High interest rates, resistant inflation hurt companies whose sales depend on credit
27/07/2022
Much higher interest rates, resistant inflation and reduced consumption power make up the scenario that has punished retail companies in the stock market for some months. But, more recently, the warning sound has also started to blare in the local corporate debt market, where a good number of these companies have been financing themselves, either to continue their expansion plans, or to reinforce their cash flow, thinking of going through the turbulence that may still come given the macroeconomic risks that lie ahead.
Analysts heard by Valor are unanimous in saying that, unlike what one might think when looking at large retailers traded on the stock market – Magazine Luiza, Americanas C&A, Centauro, Guararapes, Renner and Via –, which have seen losses of up to 88% in 12 months, the situation in the credit market is not dramatic. Most companies have a leverage situation under control and can access the market.
The point is that investors are becoming more demanding, not willing to pay any price, and not even willing to finance companies for any length of time. And at a time when the supply of securities is abundant, you can choose who you want to give money to. And this is already reflected both in the trading of shares in the secondary market and in new issuances.
“What we see is a dispersion of performance among companies, typical of times when uncertainty about the sector as a whole grows,” says Alexandre Muller, a partner at the asset management company JGP.
Two recent operations by large retailers illustrate this environment well. Americanas raised R$2 billion in June issuing 11-year bonds. The rate paid was 2.75% above the CDI (the interbank short-term rate), in an operation considered very successful, even with such a long term. Similarly, Centauro raised R$500 million by issuing 5-year bonds, paying 2.1% above the CDI, in a placement that was fully absorbed by the market.
In July, Via concluded the issuance of R$400 million in five-year and seven-year Certificate of Real Estate Receivables (CRI). But given the low demand for the security, of only R$134 million, the banks that coordinated the offering had to keep a portion of R$266 million.
In this case, the assessment of the managers is that the term was too long given the risk of the company, which deals with macroeconomic issues but also operational and governance issues. It is enough to remember that during the book-building process, a disagreement between the partners about the company’s compensation plan became public.
Similarly, C&A tapped the market to raise R$600 million through bond issuance in April. At the time, Fitch had changed the company’s rating outlook to negative. The banks also had to exercise the firm commitment and were left with 69% and 28.65% of the two lots, maturing in 2025 and 2028, respectively.
When one looks at the secondary market, there are also some movements drawing attention. Magalu’s bond, which was issued last year at a rate of 1.25% above the CDI, for example, is now traded at 1.75%. In contrast, Guararapes’s bond maturing in 2024, which was issued with a spread of 2.95% above the CDI, had a reference rate of 2.0295%.
“There is a change in conditions for these companies, and the credit world also perceives this,” says Mr. Muller. He notes that, although the negative effect is not as intense as the one seen in 2020, when the pandemic strongly impacted some sectors, such as restaurants or tourism, investors now seem even more cautious.
“In 2020, it was easier to have a projection for the companies’ recovery because we knew things would normalize. Now, the call is more complex, because nobody knows when the interest rate will stop rising and not even for how long it will remain high,” he explains. In this context, says Mr. Muller, the fiscal scenario has an even greater weight on the market, once the definition of the fiscal framework for the next government will have a great influence on the interest rate projections.
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Vivian Lee — Foto: Carol Carquejeiro/Valor
Vivian Lee, a partner at Ibiúna Investimentos, says that the macroeconomic scenario of high interest rates and inflation affects income and cools consumption. And this has a direct impact on the companies’ revenues and especially punishes those who have a financial arm. Not to mention the immediate effect of the rise in the Selic policy interest rate on the debt, which, for the most part, is pegged to the CDI. “We haven’t seen any impact of the financial cost on the earning reports when looking at the 12-month horizon yet, but in the second half of the year this will start to appear,” she says.
What analysts observe, however, is that the impact of interest rates will have a different magnitude in each retail segment. The most sensitive is the white goods segment – represented by Via and Magalu – which has already benefited a lot during the pandemic, a period in which consumers directed their funds to this type of product.
On the other hand, fashion retail ends up gaining space at this moment. But for those who have a financial arm, the rise in interest rates has a double negative effect: on consumption and on portfolio default. This is the case with C&A, Renner, and Guararapes (owner of Riachuelo).
The need for working capital, the profile of the consumer public, and the level of leverage are also variables that are being closely observed by investors.
“Those who depend on the upper classes end up benefiting. Those who work more with the lower classes will lose more because inflation weighs more for these consumers,” says Luiz Sedrani, BV Asset’s chief investment officer. “The government’s [consumption stimulus] package tends to stimulate the economy, but we have to keep an eye on default rates.”
The market has observed since March a repricing of the shares, a movement that has not yet reached all the companies, says Ms. Lee, with Ibiúna. “How much this scenario will be reflected in the fees paid by the companies is hard to say, but it is clear that there will be a price correction, and this time it will be due to credit risk,” she says. This environment is likely to overlap the flow of investments, which remains strong for the corporate debt market. This has contributed to balancing the rates paid by companies. “Even if you have an appetite for corporate debt, investors will separate the wheat from the chaff, and at some point, prices will adjust.”
Leonardo Ono, Legacy’s corporate debt manager, says that many retailers are impacted because of factoring of receivables, an operation whose cost increased with the higher Selic. But, for him, this is not an exclusive situation for retail, but for companies that depend on the local economy. A good part of these companies are prepared to go through turbulent periods. “I don’t see an explosive situation,” he says.
In a note, Magalu said it ended the first quarter with an adjusted net cash flow of R$1.6 billion and a total cash flow of R$8.5 billion, considering cash and financial investments of R$2 billion and available credit card receivables of R$6.5 billion. Guararapes, Americanas, Renner and C&A declined to comment. Centauro and Via declined to comment, citing a quiet period before the release of their earnings reports.
*By Lucinda Pinto — São Paulo
Souarce: Valor International