Companies in crisis lure buyers offering symbolic payments, debt relief

Specialist managers increase transactions involving problematic assets

08/07/2024

Renato Azevedo — Foto: Gabriel Reis/Valor

Renato Azevedo — Foto: Gabriel Reis/Valor

Companies facing financial distress and undergoing restructuring are increasingly being sold for nominal amounts, with buyers assuming the existing debts. A notable instance is the sale of the retailer DIA for €100 during its court-supervised reorganization process. Initially, the Spanish group attempted to divest the asset before it sought court protection for its creditors.

In the biotechnology sector, Superbac, which received investments from XP’s private equity fund, transitioned to a firm specializing in restructuring, Valor found. Similarly, the footwear retailer Mr. Cat, which received investments from the HIG fund, followed this trend. Both XP and HIG declined to comment when approached.

Another example includes Rodovias do Tietê, which was sold for R$1 after restructuring firm Starboard brokered the deal. A representative from the managing firm explained that the bondholders organized into a temporary holding structure, assumed the company’s debts, and established interim governance pending approval from the granting authority.

Renato Azevedo, a partner at Latache, notes the increasing prevalence of such transactions in Brazil. “This growth is driven by a more sophisticated market and evolved legislation, along with a greater understanding from both shareholders and creditors that, in some cases, this might be a more viable option than simple debt renegotiation,” he explains.

Market insiders reveal that some investment firms employ a strategy of divesting problematic assets to facilitate exits from challenging investments, typically demanding extensive restructuring efforts. These transactions are often “closed-door” sales, which entail the transfer of both assets and associated liabilities.

Daniel Vorcaro, president of Master, elaborates on the economic volatility, pandemic impacts, and institutional crises that have compelled numerous companies to undergo restructuring. The bank has engaged in acquiring companies for nominal sums while taking on their debts, either directly or through financial vehicles associated with the institution.

Mr. Vorcaro highlights several notable acquisitions in this framework. Beyond the retailer DIA, Master’s MAM fund—operating independently from the bank—acquired Veste (previously known as Restoque), which manages several prominent fashion brands, and Metalfrio, an industrial concern. “These companies are well-regarded but required substantial restructuring,” he notes.

According to Mr. Vorcaro, these symbolic purchases are integral to a broader strategy of sophisticated capital restructuring. This approach is designed to recalibrate the company’s debt load, setting the stage for future growth and stability.

In certain situations, stressed assets represent the final divestment within a portfolio, according to industry insiders. Notably, last year, Pátria Private Equity offloaded Tenco, a company that owns shopping centers in Brazil’s countryside regions, as the last of its troubled investments.

Sources reveal that asset management firms like Vega, Starboard, and Evix have engaged in similar transactions. Additionally, special situations asset restructuring companies such as Makalu and Prisma are known to have contemplated these types of deals, Valor found.

Gilberto Zamcopé, a trailblazer in this sector and founder of the OrderVC fund, has a track record of turning around distressed companies. Eighteen years ago, he purchased Wap, a manufacturer of high-pressure washers, for R$10 million when it was mired in debt. After comprehensive restructuring, the company is now valued at R$3.5 billion. “It was a failed company; carrying debt in Brazil is very challenging,” Mr. Zamcopé remarks. The turnaround strategy included overhauling the administrative processes and outsourcing production to China to revitalize the business.

Mr. Zamcopé has coined the “theory of order” over his career, which has proven effective in his ventures. This year, he acquired another struggling business, Acquion, a collagen manufacturer. “I’ve bought several companies in disarray; it’s not necessarily better than buying a stable company, but a stable one is more expensive,” he explains. With high interest rates currently pressuring many firms, Mr. Zamcopé notes an increase in available opportunities. “High interest rates often precipitate crises, leading companies into disarray. Other contributing factors include toxic leadership, succession issues, market dynamics, competitive pressures, and technological challenges,” he elaborates.

Demand for restructuring expertise is surging, prompting firms like Evix to establish specialized teams to manage these situations internally. André Berenguer, a partner at Evix, explains that the rise in restructuring cases typically aligns with economic downturns and follows periods of aggressive corporate expansion, such as those witnessed during the pandemic fueled by high global liquidity and low interest rates.

Mr. Berenguer identifies three main groups seeking Evix’s restructuring services. The first includes private equity funds at the end of their investment cycle needing to divest problematic assets to return capital to investors.

The second group also consists of private equity funds, but these are seeking assistance with portfolio companies requiring restructuring before they reach the divestment phase. The third group involves financial institutions that have acquired stakes in struggling companies through debt-to-equity conversions and now require specialized turnaround expertise.

Luiz Prazo, a partner at Makalu, notes an uptick in such cases at his firm. He emphasizes the importance of thorough due diligence to avoid unforeseen risks. “We focus on sectors we are familiar with to fully understand the risks involved,” he states. Mr. Prazo points out that acquisitions in this segment often involve taking on substantial liabilities, as purchases made for symbolic amounts like R$1 typically imply the assumption of existing debts.

Sources interviewed by Valor indicate that international conglomerates planning to exit the Brazilian market have increasingly turned to asset divestment as a viable option, as seen with companies like DIA. Often, these negotiations are conducted solely with a local representative, as the primary management may no longer be operating within the country. “There are opportunities to secure favorable deals currently,” one source noted, preferring to remain anonymous.

This strategy falls under what is globally known as dealing with “corporate orphans.” This term refers to companies looking to offload a business division that no longer aligns with their core objectives or to withdraw from a specific geographical market.

