Key goal is carbon neutrality in land and forest use by 2030
11/05/2024
Governor Helder Barbalho of Pará signed into law the “Amazon Now State Plan” on Monday, aimed at curbing deforestation and promoting sustainable development across the state. A primary goal is to achieve carbon neutrality in land and forest use by 2030. The plan also outlines directives for land regularization, strengthening environmental monitoring, and fostering a low-carbon economy.
Key measures in the new law include establishing the State Anti-Deforestation Force, a unit dedicated to monitoring forest areas in Pará, and the creation of the Eastern Amazon Fund, a financial mechanism designed to attract and allocate resources for environmental conservation, ecosystem restoration, and sustainable development projects.
The law also provides incentives for rural producers to adopt low-carbon practices and encourages active participation from local communities, including Indigenous and quilombola groups, in conservation and restoration efforts.
Gabriela Savian, deputy director of public policy at the Amazon Environmental Research Institute (IPAM), believes that formalizing the plan—originally introduced in 2019—is crucial for providing predictability and legal certainty for sustainable investments. “It’s essential that subnational states have long-term, low-emission economic development plans, with a well-defined strategic direction,” she said, noting that over 80% of Pará’s emissions stem from deforestation and forest degradation.
The plan uses an average of greenhouse gas emissions between 2018 and 2022, based on data from Brazil’s National Institute for Space Research (INPE). The aim is for Pará to reach near-zero emissions by 2030, which will require not only controlling deforestation but also expanding secondary vegetation areas to compensate for lost forest cover.
To monitor compliance, the government has created a Permanent Monitoring Center responsible for tracking actions and publishing periodic progress reports. Another body, the Climate Science Panel, made up of research institutions, will contribute technical recommendations and strategies for the plan.
The proposal also includes the establishment of the Pará Forum for Climate Change and Adaptation, a platform that will allow local communities and social organizations to participate in policy discussions and action oversight. These groups will be involved in forest conservation and promoting sustainable practices.
The law aligns the state with Brazil’s national commitments, such as the Nationally Determined Contributions (NDCs) under the Paris Agreement and the United Nations’ Sustainable Development Goals (SDGs). The plan also emphasizes adopting the REDD+ mechanism, an international system incentivizing forest conservation, which would reward Pará for reducing emissions from deforestation.
Analysts highlight tensions in climate, human rights, and geopolitics, but more aligned if Kamala Harris wins
11/05/2024
The outcome of Tuesday’s U.S. elections could pressure the convergence of the U.S.-Brazil agenda and the stability of bilateral relations. Experts consulted by Valor suggest that much of the economic ties’ robustness is likely to remain, regardless of the winner. Still, risks of discord in areas like climate, human rights, and geopolitics may increase.
The U.S. is the top investor in Brazil. Commercial engagement is also growing, with Brazilian exports to the U.S. hitting a record this year, helping reduce Brazil’s trade deficit with the U.S.
Beyond the economic sphere, relations between the countries, currently led by presidents Biden and Lula, converge on cross-cutting issues like climate but are not free of disagreements.
“Bilateral relations have reached a stage of maturity under the Biden-Lula agenda, converging on topics like the environment and human rights, particularly concerning decent work, with initiatives from the United Nations and the International Labor Organization (ILO) to regulate app-based activities,” said Cristina Pecequilo, an international relations professor at the Federal University of São Paulo.
“The larger issue remains in the geopolitical arena. As Brazil returns to a more neutral, independent foreign policy, reviving classic international agenda principles, not just in bilateral relations, a series of discrepancies arise from the fact that the U.S. would rather see Brazil supporting its policies more directly and not diverge, for instance, on conflicts between Russia and Ukraine and Israel and Palestine.”
Besides that, she added, is the weight of the growing Brazil-China relationship within BRICS, the very Brazil-U.S. relationship, and the upholding of reforms in the international order, which conflict with U.S. interests.
If Ms. Harris wins, she noted, continuity in proximity on cross-cutting issues is expected until the end of President Lula’s term, with divergence on some geopolitical matters.
