreign-exchange reserves and forex derivatives in the domestic market would not be transferred anymore to the unified account of the National Treasury, according to a new legislative bill, 314, which has already won a favorable opinion in the Economic Affairs Committee (CAE) of the Senate and should be voted next week.

The bill would channel the profits to a “reserve of results” that can only cover BC losses or cover the federal debt in exceptional cases “when severe liquidity restrictions significantly affect their refinancing.”

As for the BC’s paper losses, they will not be covered anymore by Treasury-issued government bonds. It will have to be offset with existing funds from the “reserve of results” and by reducing the BC’s institutional equity, until BC’s net equity reaches the minimum of 1.5% of the existing total assets on the earning’s date.

If these two measures are not sufficient to cover the negative result, the federal government may pay the remaining balance with the issuance of government bonds. In order to protect the bank’s net equity, the bill would create an automatic trigger demanding transfers of federal bonds every time the monetary authority’s net equity reaches 0.25% of all assets. According to the proposal, the federal injection should ensure the net equity of the BC rises back to 0.5% of total assets.

The bill’s rapporteur at the CAE, Ceará Senator Tasso Jereissati (Brazilian Social Democracy Party, PSDB), removed an article that authorized the BC to collect spot or term deposits from financial companies. Under the original draft, the BC would be tasked with determining the returns, conditions, and maturities, as well as how voluntary deposits can be negotiated.

In his opinion on the bill, Mr. Jereissati said it would be up to the President of the Republic to enact the creation of voluntary deposits. “Despite agreeing with the measure’s merit, we understand that the authorization proposed (creation of voluntary deposits), by handing new attributions to an Executive Branch body, assigns them wrongly,” he argued. Bill 134 was sponsored by Espírito Santo Senator Ricardo Ferraço (PSDB), and was discussed in detail with BC president Ilan Goldfajn.

The bill includes an automatic trigger to rebuild the BC’s bond portfolio. Whenever the value of bonds cleared for trading and held by the BC reaches 4% or less than its overall bond portfolio, the federal government will issue for the BC the necessary amount so that the free portfolio accounts for 5% of its global assets.

The bill also raises the possibility, through previous authorization from the National Monetary Council (CMN), of the federal government redeeming the bonds without having to hand over the proceeds to the BC, and ordering the corresponding cancellation of free bonds. According to Mr. Jereissati’s opinion, the measure aims to allow the BC to reduce its stock of government bonds, “which will lower federal interest costs on those securities.”

Senator Ferraço told that his bill aims to end “creative accounting” allowed by current legislation. “The Central Bank’s profits are transferred to the Treasury in cash, and the losses are covered in bonds. This may result in a kind of “disguised” credit operation, which is prohibited by the Constitution,” he said. “To use a popular jargon, today everything is together and mixed [the Treasury and the BC],” he said.

In his opinion, Mr. Jereissati says that the accumulation in the Treasury’s single account of funds resulting from the transfer of BC’s positive results enabled the repayment of part of the securities debt, despite the nominal public deficits.

Source: Valor Econômico

31 de October de 2017/by Gelcy Bueno

Murray News

Caixa reviews operations to strengthen core capital

Caixa Econômica Federal wants to renegotiate its relationship with its sole shareholder – the Brazilian Treasury – to ensure that it has enough capital to back the carrying out of public policies, reversing the course taken by the administrations of former presidents Luiz Inácio Lula da Silva and Dilma Rousseff, who weakened the bank’s Basel III index through the generous distribution of dividends and counter-cyclical credit policies.

From now on, to execute government projects, the bank will not only request funding to lend out, but also a guaranteed capital structure. Caixa is also taking certain steps such as cutting administrative costs, selling an infrastructure project portfolio worth R$5 billion to the market, possibly raising funds abroad, and restructuring its insurance area.

The government, meanwhile, is looking for alternatives – the one that has progressed the furthest is a R$10 billion operation involving the Workers’ Severance Fund (FGTS) that would expand by R$200 billion Caixa’s margins for housing loans – but it also wants to redefine the bank’s role, shrinking it and focusing it more on housing loans for low-income Brazilians.

Caixa has argued for expanding its operations, however, to include farm credit and corporate loans, seeking out profitable niches to offset the tight margins involved in public policy projects. The diagnosis is that the federal bank, which today has R$711 billion in credit operations, would become unsustainable if its portfolio dropped below R$670 billion.

“We won’t violate Basel III rules,” says one bank executive. “And in order to not violate them, we need to stop providing credit unless there is a solution for the bank’s capital.” FGTS has directed R$85.5 billion towards Caixa for loans in 2018, which would require R$5 billion in capital reserves to back these operations in accordance with Basel III rules. There are no capital restrictions for home loans in 2017.

The possibility of lending coming to a standstill is seen less as a threat and more as a legal imperative. “Nobody would attach their CPF [tax number] to a credit expansion like this,” the executive says, referring to the legal risk that directors face should they not comply with banking system prudential rules. That’s why, in the view of this executive, it’s the government, rather than the bank, that has a capital problem to resolve.

