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The companies that tapped the capital markets to issue debt in 2021 taking advantage of the very low Selic rate will see their costs with interest expenses almost double in 2022. This is because, of the R$250 billion of funds raised last year through bond issues, 76% are pegged to the interbank deposit rate (CDI).
This higher cost does not yet bring to the fore a solvency risk for those companies that, in most cases, still require low leverage. But it will certainly affect profitability, with a direct effect on profit and, consequently, on growth capacity in the medium term.
“The higher interest rate causes a redistribution of results, which used to go to shareholders and now also go to creditors,” said Alexandre Muller, JGP’s managing partner. In order to estimate the impact of the higher Selic policy interest rate, which started 2021 at 2%, the analyst looked at the evolution of the debt of the companies that make up IDEX-CDI, an index created by JGP that includes CDI-linked, liquid bonds. Considering an average CDI of 4.46% last year, the effective interest cost of these companies will be R$6.68 billion in 2021. If the Selic increases to 12%, as predicted by the market, the average CDI this year would increase to 12.31%, raising the cost of this group of companies by 84% in 2022, to R$12.31 billion.
Mr. Muller explains that one indicator tracked by JGP is the return on invested capital (ROIC). A given company whose operations generate an 8.9% ROIC creates value when the cost of capital is 6.5%. The point is that when the cost of capital goes up, smaller, less profitable companies suffer. “Interest rate changes cause more market concentration, because larger companies, which have the power to adjust prices, can survive, while smaller ones have a harder time.”
But higher interest rates are not the only factor making companies’ debt more expensive. Vivian Lee, a partner at Ibiúna Investimentos, recalled that the spread, which is the rate paid above the CDI for the bonds, can also go up again in the coming months. She recalled that in 2021, as investors migrated to fixed income assets from the stock market, there was a strong flow to corporate debt funds, which reduced the spread substantially, to nearly 1.4%. The companies took advantage of the favorable moment and accelerated issuance between October and November. At the same time, faced with a more uncertain environment of rising interest rates, corporate debt funds became more selective at the end of the year.
With a more balanced demand and a flood of offerings, the spread rose to around 1.8%. “The market was busy at the end of the year, showing that even with the migration to fixed income, investors will not support such low spreads,” he said. The point, he said, is that issuers who need to roll over their doubts or even strengthen their cash reserve this year have to do so in the first half of the year, because from then on investors’ willingness to take risk is likely to decrease due to the presidential election. In other words, there may be a new concentration of offerings in the coming months and, therefore, a repricing of securities. “Whoever needs to go back to the market may have to pay a higher spread, besides a much higher CDI,” he said.
For Laurence Mello, head of corporate debt strategy at AZ Quest, the landscape for companies will worsen with the interest rate hike, “but won’t necessarily be bad,” especially when looking at the “high grade” companies, those with good risk ratings. These are companies that have already made adjustments and are now in good liquidity conditions. “Looking at the structure of their balance sheets, the companies are able to pay debts,” he said. Even so, financial costs will rise, impacting profitability and these companies’ performance in the stock market.
The consequence will be, in his view, a setback in the dynamics of the debt market, which went through a period of lengthening terms and reducing spreads. “Companies will need more leverage, more equity, and will make shorter term issues,” Mr. Mello said, adding that this dynamic may affect the speed of growth of these companies.
The impact of the increased cost of debt is likely to be different depending on the company’s profile, said Artur Nehmi, head of fixed income at Sparta. Sectors that offer basic public services, whose capital has natural protection from the rise in inflation, will have fewer problems, he said. This is the case of companies in the energy, infrastructure or sanitation industries, which are important issuers of bonds. But cyclical companies will have a harder time, as their revenues will drop due to the economic slowdown, while financial expenses will increase with higher interest rates.
Another company profile that may be more affected by the increase in interest rates are those that exchanged IPOs for debt offerings as a way of strengthening cash reserve. “Some of these companies had room on their balance sheets to issue equity, but not necessarily to issue debt,” he said.
For Ricardo Carvalho, an analyst at Fitch, higher interest rates will pressure the companies’ financial expenses. But the perverse effect for companies will come from demand. “Interest rates rise because inflation is high, and this combination impacts income and has a restrictive effect for companies,” he said. He points out that companies’ leverage ratios are still low – their net debt-to-EBITDA ratios are at 1.5%, according to Central Bank data, compared with 3.5% in 2019. This means that balance sheets are likely to remain well, even as credit cost conditions worsen. “The question mark now is how long interest rates will stay high. But companies did their homework, lengthened their liabilities and are more prepared to face this more adverse scenario,” he said. “Results will be weaker in terms of revenues and interest rates, but this is not a risk that concerns us.” Given this, Mr. Carvalho believes that there will be a smaller number of upgrades of companies’ ratings. “Yet we don’t expect a material number of downgrades either.”
For Yuri Ramos, head of investment banking at BV, the Selic and the cost of debt is likely to have an accounting impact for companies. But, according to him, most of them were already planning for a higher interest rate level, which may indicate a milder effect on these companies. Even with this interest rate increase underway, he said, the capital market is likely to remain heated this year, propped up by infrastructure companies, for example. He recalled that there were several concessions in this sector last year, such as that of Rio’s sanitation company Cedae, and companies will seek long-term financing to make the necessary investments viable.
Source: Valor international