Under a Trump administration, there could be greater economic protectionism and increased pressure for Brazil not to deepen ties with China amid the China-U.S. tensions.
“A Trump victory might also embolden far-right forces to feel more represented in exerting pressure. Thus, a Trump administration would certainly make it harder for Brazil to navigate these cross-cutting agendas.”
Bruna Santos, head of the Brazil Institute at the Wilson Center in Washington, said there is an overlap of agendas and quite similar views for the first time in U.S.-Brazil relations.
“Both current presidents are over 70 and became presidents after well-established political careers, confronting right-wing leaders with similar characteristics, such as [Jair] Bolsonaro and [Donald] Trump, and both had election results challenged by public demonstrations on January 8 [2023] and January 6 [2021],” she said.
“Moreover, there is a shared labor agenda involving unions, a central point of their meeting in February 2023, with both looking at energy transition as a path for economic development. This is unique.”
Ms. Santos noted that Brazil and Latin America as a whole aren’t a priority for any White House candidates, but the Brazil-U.S. relationship today is solid. “They are good friends, good companions, good partners. They aren’t allies in foreign policy, but they have a very consolidated relationship,” she said.
“The fact that Brazil considers the U.S. its second-largest trade partner [after China] is highly significant, as is the level of American direct investment in the country. It’s a bilateral relationship based on high-value-added products, which is also very important for Brazil.”
The U.S. remains the largest investor in Brazil. American foreign direct investment (FDI) stock rose from $123.9 billion in 2020 to $190.8 billion in 2021 and $228.8 billion in 2023, the highest level since at least 2010, according to the Central Bank’s official records. This is over four times the direct investment stock from Spain, the second-ranking country.
Data from the American Chamber of Commerce for Brazil (AmCham Brazil) show that the U.S. share in Brazil’s FDI increased from 11.8% in 2015 to 21% in 2019 and 25.8% in 2023.
In recent years, trade in goods and services between the two countries has grown, with intensified investment flows, especially in sectors like technology and the green economy, said Abrão Neto, CEO of AmCham.
“We expect the positive trajectory in trade and bilateral investments will continue. The U.S. is the main destination for Brazilian exports of industrial goods and high-tech products like aircraft, machinery, and equipment,” he said.
“Additionally, we’re watching a new cycle of American investments in Brazil in sectors like technology, data centers, and renewable energy. In 2023, U.S. companies announced 126 greenfield projects, the highest volume in a decade. Conditions are favorable for these results to intensify.”
From January to September this year, Brazilian exports to the U.S. grew 10.3% compared to the same period in 2023, reaching a record $29.4 billion, according to the Brazil-U.S. Trade Monitor by AmCham Brazil.
In recent years, increased shipments to the U.S. have significantly reduced Brazil’s trade deficit with the U.S., which fell to $1 billion in 2022 from $13.9 billion in 2021.
He noted that there are presidential elections in Brazil or the U.S. every two years, a cycle of political changes that is anticipated.
“In general, governments and businesses in both countries handle these transitions well. Behind political cycles, there are consolidated, long-term economic interests,” he said. “Moreover, Brazil and the U.S. have institutional maturity and strong incentives to maintain this cooperation.”
He added that the current Democratic government’s emphasis on sustainability and climate would undergo significant change under a potential Republican administration, but recently adopted policies like the Inflation Reduction Act and the Chips Act have bipartisan support, indicating continuity regardless of this Tuesday’s election outcome.
The same applies to the importance placed on the U.S. geopolitical rivalry with China and supply chain resilience, topics that are likely to remain priorities on the American political agenda.
“For Brazil, the ideal is to seek balance, defending its interests and maintaining partnerships with both countries. But [this] will increasingly be like walking a tightrope,” added Abrão Neto.
Study reveals legislative power over city budgets and federal influence loss over mayors
11/04/2024
In the past four years, parliamentary budget allocations to municipalities have nearly doubled the amount voluntarily transferred by the federal government to local administrations, according to an exclusive study by the technical advisory team of Congressman Pedro Paulo obtained by Valor.
