International investors have withdrawn R$22 bn from B3 this year, despite seeing opportunities in Brazil
03/28/2024
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Foreign investors posted net withdrawals of R$22.19 billion in the secondary segment this year at B3 — Foto: Divulgação
External uncertainties that have been hitting the domestic stock market are now combined with local interferences, weighing on important shares in Benchmark stock index Ibovespa such as Vale and Petrobras. As a result, the Brazilian stock market has underperformed its emerging peers, in a scenario that also includes a substantial outflow of foreign capital.
Uncertainties involving state-owned companies were added to factors that contributed to the outflow of funds from the Brazilian stock market, a trend observed since early this year. According to the most recent data released by the B3 stock exchange, foreign investors posted net withdrawals of R$22.19 billion in the secondary segment of the exchange (shares already listed) this year until March 22, the highest volume since 2020.
Statements made by people close to the government have been raising concerns since President Lula was elected, but the decision by state-owned company Petrobras not to pay extraordinary dividends raised a flag and led to significant losses in the market. The decision surprised most investors—on the day it was announced, the oil giant’s shares fell by 10%, leading the company to lose R$56 billion in market capitalization. As a result, the company’s preferred stock, which ended 2023 up 94%, is down 4% this year.
Overall, the performance of Brazilian shares is well below its peers. A survey by J.P. Morgan reveals that the MSCI Brazil index, measured in dollars, has posted the worst return in 2024, with losses of around 8%. In the same time range, the MSCI China is down 1% and the MSCI for emerging markets is up around 2%. The S&P 500, in turn, is up around 10%.
“We have seen a substantial outflow from the stock market since the beginning of the year. However, that should be put into perspective, since, at the end of last year, we saw a very positive inflow. The market rally in November and December was very strong,” said Luis Fernando Azevedo, equity manager at Oriz Partners. “Since earlier this year, the scenario has changed and the market has realized that the pace of interest rate cuts abroad may not be as intense as expected.”
“Here, we saw some interference involving state-owned companies, which raised concerns. Perhaps it is rather a one-off event than a change in the outlook for the broader market, but the then optimistic foreign investor may have been affected. It is an interference, a reason for an increase in volatility,” Mr. Azevedo said.
In this context, the recommendation made by Goldman Sachs strategists for investors to bet against Brazilian state-owned companies gained the market’s attention According to the bank’s analysts, the multiples of state-owned companies are too high compared to private sector companies, and possible political interference could lead to cuts in these companies’ ratings.
Renato Jerusalmi, founding partner and portfolio manager at Riza Asset, said that the four stocks mentioned by Goldman—Petrobras, Banco do Brasil, Sabesp, and Cemig—should not be placed in the same basket. According to him, BB has the lowest discount to its peers when considering the last ten years. Petrobras, however, when compared to the largest companies in the sector globally, has a discount of 44%, above the range seen in the last five years, which was between 30% and 34%.
“We are seeing greater intervention in Petrobras. We went from political effect to practical impact, as seen in the decision on the distribution of dividends,” Mr. Jerusalmi said. “The market digested it and became more defensive, seeking to increasingly reduce its risk [exposure] in Brazil.”
Affected by political interference in state-owned companies, since the multibillion capitalization of Petrobras in 2010, Rio Bravo Investimentos stopped buying assets that have this level of risk, said Evandro Buccini, partner and director of credit and multimarket management at the firm. “March was a scary month for the stock market, with Vale and Petrobras performing poorly due to the government’s attempt to interfere in large companies. That is not good at all.”
Mr. Buccini said the issue involving the B3 giants is one of the reasons why foreign investors left Brazil. “I don’t think it’s the only reason, but it certainly helps. Once bitten, twice shy,” he said.