*Por Fernanda Guimarães, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Central Bank indicates that rate hike is on the table

Meeting minutes reveal a more conservative stance than initial analyst interpretation

08/07/2024

Minutes from last week’s meeting state that Central Bank’s decision in September will depend on the economic developments until then — Foto: Divulgação/BCB

Minutes from last week’s meeting state that Central Bank’s decision in September will depend on the economic developments until then — Foto: Divulgação/BCB

The Central Bank of Brazil’s Monetary Policy Committee (COPOM) has indicated the possibility of a rate hike at its next meeting in September, while simultaneously avoiding any premature decisions.

The minutes from last week’s meeting, released on Tuesday, state that the decision in September will depend on the economic developments until then, without committing to any future strategies.

This conditional approach suits the committee well given the unfavorable inflationary scenario observed at the meeting last Wednesday and is appropriate for handling the new situation that emerged the following day, when fears of a recession in the United States intensified.

It is unlikely that the COPOM updated its minutes to reflect recent events. The governance of drafting this document means the committee confines itself to what was discussed at the COPOM meeting. Any deviations should have been explicitly mentioned in the text.

Therefore, it is crucial to consider how the COPOM viewed the situation in the United States during its meeting. From this initial benchmark, one can follow the thread to anticipate how new developments might affect the September decision. “A scenario of gradual reduction in inflation and activity and a cautious start to monetary easing is envisaged,” the minutes state, referring to the United States.

In other words, a more substantial economic downturn in the U.S. was not anticipated by the Central Bank, nor was a more aggressive cycle of monetary easing by the Federal Reserve (Fed).

It is also essential to understand how the COPOM will digest the new developments: lower interest rates in the United States do not mechanically translate to lower rates in Brazil, nor does a weaker dollar. It will depend on how these factors affect inflation, which also depends on other variables, such as the level of economic activity and fiscal policy developments.

Overall, the minutes are more conservative than the initial interpretation of the statement made by economic analysts last week. The scenarios under consideration are clear—either maintaining or increasing interest rates from the current 10.5% per annum, depending on the situation the committee encounters in September.

The market misinterpreted the COPOM’s view on its inflation projection. It assumed that the 3.2% inflation rate for the 12 months ending March 2026 was close enough to the target to be indistinguishable. The COPOM’s minutes clearly state that the rate “is above the inflation target of 3%.” In other words, the current 10.5% interest rate no longer seems sufficient.

The market also downplayed the COPOM’s expressed concerns regarding its inflation risk balance. All members acknowledged that there are more items listed indicating the risk of inflation exceeding the target. “Several members” emphasized the asymmetry of the inflation risk balance, pointing out that upward factors outweigh downward ones.

Had nothing new occurred since last Thursday, the market’s re-pricing—assuming a more “dovish” COPOM—would have been premature. The minutes do not appear to differentiate between the chances of maintaining rates and additional tightening.

Within this more conservative message, there are some inconsistencies between the minutes and the decision to maintain rates last week. If the COPOM believes the projected inflation is above the target, why not raise rates already? There were reasons for at least a split vote, considering that “several members” view this projection with greater skepticism, noting that the chances of inflation exceeding the target are higher than those of it falling below.

The decision to maintain rates, postponing the decision on a hike until September, could reflect a committee seeking consensus in its decisions, following the scars left by its divided decision in May. Ultimately, a slower approach provides the COPOM more time to analyze a more uncertain situation with greater calm and more information.

*Por Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Recession fears spark risk aversion

While services data offers relief, concerns about the U.S. economy persist

08/06/2024

Ruy Alves — Foto: Leo Pinheiro/Valor

Ruy Alves — Foto: Leo Pinheiro/Valor

Global markets plunged into panic amid mounting fears of a U.S. recession in Monday’s trading session. Risk aversion gripped investors from the early hours, starting with Japan’s stock market experiencing its second-worst day ever and continuing across global stock markets throughout the day. In Brazil, concerns pushed the exchange rate to its highest close since March 2021, while Brazil’s benchmark stock index (Ibovespa) also fell, though local asset losses were less severe compared to their international counterparts.

The day’s trading commenced with high tension as Asian stock markets recorded substantial losses driven by fears of a U.S. economic slowdown and concerns over a tech stock bubble. Japan’s primary market index, the Nikkei, plummeted 12.4%, marking its steepest decline since 1987, and South Korea’s Kospi index closed down 8.7%.

U.S. markets mirrored this downward trend, with significant indices suffering heavy losses. The Dow Jones Industrial Average dropped 2.60%, the S&P 500 declined by 3.00%, and the Nasdaq Composite fell 3.43%, dipping over 6% at one point during the session. The S&P 500 experienced its worst day since September 2022. Furthermore, the VIX index, often referred to as Wall Street’s “fear gauge,” surged by 65%, ending the day at 38.57 points.

In a communication to clients, strategists at Citi noted that the investment strategies widely adopted by the market are now showing their limitations. “Positioning metrics shed light on some of the recent movements in asset classes, providing insights into vulnerabilities during periods of high volatility. Japanese stocks were widely favored […], and equities in Europe, the U.S., and emerging markets (excluding China) remain overweight,” they commented.

Citi highlighted that “carry trade” positions—where investors borrow at low interest rates in one country to invest in higher interest options elsewhere—are particularly vulnerable, impacting currencies such as the Brazilian real, the Turkish lira, and the British pound.