These sums are already significant relative to what smaller municipalities receive annually from the Unified Health System (SUS), the Fund for Maintenance and Development of Elementary Education (FUNDEB), and the Municipal Participation Fund (FPM).
The report highlights the growing influence of the Legislative branch over city budgets, particularly in smaller municipalities, and the declining federal government influence over mayors. From 2016 to 2020, the federal government allocated R$66.4 billion to municipalities through voluntary transfers, while parliamentary allocations totaled R$43.6 billion. Between 2021 and 2024, this trend reversed: mayors received R$96.5 billion endorsed by lawmakers, compared to R$49.9 billion in discretionary federal funds.
This figure masks that in 2023, half of the R$21.3 billion in discretionary spending by the Lula administration in municipalities was directed by congressional indications. This resulted from a deal to pass the so-called Transition Constitutional Amendment Proposal (PEC). In exchange for releasing R$170 billion for the Executive, Congress maintained control over “secret budget” funds, which the Supreme Court had abolished the previous year.
According to the study, the federal government’s voluntary transfers to municipalities were mainly through discretionary ministry funds and the former Growth Acceleration Program (PAC). These Executive resources reached R$27 billion in 2020, during the pandemic. Since then, Congress has assumed control over these funds by creating the so-called rapporteur allocations (popularly known as the “secret budget”), expansion of other transfers, and the end of PAC. Municipal allocation funds increased to R$28.8 billion in 2024 from R$7.8 billion in 2019, a 269.2% growth.
Parliamentary preference is for transfers to municipalities. Last year, the amount reached R$23.1 billion, equivalent to 15.2% of what they received from the Municipalities Participation Fund (FPM)—distributed based on population size and local income, historically the primary revenue source for small cities. For state governors, lawmakers and senators’ allocations totaled R$4.5 billion in 2023, just 3.5% of the R$129.3 billion received via the State Participation Fund (FPE).
Regarding health and education funds, the smaller the city, the more significant the impact of parliamentary transfers. In municipalities with fewer than 5,000 inhabitants, the average per capita budget allocation was R$355.80, equivalent to 71% of what they received from SUS and 36.5% of FUNDEB (although not all municipalities in this category received all three transfers). In contrast, those with over 50,000 inhabitants received R$105.2 per capita—24% of the funds from SUS and 12% from Fundeb.
The data also show that the lower the Human Development Index (HDI), the higher the value allocated by parliamentarians. Municipalities with an HDI below 0.600 received R$263 per capita. Those with an HDI between 0.600 and 0.750 received R$143 per inhabitant, while those with an HDI above this range received R$47 per resident.
On the other hand, the study also points out significant discrepancies among municipalities. “There is a notable concentration of entities receiving amounts below R$200 per inhabitant [in 2024],” it said. The average value was R$236.30 per resident, but 89 locations exceeded this by almost four times, reaching over R$919.
“The ten municipalities receiving the least per capita allocations [in 2024] had a total of R$6.7 million for a population of 3 million, averaging R$2.20 per inhabitant,” the report noted. Leading this list is Itaí (São Paulo), with R$21,500 in parliamentary transfers for its 25,900 residents, equivalent to R$0.80 per capita. The list also includes the capital, Belém, with R$3.7 million in allocations for a population of 1.4 million.
“Conversely, the ten municipalities with the highest per capita transfers totaled R$76 million for a population of just 33,000, with an average transfer of R$2,300,” the study said. Davinópolis (Goiás), with 1,900 residents, tops the list with R$2,745.40 per capita.
Twenty-six cities received more from direct transfers to states and municipalities without the need for agreements than from the FPM. Of Roraima’s 15 towns, 12 are in this situation. This method is favored by mayors and congress members because it allows funds to arrive more quickly, as it doesn’t require a project submission or federal government evaluation. However, it faces criticism for its lack of transparency.