*Por Victor Rezende, Augusto Decker, Adriana Cotias, Liane Thedim — São Paulo, Rio de Janeiro
Source: Valor International
Deal was approved in a summary procedure as it poses no harm to competition
03/28/2024
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Operation is not expected to cause harm to the competitive environment, Cade said — Foto: Divulgação
The General Superintendence of the antitrust watchdog Cade approved the Arezzo and Grupo Soma merger. The deal was approved in a summary procedure, an analysis in which the antitrust regulator considers a case has the least offensive potential to competition, due to the simplicity of the operation.
If the Cade tribunal does not highlight the merger for analysis or there is no appeal filed by any interested third parties within 15 days, the decisions of the General Superintendence will be final and the operations will receive final approval.
“The applicants’ reduced market shares in the markets identified above allow us to infer that the operation does not result in a significant increase in the portfolio to the point of causing damage to the competitive environment,” the Superintendence wrote in an opinion.
In the analysis, the superintendence informs that the market-share estimates of companies in horizontally overlapping markets (of the same segment) are below 20% and that market-share estimates in vertically integrated markets (in a chain) are below 30%. Therefore, the operation is not expected to cause harm to the competitive environment.
The deal includes a non-compete clause. It prevents the “Birman block” and primary shareholders Grupo Soma from engaging in any way as consultants, partners, or investors in any activities in the retail, wholesale, and industrialization and manufacture of clothing, articles of clothing, and other activities competing with the group. They are also barred from establishing any type of commercial relationship with the customers of the resulting company, aiming to provide direct or indirect services that are, in any way, related to competing activities.
The commitment covers the entire period up to two years after ceasing to be a shareholder of the resulting company, or for five years from the execution of the shareholders’ agreement, whichever occurs last, unless with specific authorization and in writing from the board of directors of the resulting company.
The deal creates an operation with 34 brands, 2,000 stores, and 21,000 sales channels. The two companies tried to combine their businesses for at least two years. The deal is the biggest in the retail segment since the Raia-Drogasil merger in 2011.
When the merger was announced, the market expected the new company to be placed among the top 20 in the sector in Brazil, becoming the second-largest fashion retailer by annual revenue, second only to Renner. The company emerges with R$11.8 billion in net revenue projected for 2024.
*Por Beatriz Olivon — Brasília
Source: Valor International
French president follows opposite line of Brazilian businesspersons, who call for deal’s approval
03/28//2024
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President Luiz Inacio Lula da Silva and Emmanuel Macron — Foto: Silvia Izquierdo/AP
President Luiz Inácio Lula da Silva defended increased cooperation with France in the area of national defense, to ensure Brazilian sovereignty in the face of growing conflicts around the world. The statement was made on Wednesday, during French President Emmanuel Macron’s visit to Brazil.
“Our partnership reinforces Brazil’s resoluteness to achieve greater strategic autonomy, which is crucial in the face of the multiple crises and challenges faced by humanity in the 21st century,” he said.
Presidents Lula and Macron attended a ceremony launching the “Tonelero” submarine into the sea. It is the third of four conventional diesel-powered vessels built by the Submarine Development Program—a strategic partnership between Brazil and France. The event was held at the Itaguaí Naval Complex, located on the south coast of Rio de Janeiro.
The event was attended by ministers José Múcio (Defense), Mauro Vieira (Foreign Affairs), Silvio Costa Filho (Ports and Airports), and Nísia Trindade (Health), as well as the governor of Rio de Janeiro, Cláudio Castro. On the French side, Chancellor Stéphane Séjourné was also present.
In his speech, President Lula did not mention other countries, but pointed out the increase in conflicts around the world and the “animosities in the democratic process”, globally. He also stressed the need to maintain peace in Latin America and South America—a line of speech he had adopted when Venezuela and Guyana came into conflict at the beginning of the year.
In the afternoon, in São Paulo, Mr. Macron said the trade agreement between the European Union (EU) and Mercosur is “a terrible deal”, and therefore he cannot defend it as it is.