Amid these global tensions, local markets displayed a stark aversion to risk. At one point during the day, the exchange rate surged by 2.71% in Brazil, reaching R$5.8641 per dollar. Simultaneously, the Ibovespa plummeted to a low of 123,073 points, a drop of 2.20%.

Nevertheless, unexpectedly positive data from the U.S. services sector tempered fears of an imminent recession in the world’s largest economy, leading to a partial recovery in market sentiment. Consequently, local assets rebounded from their lowest points of the day. By the close of trading, the exchange rate had risen by 0.56%, settling at R$5.7412 per dollar, marking a year-to-date gain of 18.31%. Meanwhile, the Ibovespa closed down slightly by 0.46%, at 125,270 points.

Ruy Alves, global macro manager at Kinea, expressed confidence that there is no imminent recession on the horizon for the U.S., nor is there a likelihood of a sharp economic downturn. According to him, the recent monetary policy meetings of the U.S. Federal Reserve and the Bank of Japan have led to a recalibration in risk perception among highly leveraged trades, contributing to the recent market corrections. “It’s a misconception to think that the market consistently aligns with economic fundamentals. In reality, the market is shaped by supply and demand dynamics, which only sometimes coincide with the fundamentals,” he explained.”

The executive is optimistic about the potential for the Brazilian real to recover from its recent excessive fluctuations compared to its counterparts. “The real has room to correct some of the unusual movements it has experienced in recent months,” observes Mr. Alves. He notes that despite the market turbulence, the currency has shown considerable resilience relative to its peers.

Echoing this sentiment is Sérgio Goldenstein, chief strategist at Warren Investimentos. He suggests that the anticipated Federal Reserve rate cut of 0.5 percentage points should, in theory, benefit emerging market assets, particularly currencies. However, he points out that there is volatility stemming from the unwinding of carry trade operations.

“The yen has risen about 10% in a month. Fortunately, this appears to be a cyclical trend. Notably, on Monday (5), the real managed to outperform other emerging market currencies. If this unwinding of positions has concluded, it suggests that the real is poised to adjust to a more favorable rate. Currently, the currency stands well above its equilibrium rate,” Mr. Goldenstein explains.

He believes that an improvement in the exchange rate could significantly alleviate the Central Bank’s inflation concerns. “Should the Fed initiate rate cuts in September, combined with the cessation of ‘carry trade’ unwinding, there could be an opportunity for the real to appreciate, potentially reducing inflation projections. This scenario would enable the Central Bank to maintain the Selic [Brazil’s benchmark interest rate] at a stable level over an extended period,” he adds.

*Por Gabriel Roca, Gabriel Caldeira, Maria Fernanda Salinet — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Highway auctions to generate investments of R$32bn

Market expects the five scheduled auctions to attract at least one offer each

08/06/2024

Viviane Esse — Foto: Gesival Nogueira Kebec/Valor

Viviane Esse — Foto: Gesival Nogueira Kebec/Valor

The highway concessions segment will see a series of large auctions in the second half of the year. At least five tenders by the São Paulo state and the federal government are planned and could total R$32.3 billion in investments. In addition to these, eight other projects could be launched in 2024, apart from the renegotiation of concessions, according to the Ministry of Transportation.

In the market, the main doubt regards the possibility of attracting investors in a scenario of high interest rates and with concessionaires already committed to investments in ongoing contracts. However, according to governments and analysts interviewed by Valor, at least the auctions that have already been scheduled are expected to attract proposals.

Even the concession of BR-381 in Minas Gerais, known as the “Road of Death,” is expected to attract interest. Following changes in the project, which mitigated geological and expropriation risks and increased the rate of return, the expectation is that the auction will attract at least one group.

“There have been four attempts to bid. Now it’s for real,” said Viviane Esse, national secretary of Road Transportation. According to her, there are a host of companies analyzing the project, at least three with a background in the construction sector, in addition to traditional highway concessionaires. One is J. Malucelli, according to a source. When contacted, the company said it uses its “structure and experience” in the construction and highway segment “to study the programs announced by the government.”

For Ms. Esse, the broad market interest has grown. “I see increased participation. That became clear in the BR-040 auction, which attracted four bidders. We have seen many groups studying it.”

For Rafael Benini, São Paulo’s secretary of investment partnerships, the size of the contracts helps attract interested parties. “I understand there is concern [about a lack of proponents] but the size of projects was reduced. Two years ago, there were auctions worth R$15 billion, like the Dutra highway. Now we have [projects of] R$7 billion, R$8 billion,” he points out.

The two São Paulo state auctions scheduled for this year—the Sorocabana and Nova Raposo lots—are seen as highlights. The bids will take place as a result of the approaching expiration of the ViaOeste concession, by CCR. They are considered attractive because traffic on the roads is known and tolls are already in operation.

According to Mr. Benini, Sorocabana is a traditional lot, which tends to attract well-known concessionaires. Nova Raposo, on the other hand, includes urban construction work, which will require complex expropriations, and therefore tends to attract groups in the construction segment.

Sorocabana has been studied by CCR, Pátria, Ecorodovias, EPR, and Via Appia (by Starboard). Nova Raposo has been evaluated by groups such as Acciona, CDL (Consladel), Via Appia, and a consortium comprising CCR and construction companies.