The starting point for these discussions is the fact that between 2007 and 2014 Caixa paid out R$29.4 billion in dividends to the Treasury (an average of 73% of profits) when banks the world over were reining in dividend payouts to comply with Basel III rules. The Treasury, meanwhile, injected R$13 billion of capital into Caixa, and another R$17 billion in hybrid capital instruments and debt from bond issues. “We pay interest on those operations,” the executive explains. Caixa also received Petrobras and Eletrobras shares, which have lost value as a result of the economic crisis.

In June, Caixa had a tier 1 capital ratio equal to 9% of risk-weighted assets. The bank’s prudential mechanisms require that capital levels be at least 1.5 percentage point higher than the minimum Basel III level, which will require a capital index of 9.5% on January 1, 2019. Therefore, Caixa needs to bring its tier 1 capital ratio to 11%.

The Basel index represents a ratio of bank capital to asset volumes – especially credit – weighted by the risk that the institution is exposed to in these operations. To improve its Basel index, the bank can increase its capital, reduce assets, or mitigate risks.

Caixa’s view is that with drastic adjustments it would be able to comply with Basel rules without any capital injection from the Treasury and the FGTS fund, but it would have to rein in lending. The first measure that it worked out with the Treasury was the reduction of the minimum dividend payout, of 25% of profits. In talks with the Central Bank, reducing dividends to zero is seen only as an extreme measure, should compliance with Basel III be at risk. “We are working day and night to pay dividends,” the executive says. “Cutting dividends would be an extreme measure, and before we do that we would already have halted credit.”

Next month, Caixa is expected to conclude two operations to reduce its assets. One of them is the sale of an infrastructure loan portfolio worth as much as R$5 billion. “We have already spoken with some investment banks, and there is interest,” the executive says. Another operation involves the sale of a fund including repossessed real estate, as Valor previously reported. The estimated sales volume would reach R$1.6 billion, more than the R$1 billion originally considered.

Major corporations are also paying back their debts to Caixa – a total of R$10 billion. Petrobras alone paid back R$3 billion, and JBS paid another R$5 billion. There was no restrictions on this credit, but rather a decision by the clients. “The companies had money and thought that it worthwhile to liquidate their debt,” the executive says. Caixa even discussed transferring a R$10 billion loan portfolio to the BNDES, but gave up because “the deal didn’t go the way we were hoping.” The idea was for Caixa to transfer a portfolio consisting of on-lending credit received from the development bank, freeing up R$1 billion in capital.

The bank also carried out a road show to sell $1 billion in overseas bonds, which was authorized by the bank’s board of directors. “There is great demand,” the executive says. But the costs are high, and the bank is looking for less expensive options. It is thinking about a smaller bond sale, closer to $500 million, to mark its presence in overseas markets and obtain a seal of quality.

Another way of strengthening its capital is by restructuring its insurance area. An agreement with CNP Assurances will generate a premium on the extension for 20 years, starting in 2018, of access to Caixa’s life, pension, and lending businesses. And it will also raise “a few billion” via a competitive process to select partners for the housing, auto, and asset insurance areas, as well as consortia.

For now, the possible opening of Caixa capital to the public is not on the table. The board considered the first step, which would involve changing the bank’s bylaws to transform it into a joint-stock corporation, but legal issues forced the matter to be removed from the agenda twice. Decree no. 759 specifies that Caixa is a government owned company, and for it to become a joint-stock corporation this rule would have to be changed.

Some argue that the bank should be whittled down, but the executive says that this would create an imbalance in the bank’s business. With a R$711 billion loan portfolio, Caixa is a market leader. But of this amount, R$420 billion are housing loans, of which R$220 billion belong to the FGTS. “If they take FGTS housing away, Caixa would be the same size as Santander,” he says. Higher returns from commercial operations, the executive says, would compensate the lower returns on housing loans, providing return on capital and allowing the bank to continue its operations without any capital injections.

The Caixa executive defends the banks’ continued presence in various niches it has entered recently. Such as farm credit, which is the only way to get out of the Central Bank’s punitive reserve requirements for banks that don’t provide demand accounts. Making huge loans to companies, the source says, also represents a profitable business for the bank.

Caixa also wants to continue financing home loans with funding from savings funds because it creates a relationship with middle-class clients. But it is pulling back on advance exchange contract operations. Although this is a profitable market, it carries a high risk that weighs on capital ratio calculations, and therefore eats up huge volumes of capital.

Caixa deems that it needs to grow its insurance area, where the bank has seen its market share grow to 8.1% from 5.6% this year, according to the executive. For this executive, it’s “unacceptable” for Caixa to have 23% of the credit market but only 5% of the insurance market. “It’s a cultural question, thinking that Caixa is a public company,” he says. “Caixa is a bank. It has to be efficient and generate profit.”