“The trade deal with Mercosur, as it is being negotiated now is a terrible deal,” he said, speaking at the 8th Brazil-France Economic Forum, in São Paulo. In his opinion, that is because negotiations began 20 years ago, which makes it invalid to face challenges such as climate change and the conservation of biodiversity.
“This deal, as it is, I don’t defend it,” he said. Mr. Macron added that, under the deal, French companies governed by stricter environmental laws—as in the case of pesticides—will face competition from rivals that do not follow the same standards.
“I say this from a country that produces with low carbon,” he said, adding that Brazilian companies have this consideration and the government is committed to fighting against deforestation. “We need to leave behind something that was built 20 years ago and look for a new deal, built on new goals, that considers the fight against deforestation, climate change, and the fight for biodiversity.”
The French president’s speech came in the opposite direction of the speeches of authorities and businesspersons attending the event, held at São Paulo’s Industry Federation (Fiesp) headquarters. Vice President Geraldo Alckmin, who spoke just before, pointed out the long-standing partnership between the two countries and added: “France is a great trading partner for Brazil, but we can make it [the partnership] grow even more.”
Mr. Macron started his speech by mentioning the strong presence of French capital and companies in Brazil and asking Brazilian investors to take a closer look at France. He defended a new deal that includes cross-partnerships for industry decarbonization and investment in cleaner economic activities and energy production.
“Brazil managed to face challenging periods. It has solid growth, it knew how to control inflation and resist the unrest that democracies around the world sometimes experience,” he said. “We believe in Brazil, in its growth model. We have to unite and I am convinced that this union is part of the solution to winning the fight for climate and biodiversity.”
Representatives of Brazilian industry defended the signing of the trade deal between the European Union and Mercosur. Ricardo Alban, the president of the National Industry Confederation (CNI), said the two countries need to move forward in exploring “win-win” situations. He said that Brazil is the ninth destination for French exports, but ranks 34th among imports by the country.
“We are confident that in the long term, the benefits of integration between the two regions will outweigh the problems,” Mr. Alban said.
Josué Gomes da Silva, the president of Fiesp, said Brazil and France relations go far beyond trade. “This 8th forum reopens and strengthens these relations. The Mercosur and European Union trade deal will benefit both regions. We believe that both regions can benefit a lot, especially France,” Mr. Gomes said. “President Macron’s visit to Brazil demonstrates the interest of both countries in increasingly strengthening their relationship.”
France is the most vocal European country in opposition to the trade deal, finalized in 2019 but never approved. In January, under strong pressure from farmers, Mr. Macron said he had even demanded that the negotiations be halted.
*Por Camila Zarur, Marcelo Osakabe — Rio de Janeiro, São Paulo
Source: Valor International
By Alexandre Tuzzolo Paulino
Brazil can ensure a sustainable supply of raw materials for years to come, company says
03/25/2024
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Andrea Illy — Foto: Gabriel Reis/Valor
Brazil will be able to guarantee illycaffè’s supply of coffee from regenerative practices in the next decade, said Andrea Illy, CEO of the Italian multinational. For him, sustainable cultivation is the key to increasing productivity, even in the face of climatic adversity. For this reason, the businessman is studying the creation of a fund of $1 billion a year “for coffee resilience.”
Illy wants to make it possible to renew coffee plantations in producing countries where farmers are unable to finance the transition to more sustainable production methods. With the “coffee resilience” fund, the company would also have more raw materials available for processing. But the main goal, according to Illy, is to “mitigate” the effects of climate problems.
Regenerative agriculture involves practices that restore soil, reduce carbon emissions, and manage water and biodiversity. With raw materials produced using these methods, illycaffè aims to double its share of markets outside Italy and the United States, which currently represent 0.3% of volume and 0.6% of sales.