Via Appia says it is studying the projects but has not yet made a decision, according to CEO Brendon Ramos. The two blocks have their challenges but also synergies with concessions that the company already operates, he points out. When contacted, CCR said, “The auction pipeline is extensive and the company has carried out in-depth assessments.” EPR says it “has a habit of evaluating opportunities.” Ecorodovias said it continues to analyze projects “selectively, looking for opportunities with an attractive rate of return.” Pátria and CDL declined to comment.

The São Paulo state government has other projects underway, which will likely be scheduled for 2025. In the first half of the year, a concession for the Paranapanema lot (Raposo Tavares highway between Itapetininga and Ourinhos) should be tendered, with investments of R$2.5 billion to R$4 billion. In the second half of the year, the Mogiana and Circuito das Águas blocks should be tendered, as a result of the expiration of the Renovias concession. As with ViaOeste, the state will likely split the concession in two and incorporate new road stretches into each lot.

Other federal government auctions are scheduled for this year, including the Rota dos Cristais (BR-040 between Minas Gerais and Goiás) and the BR-262 in Minas Gerais. They are regarded as challenging projects but there is interest.

“The best stretch of BR-040 has been tendered and was taken by EPR. The other two lots are considered complex projects. However, EPR tends to be a proponent,” said Massami Uyeda Junior, a partner at Arap, Nishi & Uyeda.

Marco Aurélio de Barcelos, president of ABCR (Brazilian Association of Highway Concessionaires), said there has been progress in federal projects, with an increase in return rates and greater risk sharing in challenging projects. “The government did its job to increase attractiveness. The IRR [internal rate of return] became more attractive as the final model has resolved risks.”

As projects progress, the general perception in the market is that new players are increasingly entering the sector. “We have been approached by companies from abroad which are interested in learning about the concession environment. We have seen moves,” said Mr. Barcelos.

Rodrigo Campos, a partner at the Vernalha Pereira law firm, expects to see offers for all scheduled auctions. “We won’t see many bidders as the projects are many and with different profiles. However, I believe all projects will attract interest, including the BR-381.”

Letícia Queiroz, a partner at Queiroz Maluf Advogados, also sees interest in the sector but points out that there are challenges, mostly related to funding and hiring engineering work. Furthermore, she points out that auctions will likely occur simultaneously with the renegotiation of troubled concessions. “The pipeline will coincide with the number of contracts being renegotiated which are also expected to generate new investments. It’s a challenging calendar, with a lot of auctions, but I see moves in the market.”

*Por Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Flying car gains traction with 830 orders

Regulatory certification pending, vertical and take-off landing vehicle eVTOL promises lower emissions and reduced costs, eyeing competition with helicopters

08/06/2024

Vertical take-off and landing vehicles—eVTOLs, also known as flying cars—attracted 830 orders — Foto: Divulgação

Vertical take-off and landing vehicles—eVTOLs, also known as flying cars—attracted 830 orders — Foto: Divulgação

Currently undergoing certification with regulatory agencies, the future vertical take-off and landing vehicles—eVTOLs, also known as flying cars—attracted 830 orders from eight commercial aviation and air taxi companies in Brazil. Executives in this emerging sector are preparing to compete with helicopter transportation, promising reduced pollutant emissions, safety, and lower costs. However, specialists are monitoring several factors that could influence the development of this new market: how the National Agency of Civil Aviation (ANAC) will regulate the segment, for instance, regarding the construction of landing and take-off sites, known as vertiports, and the potential delay in consumer adoption of this new type of vehicle.

In a statement, ANAC highlights the importance of fundamental safety, design, technology, and accessibility requirements for users and aircraft, considering the need for integration into city structures and urban mobility, connecting eVTOLs with other modes of transportation, services, and public facilities. All of this generates social, economic, and environmental benefits, the agency said. “This necessity directed the agency to implement the regulatory sandbox currently underway.”

This process has not deterred interested parties. Of the total 830 orders reported in Brazil, 57% were placed by airlines Gol and Azul. There are also startups created specifically to explore this potential market.

One of them is VertiMob Infrastructure, which anticipates significant interest from high-income individuals who use air taxi services. According to data from the Brazilian Association of General Aviation (ABAG), São Paulo has the largest helicopter fleet in the world, with 420 aircraft in operation, followed by New York and Tokyo. Brazil has about 2,000 helicopters.

On another front, based on forecasts from international consulting firms, the company also projects that the cost of travel with flying cars will gradually decrease, potentially generating demand among higher-income individuals within the upper middle class. For example, VertiMob CEO Bruno Limoeiro noted that the 15-minute flight from São Paulo’s financial center, known as Faria Lima, to Guarulhos Airport can cost R$2,500 per seat for an executive in a helicopter. In an eVTOL, he said, the cost should range from R$500 to R$1,000 per seat on this route.

“If this trip costs R$1,000 at the start, that’s very good, with a 60% reduction,” Mr. Limoeiro said, acknowledging that the flying car will not be part of most people’s daily lives. The target audience will likely use the service in exceptional situations, such as risking missing an international flight, traveling to nearby cities in an emergency, or sightseeing with panoramic flights.

Marcus Quintella, head of the FGV transportation study center, believes the future mode will have to undergo stricter demand tests, which may yield different results than the company expects, depending on how the service is regulated and the level of acceptance. There may be consumer distrust related to safety, at least initially. “Even with helicopters, many people who have money decide not to fly,” he said, referring to the fear of accidents.