Without a structured business model or defined partners for the fundraising phase yet, Mr. Illy is inspired by actions such as those of the Swiss bank Lombard Odier, which has contributed $150 million to transform farms into regenerative systems, and the Bill and Melinda Gates Foundation, which has invested nearly $6 billion over the last 17 years in initiatives to improve agriculture, particularly in Africa. Mr. Illy also mentioned the Mattei Plan, an initiative of the Italian government to support the development of African countries.
Should the fund materialize, its initial resources will be dedicated to renovating coffee plantations globally, facilitating their transition to regenerative practices. The businessman said that coffee plantations in India and Vietnam, aged between 80 and 100 years, are experiencing declining productivity. In contrast, in Brazil, where the average plantation age is 12 years, the situation is different.
Hence, Brazil might not be given precedence in the selection of countries to receive funding from the initiative, although Mr. Illy has not dismissed the possibility entirely. The primary focus would be on supporting micro-producers in vulnerable regions facing challenges in accessing financial resources.
“We’re currently exploring the feasibility of investing in equity, or a combination of equity and loans, to empower micro-producers to enhance and rejuvenate their plantations. The main challenge lies in determining the appropriate business model to elevate the project to the next stage,” said Mr. Illy.
Although talks have already begun to get the idea off the ground, the CEO admitted that it could take a while. Nevertheless, he expressed optimism and projected that the adoption of regenerative methods is expected to grow worldwide.
Today, Brazil is one of the leaders in this practice, which increases the company’s interest in local coffee. Today, Mr. Illy’s main suppliers of Brazilian beans are the Cerrado Mineiro, Matas de Minas, Sul de Minas, and Chapada de Minas regions.
Last year, the company launched the world’s first 100% coffee sourced from regenerative management. All the beans composing the blend come from the Cerrado Mineiro, a region that produces over 6 million bags per harvest.
As part of its commitment to fostering sustainability in the coffee industry, illycaffè is currently conducting tests on several experimental plantations to quantify the reduction in greenhouse gas emissions. The goal is to pinpoint effective practices that can be promoted as regenerative methods in coffee farming. Initial findings are slated for publication next year.
*Por Isadora Camargo — São Paulo
Source: Valor International
Facility is expected to increase production of pivots by 50%
03/25/2024
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Rodrigo Parada and Luiz Alberto Roque — Foto: Divulgação
Bauer do Brasil, an irrigation equipment company, will invest R$40 million in the construction of a new plant in São João da Boa Vista, São Paulo. The investment is intended to expand the company’s operations in Brazil and Latin America and increase its share of the irrigation market. The new unit will occupy a plot of land opposite the site where the company has been operating since 2017. The land was donated by the local city government, and in return, Bauer committed to creating at least 100 new jobs over up to four years.
The Austrian company has been present in Brazil for 20 years, and today 95% of its turnover comes from the sale of pivots produced in the country. In 2023, according to the company, total sales will reach R$460 million.
In an interview with Valor, Luiz Alberto Roque, Co-CEO of Bauer do Brasil, said that with the new plant, the goal is to increase the capacity to produce pivots by 50%. In addition, the new plant will assemble reels, another irrigation model, and separators dedicated to waste and manure management. This equipment is currently imported from Austria.
According to Rodrigo Parada, also co-CEO of Bauer do Brasil, starting to manufacture other products from the catalog in the country means more than increasing profitability, as it reduces dependence on imports. “The whole issue of intellectual property and technology that characterizes Austrian quality is now coming to Brazil and Latin America,” he said.
Bauer’s sales in Europe are divided almost equally between the three products it offers, according to Mr. Parada. Brazilian executives hope to increase the share of reels and separators in the company’s sales and reduce the dominance of pivots.
Separators are used on livestock farms to separate solid waste from liquids.
Both pivots and reels are sprinkler irrigation systems that simulate rain. While center pivots are suitable for large areas and irrigate in circles, reels are more suitable for smaller areas as they work in a line. Bauer’s main customers are producers of soybeans, cotton, corn, and wheat.
Work on the new factory is expected to begin this year and be completed by 2025. The structure will include a new factory, training center, and offices.
The training center will be used to train sales staff and agents. Bauer works with a dealer system, with representatives spread throughout the main agricultural regions of Brazil and Latin America. Aiming to create a kind of “model” of best practices for selling its products, Bauer will open its first store in Campo Grande, Mato Grosso, in June.
Before the company recoups its investment, it expects its sales to grow by 23% to 26% this year. “The company has boomed during the pandemic. In the last four years alone, we’ve grown 7.6 times, mainly in the pivot market, but also in the technology solutions and services market,” added Luiz Alberto Roque.
Mr. Roque founded Irricontrol, an irrigation technology platform that manages and automates processes, which was acquired by the Bauer Group in 2019 to become its global technology arm.
(*Nícolas Damazio reporting was supervised by Alda do Amaral Rocha.)
*Por Nícolas Damazio* — São Paulo
Source: Valor International
Spanish company will start a court-supervised reorganization amid R$1.1bn debt, seeks to prevent blocking of funds
03/22/2024
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Sébastien Durchon — Foto: Claudio Belli/Valor
The DIA supermarket chain, which filed for court-supervised reorganization on Thursday (21), wants to prevent Daycoval from blocking its funds. The Spanish company claims that the bank is refusing to release the retailer’s resources. The bank declined to comment on transactions involving clients.
In the early hours of Thursday (21), the retailer filed the petition with the 1st Bankruptcy Court of São Paulo, due to a debt of R$1.1 billion. Of this total, R$986.5 million are unsecured debts with suppliers and factoring of receivables with banks.
Until early Thursday (21) evening, the court had not granted the retailer’s request. DIA is represented by the Galdino & Coelho, Pimenta, Takemi, Ayoub Advogados law firm, while Alvarez & Marsal is a financial adviser.
The debt with Daycoval reaches R$61.7 million (without guarantees), of which R$23 million can be redeemed, in a Certificate of Bank Deposit (CDB) line, as the retailer informed in the process.
The chain also asks that a daily fine be defined if Daycoval insists on not releasing the funds. Santander is the largest financial creditor in a list that also includes Banco do Brasil besides Daycoval. DIA’s debt with banks totals R$268 million.
In addition, the company also asked the court to authorize the sale of the 343 stores that are in the process of closing, out of the total 587 existing units earlier this year, for future settlement of liabilities. The remainder 244 stores will remain open. The retailer operates leased points of sale.
But the idea is to get the right to sell the businesses, which would be possible in the case of long-term retail contracts. Of the total 334 closures, 33 are franchises and the remainder are leases of company-owned stores. Three of the four distribution centers will be closed, and only the one in Osasco (in the greater São Paulo area) will be maintained.
The crisis already affects the company’s partners. DIA has returned the Mauá (São Paulo) distribution center, which involves a lease agreement with FII VBI Logístico, with the February lease outstanding, according to a person familiar with the matter.
The group also seeks solutions such as finding a financial partner or selling the chain as a whole. According to a source, the issue remains on the table, but the main idea would be to “fix” the company first, and then search for buyers.
Valor found that representatives from Lazard’s consultancy have already offered the company to cash-and-carry chains, supermarkets, and even online retailers with a focus on durable goods.
As Valor reported on Thursday (21), the chain has been trying to negotiate with investment funds, but the high debt is an obstacle. In addition, the parent company is not willing to inject capital into the business and reduce liabilities before the sale.
In the filing, DIA says it is looking for an investor to provide funds to revamp stores. Creditors see little chance of this plan moving forward at the moment.
The crisis at the company is a reflection of a sharp drop in sales volumes in recent years, food deflation (which reduces prices and compromises revenue), increased debt with rising interest rates, and mistaken strategic decisions.