Alessandra Abrão, CEO and partner of Voar Aviação, which has already ordered 70 eVTOL units, argues that they are being developed to the highest safety certification standards by manufacturers and international regulatory agencies. “These vehicles are designed with advanced technologies that include multiple redundant systems, such as batteries and engines, to ensure safety in case of failures,” she said.

For Mr. Quintella, with FGV Transportes, if there are too many restrictions on coexisting with other aircraft, the supply of flights may not be as large. He draws attention to the licensing criteria for the vertiports themselves. “The travel time to the take-off area should be short, and these points should be distributed throughout the city. This broad base is essential for it to be competitive,” the expert said.

VertiMob, created in the first semester, plans to install and operate the first “vertiport” in Latin America. The initiative is conducted in partnership with São José dos Campos Airport, whose technical proposal will be analyzed by ANAC. The agency is seeking interested parties to implement a vertiport, within the “regulatory sandbox” model whose registrations are open until October.

According to ANAC, this sandbox model allows for the development of new technologies in an evaluation environment by the regulatory authority. “Thus, it is a preliminary stage for future normative production and, consequently, the inclusion of the topic in the regulatory agenda. Meanwhile, ANAC can monitor the evolution and assess the effectiveness and safety level guaranteed by the innovative technique proposed by eVTOL technology.”

Contacted, Gol reported that it has partnered with the Irish leasing company Avolon and the British eVTOL manufacturer Vertical Aerospace to “study the ecosystem that will enable this new mode,” which is “promising.” It said that the prototype of Vertical’s VX4 is “in the test flight phase on its certification journey,” with the “highest safety criteria,” which will extend until 2026. “In the meantime, all other participants in this ecosystem—infrastructure, airspace control, energy providers, regulatory agencies, and companies—must work collaboratively for the success of eVTOLs,” which are important for the “potential expansion of the air network.”

Azul reported that the partnership with the German company Lilium, involved in eVTOL research, will help achieve the carbon neutrality goal by 2045. Emphasizing that it is one of the first companies to support the new aircraft project, it reported that it is “awaiting the regulatory part, which still needs to be defined, in addition to working on planning, support, and studies of bases and infrastructure to determine how the operation will be.” It added that eVTOLs are for “short and medium-distance routes, which would help complement the air network, operating in places where conventional aircraft cannot.”

Asked about its strategy, Latam declined to comment.

*Por Rafael Bitencourt — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Central Bank “won’t hesitate” to raise rates if necessary

In minutes of last meeting, Monetary Policy Committee members stated that domestic and international conditions require even greater caution in conducting monetary policy

06/08/2024

Central Bank’s building in Brasília — Foto: Raphael Ribeiro/BCB

Central Bank’s building in Brasília — Foto: Raphael Ribeiro/BCB

Central Bank’s Monetary Policy Committee reported in minutes released this Tuesday that its members agreed “that there are more upward risks for inflation, with several members emphasizing the asymmetry of the risk balance.” The COPOM, as the committee is known, also reinforced that it will not hesitate to raise interest rates to ensure convergence of inflation to the target if deemed appropriate. Last week, it maintained interest rates at 10.5% per year.

The information about the increased upward risks for inflation is included in the part of the minutes that details the risk balance, that is, the group of factors that could potentially cause inflation to exceed or fall below the 3.2% projected for the 12-month period ending in March 2026. The minutes again list the factors that had been anticipated in last week’s statement.

The minutes cite three factors that could accelerate inflation: “a de-anchoring of inflation expectations over a more prolonged period; “a greater resilience in service inflation than projected due to a tighter output gap”; and “a combination of external and internal economic policies that have inflationary impacts, for example, through a persistently depreciated exchange rate.”

On the deflationary side, there are two factors: “a sharper global economic activity slowdown than projected”; and “the impacts of monetary tightening on global disinflation proving to be stronger than expected.”

Domestic and international scenarios

The COPOM assesses that domestic and international conditions require even greater caution in conducting monetary policy. “In particular, the inflationary impacts arising from movements in market variables and inflation expectations, if they prove to be persistent, corroborate the need for greater vigilance,” the minutes state.

In the document, the COPOM cited surprises in economic activity, an increase in the inflation projection, a rise in inflation expectations, and an adverse international scenario.

“In the domestic scenario, the labor market and economic activity, especially household consumption, have surprised and diverged from the projected slowdown,” the minutes state.

“There has been a new increase in inflation projections for the relevant monetary policy horizon, notwithstanding a new increase in the trajectory of the Selic rate drawn from the Focus survey,” the document states, citing Central Bank’s weekly survey with analysts. “Similarly, inflation expectations have shown additional de-anchoring since the previous meeting.”

According to the COPOM, inflation data “suggest a trajectory that has not diverged significantly from what was expected, but there is a noticeable cooling in the disinflation process in the more recent period.”

The document further states that the inflation rates of industrial goods and food at home have maintained their recent trajectories and have ceased to contribute to disinflation at this stage. Service inflation, it continues, “which has greater inertia, plays a predominant role in the disinflationary dynamics at the current stage.”

The minutes indicate that the COPOM also discussed the role of labor market dynamics and inflation expectations in determining service inflation. “It was concluded that the disinflationary process has lost steam and that current inflation levels above the target, in the context of dynamic economic activity, make the convergence of inflation to the target more challenging,” the minutes state.

The COPOM also emphasized that “the unfolding of the scenario will be particularly important to define the next steps of monetary policy,” citing the hypotheses of maintaining interest rates or tightening the Selic rate.