There was also a direct effect of the expansion of the cash-and-carry segment, a direct competitor of DIA because of low prices. The chain lost 20% of foot traffic from 2021 to 2023
Regarding the unsuccessful internal measures, the company admits, in the document sent to court, that it decided to lower prices to compete with cash-and-carry stores in recent years. But that didn’t work as expected. “[There was] a dramatic reduction in EBITDA from 2021 onwards, which became increasingly negative, at R$316.5 million in 2023.”
In the last 18 months, sales dropped 25% amid falling demand, making the retailer’s situation “unsustainable,” CEO Sébastien Durchon told Valor on Wednesday (20).
“It may seem brutal, but only 60% of the revenue DIA had estimated from franchises was confirmed in 2023,” he said. Furthermore, the franchises failed to honor payments for products acquired from the company, which supplies the stores.
In the filing, the company’s lawyers requested a stay period, a type of shielding phase, in which the effects of bankruptcy protection are brought forward from the moment the suit is filed.
In 2023, DIA posted a net revenue of R$3.9 billion, and for this year, it is estimated at R$2.5 billion, considering the effects of the reduction in the number of stores.
The company has 5,500 direct employees in Brazil and will maintain only 2,000 employees after the current restructuring and closure of 343 stores. The focus is to have the request accepted by the court and put together the reorganization plan within 60 days, which is the deadline defined by law.
Assembling the plan involves aligning negotiations with suppliers to avoid shortages and with franchisees so that the franchises are kept in operation amid the crisis.
*Por Adriana Mattos — São Paulo
Source: Valor International
Lula administration is considering restricting issuance of bonds by the oil and gas sector
03/22/2024
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Percy Soares Neto — Foto: Divulgação
The federal government is considering imposing new restrictions on the issuance of tax-exempt debentures and limiting their use to finance fixed concession payments. According to sources, one idea is to direct the instrument, which offers an income tax exemption for individual investors, to sectors that need cheaper financing, such as renewable energy, basic sanitation, and power transmission lines. In practice, the use of this instrument by the oil and gas industry could be limited.
According to one source, the plan is to limit the use of these securities by sectors where profitability has been higher. More specifically, there will be restrictions on the oil and gas sector. “The O&G industry, for example, has a significant margin and the cheap funding is not a game changer,” the source said.
This would allow the government to raise more revenue at a time when it needs to broaden its revenue sources. This year, the National Monetary Council (CMN) has already imposed several restrictions on the use of underlying assets to issue tax-exempt securities, such as Real Estate Credit Bills (LCIs), Real Estate Receivable Certificates (CRI), and Agricultural Credit Bills (LCAs).
“The biggest expectation we had was whether there would be a restriction on the size of the company, more or less as was done with CRAs [agribusiness receivables certificates] and CRIs. But what we’ve heard is that that kind of size restriction shouldn’t happen,” said a source who has been following the issue.
A source in the oil and gas sector said that if the restriction goes through, it will close a funding door for companies, especially the smaller ones that have less access to funding than Petrobras.
Among the groups in the sector that have recently raised funds through tax-exempt bonds is PetroRio. The company launched a R$2 billion offering in February to finance oil projects. 3R Petroleum issued R$1 billion of securities in November 2023 and Enauta raised R$1.1 billion in September.
The government is also studying whether to restrict the use of the instrument to honor fixed concession payments, a source says. This restriction could potentially lower the amount paid, thereby impacting state and municipal revenues. This limitation might extend to both tax-exempt and infrastructure debentures, the latter of which were established by law in January of this year but have not yet been subjected to regulation. “This would be very bad news for states and municipalities,” the source said.
Private-sector companies have also criticized the proposal. “We will have less competitive auctions. This will certainly reduce the appetite of investors to pay subsidies and is likely to increase the cost of capital for projects. We are very concerned,” said Percy Soares Neto, executive director of ABCON (National Association of Private Water and Sewage Concessionaires).