“The Committee will evaluate the best strategy: on one hand, whether the strategy of maintaining the interest rate for a sufficiently long time will lead inflation to the target in the relevant horizon; on the other hand, the Committee unanimously reinforced that it will not hesitate to raise the interest rate to ensure the convergence of inflation to the target if deemed appropriate,” the document states.

According to the unanimous assessment of the COPOM, “the current moment is one of even greater caution and diligent monitoring of the determinants of inflation, without committing to future strategies.”

“The scenario marked by higher projections and more risks for inflation increase is challenging, and the Committee assesses that the unfolding of the scenario will be particularly important to define the next steps of monetary policy,” the minutes state.

The COPOM asserts that, as usual, the strategies adopted by the Committee will reflect the commitment to meet the inflation target, also aiming for the re-anchoring of inflation expectations in order to minimize the cost of disinflation. “The Committee will remain vigilant and recalls that any future adjustments in the interest rate will be dictated by the firm commitment to the convergence of inflation to the target,” the minutes state.

Relevant horizon

The minutes from the last COPOM meeting pointed out that the projection for the relevant horizon of monetary policy “is above the inflation target of 3%.” The horizon is six quarters ahead, therefore, the first quarter of 2026.

According to the committee, the usual understanding was maintained, “without any alteration,” that the relevant horizon is six quarters ahead.

The document indicates that in the reference scenario, which considers the Selic drawn from the Focus survey, the accumulated projection for the relevant horizon is 3.4%. In the alternative scenario, which considers a constant interest rate, the number is 3.2%.

According to the minutes, the committee opted to communicate these projections, in addition to the traditional ones made for calendar years, to contribute “to transparency in the communication of monetary policy.” According to the COPOM, this decision is in line with the continuous target system established at 3% starting in 2025.

For calendar years, the COPOM’s projections in the reference scenario were 4.2% in 2024 and 3.6% in 2025. For administered prices, it reached 5% in 2024 and 4% in 2025. In the alternative scenario, the projection for 2024 was 4.2% and for 2025 was 3.4%.

*Por Alex Ribeiro, Gabriel Shinohara — São Paulo and Brasília

Source: Valor International

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Unigel raises tone against Petrobras after court decision

Public spending watchdog sees wrongdoings in tolling contract

08/02/2024

Roberto Noronha Santos — Foto: Silvia Zamboni/Valor

Roberto Noronha Santos — Foto: Silvia Zamboni/Valor

The discussions between Unigel and Petrobras around the natural gas used as raw material in the fertilizer factories leased by the petrochemical company took on a new shape. In a report dated Wednesday (31), the Federal Court of Accounts (TCU) concluded that there were improprieties in the tolling contract signed between the two companies. Unigel claims to be the aggrieved party due to the proposal made by Petrobras.

“Unigel is the only one affected in this case,” CEO Roberto Noronha Santos told Valor. “There is no type of wrongdoing involving Unigel and that has not been mentioned in the report,” he added. Petrobras did not immediately respond to Valor’s request for comment.

Unigel opened arbitration against Petrobras asking for financial re-balancing of a take-or-pay natural gas supply contract and will seek compensation for losses during the period when the tolling contract was negotiated. According to Justice Benjamin Zymler, rapporteur of the process at the public spending watchdog, “the economic assessment, which should have guided the decision, was biased, by considering risks and opportunities that should not have been taken into account and underestimating others.”

Furthermore, upon signing the contract, Petrobras failed to “follow the best governance practices that guide state-owned companies,” according to the rapporteur. He pointed out that Petrobras’s top management took high risks given unfavorable timing—with falling urea prices in the international market—and a serious financial crisis faced by Unigel.

Earlier this year, TCU experts pointed out that the agreement could generate losses of R$487.1 million for the state-owned company, in net present value. Justice Zymler also points out, in his report, that the value of the tolling contract, of R$759 million, contrasts with the R$280 million presented by Unigel as the necessary amount to achieve breakeven.

According to Mr. Noronha, who was ahead of the negotiations, the tolling contract was proposed by Petrobras on June 22, 2023. The purpose was to enable the resumption of nitrogen fertilizer production in two of Petrobras’s factories, leased to Unigel for up to 20 years. Operations in the so-called “fafens” (nitrogen fertilizer factories) had been halted in the first half of 2023 on the grounds that the prices of natural gas, used as raw material, made the business financially unviable after the sharp drop in urea prices on the international market.

However, the public spending watchdog pointed out that, after the signing of the contract, there were signs of wrongdoing and the plants remained closed. In June, a year after the contract was signed, Petrobras terminated the contract, claiming that certain conditions had not been met. “It was a tough negotiation,” Mr. Noronha said of the tug of war between Unigel and Petrobras over the value of the contract, which was signed six months later. During most of that period, the two factories remained closed, costing Unigel R$35 million monthly, with the expectation that operations could be resumed, he added.

*Por Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Market shows mixed reactions to Central Bank’s policy decision

Short-term interest rates dip amid balanced communication; long-term rates rise on external pressures and risk premium demands

02/08/2024

Denis Ferrari — Foto: Rogerio Vieira/Valor

Denis Ferrari — Foto: Rogerio Vieira/Valor

The reception of local agents to the Central Bank’s Monetary Policy Committee (COPOM) decision was mixed. While some of the market bet on and chose to see a harsher tone in the monetary authority’s communication given the recent depreciation of the Brazilian real and the de-anchoring of inflation expectations, another part of the investors assessed the decision as balanced. In this context, short-term interest rates closed the day with a slight drop, as bets decreased that the Central Bank would resume monetary tightening in the coming months, while long-term rates rose, with market agents demanding higher risk premiums to hold Brazilian assets.