The proposal to limit the use of debentures for subsidies is in line with the federal government’s assessment that the amounts offered in the auction will ultimately be paid by the users of the infrastructure services. This is because tariffs could be lower if governments did not seek to get higher fixed concession payments when they structure projects. In addition, the federal government has encouraged bids with the lowest tariff and the highest concession payments.
Mr. Soares acknowledged that the diagnosis is correct, but believes that imposing limits is a mistake. “The best solution would be to seek a dialogue with the bidder.”
In the decision taken at the February meeting, the CMN also decided to forbid CRI and CRA offers from listed companies that are not related to the two sectors (real estate and agribusiness). Behind this decision was the government’s plan to increase revenues and make the securities more effective, so that the funds raised would be directed to the sectors.
Since 2016, there has been a loosening in the understanding of the CRA rules, and companies operating in other sectors, such as restaurant chains and supermarkets, have been able to issue bonds of this type. As of 2022, companies that pay rent will also be allowed to use these contracts to back CRIs, further expanding the volume of offerings.
With the expected reduction in these securities, investors migrated to tax-exempt debentures. Secondary market bond prices fell, and demand grew to the point where there was even room for offers with no premium over government bonds.
At the same time as it is studying restrictions on tax-exempt bonds, the government is working to regulate infrastructure debentures. The law creating the instrument, which allows tax exemption for issuing companies, was approved in early January, but the decree with details such as the sectors that will be able to issue them has not yet been published. According to sources, the rules are expected to be published by the next week.
The Ministry of Finance declined to comment because “the matter is still under discussion within the federal government.”
*Por Fernanda Guimarães, Taís Hirata, Rita Azevedo — São Paulo
Source: Valor International
The decision prevents an impact of R$480 billion, according to the 2024 Budget Guidelines Act
03/22/2024
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Cristiano Zanin — Foto: Gustavo Moreno/SCO/STF
In a surprising turn of events, when assessing the validity of amendments to the Social Security Benefits Act (Law 8213/1991) introduced by Law 9876/1999, the Federal Supreme Court overturned the “lifetime review” theory. The retirees’ loss is a billion-reais victory for the federal government, which estimated a potential cost of R$480 billion, according to the 2024 Budget Guidelines Act.
The financial impact discussed was not unanimous. For the Brazilian Institute of Social Security Law (IBDP), there were about 383,000 benefits eligible for review, and the amount would be much lower—R$1.5 billion. That’s because the theory would benefit a restricted group of retirees—only those who were in the transition rule of the 1999 Social Security Reform would be in a disadvantaged position in relation to the planned rule.
When ruling on the matter in December 2022, the Supreme Court gave retirees an option for the more beneficial calculation. Today, a new composition of the Court overturned this possibility in the rulings of two other cases (ADI 2110 and 2111), where the review was a secondary issue. Additionally, an appeal related to the 2022 decision (RE 1276977) was on the agenda but was not addressed.
In Thursday’s (21) ruling, the justices validated the creation of the social security factor and made family allowance payments—government-provided benefits intended to support families with children by helping to cover some of the costs of their upbringing and education—conditional on presenting a vaccination card and verifying the child’s school attendance. By a majority vote (six to five), the requirement for a ten-month waiting period for maternity leave payments to individual contributors was eliminated. Justices Edson Fachin, Flávio Dino, Luiz Fux, Cármen Lúcia, Dias Toffoli, and Luís Roberto Barroso voted in this manner.
The main point of contention was precisely the transition rule established in Article 3 of Law 9876. Until the enactment of this law, retirement benefits were calculated based on the 36 highest salaries received in the 48 months before retirement or the beneficiary’s death. Following the law, the calculation considered the highest 80% of salaries received throughout the worker’s life.
The law established a transition rule for those who had started contributing by its publication date but had not yet retired, which was to calculate using the highest 80% of salaries received, excluding salaries prior to July 1994, when the Real Plan—a set of measures implemented in Brazil in 1994 to stabilize the country’s economy— was implemented.