The local market was also pressured by fears of a recession in the U.S. economy, which ended up heavily affecting the real and emerging market currencies.

At the end of the session, the Interbank Deposit (DI) contract rate for January 2026 fell to 11.565% from 11.625%, while the DI rate for January 2029 rose to 12.025% from 11.99%. The exchange rate advanced 1.43%, with the exchange rate at R$5.7349 per dollar.

According to Denis Ferrari, fixed income manager at Kinea Investimentos, the COPOM statement was good, and the authority made a correct diagnosis of the scenario. The market’s reaction was quite coherent until the external scenario showed a strong deterioration, ultimately contaminating local assets.

“The statement showed concern, but without a certain exaggeration that part of the market would like. I think the Central Bank’s diagnosis is very fair. It shows that they may, at some point, have to discuss raising interest rates, and if necessary, it will be discussed. They might even raise them, but such a move is not imminent,” he said.

Mr. Ferrari also believes that monetary policy shouldn’t try to address the problem of currency depreciation. “The exchange rate responds much more to external factors and should not be the focus of monetary policy,” he said.

The manager said he maintains positions that benefit from the local market’s decline in short-term interest rates. “I think the bar for a rate hike in September is still high. It could happen, but the Focus survey would need to keep worsening, and the real would have to fall beyond R$5.80 per dollar. Even in this scenario, I think the Central Bank could say that the risk balance has become asymmetric and raise rates in November.”

On the other hand, Sergio Silva, partner and macro co-manager at Tenax Capital, said that there has been a rapid deterioration in local assets recently, which has consumed a certain “cushion” that the COPOM kept in its strategy of keeping inflation on target with the Selic rate paused at 10.5% per year.

In this context, the manager believes that the COPOM could have issued a slightly tougher warning, making the minutes’ reading very important to understand the discussions within the committee. “We are seeing the currency at R$5.70. It is a much higher level than we saw six months ago. There is still a need for fiscal implementation and commitment to medium-term targets, which could lead to a reduction in the risk premium that the market demands. There is nothing that indicates, for now, that the scenario is improving, and things are converging to a lower level. If this is the case, the faster you act, the less you would have to react,” said Mr. Silva.

Even after the COPOM avoided signaling that it intends to raise rates in the short term, the scenario gained traction among market participants. Although it maintains the expectation that the Selic rate should start falling again in December in its baseline scenario, UBS BB sees “growing risks” of rate hikes still this year and considers a 30% chance that the Central Bank will be forced to increase the policy rate in September.

“The expected response of monetary policy and a subsequent softer fiscal policy leave us with an alternative scenario of three 50-basis-point increases in September, November, and December,” which would bring the Selic rate to 12% at the end of this year, with a resumption of monetary easing at the beginning of 2025.

In the current context of elevated uncertainties, Tenax maintains only tactical positions on the yield curve at this moment and has been making bets with a shorter investment horizon. “It seems that we have a challenging future concerning fiscal commitment. This has partly explained the underperformance of Brazilian assets we have been observing,” said Mr. Silva.

Daniel Cunha, the chief strategist at BGC Liquidez, also said that the market’s reception to the Central Bank’s statement ended up being contaminated by external factors. “We saw a risk-averse session, particularly with strong movement in the currency market, making it difficult to isolate the ‘post-COPOM factor’ in the assets. In any case, I dare say that the decision was well received, as much as possible, judging by the modest steepening of the curve, even amid the strong currency deterioration,” he said.

In his view, the narrative of a recession in the U.S. still does not seem to be supported by the data. “I do not see today’s session [Thursday] as a narrative shift or initiation of a new regime of American recession. I understand it more as a one-off adjustment, with agents wishing to lighten their positions to get through this less liquid window that occurs during the period of vacations in the Northern Hemisphere,” he said.

*Por Gabriel Roca, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Supreme Court to decide on tax cases impacting public finances by R$712bn

Key case this month addresses the exclusion of ISS from PIS/Cofins calculations

02/08/2024

Saul Tourinho — Foto: Divulgação

Saul Tourinho — Foto: Divulgação

At least 32 critical tax cases against the federal government, states, and municipalities, with a combined estimated impact of R$712 billion on public finances, are currently pending before Brazil’s Supreme Court. Three of these cases are scheduled for this month, including one highly anticipated by taxpayers, known as the “thesis of the century.” It concerns the exclusion of the Services Tax (ISS) from the social taxes PIS and Cofins tax base.

The analysis was conducted by Machado Associados law firm and includes cases mentioned in the Fiscal Risks Annex of the 2025 Budgetary Guidelines Bill (LDO). Although the potential financial impact remains substantial, experts note that the most significant cases have already been adjudicated by the higher courts in recent years. For instance, at the Superior Court of Justice, all items listed in the LDO have been reviewed on their merits, leading to an estimated R$80.4 billion being reclassified as having a “remote risk” of impact.

One of the most eagerly anticipated tax rulings, set for August 28th, involves an appeal concerning the exclusion of ISS from the PIS and Cofins tax base at Brazil’s Federal Supreme Court. Should the appeal fail, it could result in a fiscal impact of approximately R$35.4 billion on the federal government.

This case is underscored by the landmark decision made in 2017, often referred to as the “thesis of the century,” which involved the removal of the ICMS (a state tax on goods and services) from the PIS and Cofins tax base. The current case could set a precedent affecting related secondary legal arguments and interpretations, known in Brazil as “teses filhotes.” Taxpayers argue that the reasons for excluding ICMS should similarly apply to ISS. However, the Attorney General’s Office of the National Treasury (PGFN) holds a contrary position.

The issue had initially split the justices, resulting in a tie after eight votes when it was first addressed in an online session in August 2020 (RE 592616). With the case now moved to the physical courtroom, the trial will restart, though the opinions of retired justices will remain influential.

“There is great anticipation among service providers who have awaited a resolution for many years,” states Maria Andréia dos Santos, a partner at Machado Associados. She believes the prospects are promising, likening the case to the influential “thesis of the century.” However, she cautions that outcomes may vary in other related teses filhotes, such as the one involving PIS and Cofins within the tax base itself (RE 1233096), which has a projected impact of R$65.7 billion, where taxpayers might face challenges.

This expectation reflects the Supreme Court’s previous rulings, like the decision that upheld the inclusion of ICMS in the calculation basis of the Social Security Contribution on Gross Revenue (CPRB)—RE 1187264—as constitutional. “We anticipate decisions that will delve into the specifics of each case, aligning with the court’s established jurisprudence. However, the general outlook for teses filhotes is not favorable,” she notes.

Additionally, on the same day as the review of the ISS exclusion from the PIS and Cofins tax base, the justices may also finalize their analysis of the collection of the Rural Workers Assistance Fund (Funrural) from individuals—this sector’s social security contribution (direct action for the declaration of unconstitutionality – ADI 4395), with a potential financial impact of R$20.9 billion. This charge has already been deemed constitutional, and the current discussion centers on the concept of subrogation, which involves early collection or a form of tax substitution.

The August agenda also includes a case of significant interest to states and municipalities. The justices are set to determine whether ICMS or ISS should be levied on industrialization operations to order when such operations serve as an intermediate stage in the production cycle of goods (RE 882461).

According to the LDO, however, the cases with potentially the most substantial impact have not yet been scheduled. These include a dispute over the limits on deducting education expenses from income tax, estimated to impact R$115 billion (ADI 4927), and a case addressing the requirement for a complementary law to levy PIS/Cofins on imports, which could affect up to R$325 billion (RE 565886).

Tiago Sbardelotto, an economist at XP Investimentos, notes that the lawsuits listed in the Fiscal Risks Annex are unlikely to impact public accounts in 2024. Even if the scheduled items are adjudicated, their effects will only materialize once the decisions are final and unappealable, a scenario not expected to occur in the latter half of the year.

Mr. Sbardelotto outlines three phases of consequences stemming from tax judgments. The most immediate involves offsetting, where companies can claim credits they would have received and use them to offset the taxes they owe. However, Law 14873 of 2024 has introduced limits on the use of these credits, aiming to enhance predictability in tax revenue.

Tax decisions significantly influence tax computations, according to the economist. For example, if the Supreme Court determines that ISS should not be included in the PIS and Cofins tax base, Brazil’s Federal Revenue Service will be required to cease its collection, markedly affecting future tax revenues. However, he notes that with tax reform, although historical amounts would be maintained, the impact of such a decision would not be felt in the future.

The third phase, as outlined by Mr. Sbardelotto, involves the reimbursement of overpaid amounts through court-ordered refunds, which has been a significant concern in recent years. “While it takes time to materialize, it has a considerable impact on the budget,” he explains.

Saul Tourinho Leal, a partner at Tourinho Leal Drummond de Andrade Advocacia, observes that there is considerable pressure from the federal government on judicial outcomes that favor public finances. Despite this, he anticipates that with ongoing tax reform and potential new government budget measures, the Judiciary may face less pressure to resolve public account issues in the second half of the year as it has in the past.

Felipe Salto, chief economist at Warren Investimentos and former director of the Senate’s Independent Fiscal Institution (IFI), adds, “The Fiscal Risks Annex outlines, among other elements, factors that could incur costs for the federal government, such as judicial rulings, especially those involving tax matters. These represent potential expenses that must be monitored closely, one by one.”

According to Mr. Salto, there have been instances where the National Treasury has successfully contested disputes that could have led to significant costs or revenue losses for the federal government, which is commendable. He points to the social security debate around the “lifetime review” and references the legislative response to the decision that excluded ICMS from the PIS and Cofins base, culminating in Law 14592 of 2023. This law mandates the exclusion of ICMS in the calculation of social contribution credits.

At the Superior Court of Justice, though not accompanied by an impact estimate or mentioned in the LDO, tax attorney Maria Andréia dos Santos is closely watching the debate concerning the nature of stock option plans to determine the applicable income tax rate and the timing of its imposition—special appeal (Resp) 2069644.

Ariane Guimarães, a partner at Mattos Filho, draws attention to other significant issues pending before the Superior Court of Justice in repetitive appeals. One involves the potential refund of overpaid amounts as ICMS-ST—special appeals (REsps) 2034975, 2034977, and 2035550. Another pending decision will clarify whether providing a surety or bank guarantee can suspend the enforceability of a non-tax credit (REsps 2007865, 2037317, 2037787, and 2050751).

The PGFN declined to comment on the matter.

*Por Beatriz Olivon — Brasília

Source: Vaslor International

https://valorinternational.globo.com/
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