The divergence analyzed on Thursday (21) by the Supreme Court was in the transition regime. The justices debated whether the beneficiary would be subject to the transition rule or could benefit from the definitive rule applicable to those who joined later.
The obligation of the transition regime was the prevailing understanding by seven votes to four. Voting in this direction were Justices Cristiano Zanin, Flávio Dino, Dias Toffoli, Gilmar Mendes, Luiz Fux, Luís Roberto Barroso, and Nunes Marques.
The approved thesis clarifies: “The constitutional validation of Article 3 of Law 9876/1999 requires that this legal provision be mandatorily followed by other judicial bodies and the public administration, strictly according to its literal interpretation, which admits no exceptions. Consequently, social security beneficiaries falling under this provision are not permitted to choose the definitive rule, even if it would be more advantageous to them.”
João Badari, a partner at Aith, Badari e Luchin Advogados and representing retirees as an amicus curiae, stated, “By reviving two direct actions for the declaration of unconstitutionality that didn’t originally address the ‘lifetime review,’ they successfully annulled it. That effectively terminated the retirees’ rights.”
Diego Cherulli, director of the Brazilian Institute of Social Security Law, highlighted the Court’s decision’s dependency on its composition, describing the day’s events as a procedural coup. “They employed a 25-year-old case to overturn a new thesis adjudicated in general repercussion. This approach raises significant procedural questions and poses a serious threat to legal certainty,” he explained. Mr. Cherulli further emphasized the gravity of the situation, adding, “The implications for retirees and pensioners are profoundly detrimental.”
According to Mr. Cherulli, some beneficiaries who have already secured their rights in court cases with no further appeal possible (res judicata) should see no change. However, those with ongoing proceedings will likely be denied their requests.
“As part of a procedural strategy by those aiming to win the case, they prioritized the lawsuits tried today, thereby securing the right. It was a tactical move to use one case to overturn another,” Mr. Cherulli stated. He expects the appeal pending from the 2022 decision to be deemed moot and dismissed.
The lawsuits judged now reached the Full Bench after Justice Cristiano Zanin highlighted them in the STF’s Virtual Plenary, where he also led the majority vote. Justice Alexandre de Moraes expressed strong reservations about re-evaluating the lifetime review under these circumstances. He clarified, “If we proceed with a review, it means we’re in a position where one Plenary is reviewing the decision of another Plenary due to the Court’s changed composition since the 2022 session.”
Justice Cristiano Zanin mentioned that the appeal concerning the lifetime review has not achieved res judicata status, and the motions for clarification, set for Thursday’s (21) agenda, remain unresolved. “The merits have already been adjudicated; any further review would constitute an oversight or contradiction,” Justice Moraes articulated in his vote.
The General Counsel for the Federal Government, Jorge Messias, stated that the decision safeguards the integrity of public accounts and the financial stability of Social Security. “This is a paradigmatic decision for the country,” he remarked.
Moreover, Mr. Messias noted that the decision prevents the emergence of a “scenario of judicial and administrative chaos” that the National Social Security Institute would have inevitably faced had it been required to apply the so-called lifetime review thesis, as highlighted in the arguments made by the Office of the General Counsel for the Federal Government in the cases presented to the Supreme Court.
“The Supreme Court’s decision ensures legal certainty and reaffirms a stance the court itself established over 20 years ago,” Mr. Messias commented.
The federal government’s economic policy team widely acclaimed the decision. “It’s a significant win for the country,” a Finance Ministry source expressed. Although the 2024 Budget Guidelines Act includes the R$480 billion, the Supreme Court’s ruling, while not generating additional revenue, ensures the federal government is no longer at risk of forfeiting the amount estimated by the economic policy team. Since taking office, Finance Minister Fernando Haddad has repeatedly underscored the importance of Thursday’s (21) decision.
*Por Beatriz Olivon — Brasília
Source: Valor International