Lawmaker Pedro Paulo, who commissioned the study, believes the data show that although parliamentary allocations require improvement, they have effectively delivered federal resources to where people live. “What I’m highlighting is that transparency needs significant improvement. However, parliamentary transfers are a channel for more Brazil and less Brasília,” he said.
The lawmaker argues that municipalities face public pressure for actions that fall under state and federal government responsibilities and parliamentary allocations are a way to empower them after years of revenue concentration in the federal government. “In the Rio de Janeiro election, the primary topic was public security, which is a state responsibility,” he said.
He suggested, as part of the study, reserving 3% of parliamentary allocations for municipalities with up to 10,000 inhabitants and an HDI below the national average, creating a “national portfolio of local investment projects,” and allocating funds to cities that improve their fiscal and public policy indicators, along with implementing more transparency, traceability, and growth control rules.
“There’s no doubt that we have a Frankenstein compared to other countries, but wait. Just like FUNDEB, SUS, FPM, and FPE, it’s a resource that somewhat reduces the federal authoritarianism of the government. Even if unintentionally, in a haphazard way, it is taking on a redistributive and progressive character,” he said.
Market anticipates policy rate to hit 12.5% per year by mid-2025; some forecasts suggest a return to 13%
11/04/2024
Amid a deteriorating economic outlook and tighter financial conditions since September, the Central Bank’s Monetary Policy Committee (COPOM) is expected to take a more aggressive stance in its current tightening cycle. An acceleration of the Selic policy rate hike to 50 basis points is widely anticipated by the financial market, which has revised its expectations for the base interest rate upward. However, even with this adjustment, inflation is projected to drift further from the 3% target within the relevant horizon.
Of the 125 financial institutions surveyed by Valor, only three expect a smaller hike of 25 basis points. The rest anticipate that the COPOM will act decisively, raising the Selic rate by 50 basis points to 11.25% per year in response to the significant deterioration in economic conditions. Contributing factors include the Brazilian real’s depreciation to R$5.90 per dollar, worsening inflation data, a persistently heated labor market, and increasingly pessimistic inflation expectations as reported in the Focus Bulletin and the breakeven inflation rate market.
The market sentiment is reflected in asset prices. On the yield curve, the probability of a 50-basis-point hike stands at 74% versus a 26% likelihood of a 75-basis-point hike. In the digital options market, the chances of a 50-basis-point increase were at 86% by Friday’s close, while the probability of a 75-basis-point increase stood at 10%.
Itaú Unibanco’s superintendent of economic research, Fernando Gonçalves, cites notable shifts since September as justification for a quicker pace of tightening, especially the currency devaluation. At its last meeting, the Central Bank modeled scenarios with the FX rate at R$5.60 per dollar, but the updated FX rate for this meeting is closer to R$5.75.
“This brings an important inflationary push. We’re also observing a tightening labor market, inflation expectations above the target, and lingering uncertainty about the U.S. election outcome, which could impact U.S. interest rates. All of this signals a need for higher rates in Brazil,” Mr. Gonçalves explained.
The market’s upward revision of Selic rate expectations began following the release of the COPOM’s third-quarter Inflation Report, which projected inflation above target through 2026 and into early 2027. Many in the market interpreted this as an indication that interest rates must rise even further to achieve the 3% target.
According to XP Asset Management’s chief economist Fernando Genta, to bring inflation back to 3% within the relevant timeframe, the COPOM would likely need to raise the Selic rate to around 15% in the current tightening cycle. Although Mr. Genta’s official projection is for a lower base rate of about 13% by mid-next year, he believes any effective tightening must counter not only the effects of expansionary fiscal policy but also the impact of the recent rate-cutting cycle, which took the Selic from a peak of 13.75% to 10.5% between August 2023 and May this year. “I don’t think 15% is excessive. The challenge is how much disinflation we need to implement in an economy that’s growing beyond its potential,” Mr. Genta, a former assistant secretary in the Economy Ministry, remarked.
Mr. Genta anticipates that the Central Bank will likely pursue a more gradual path toward reaching the inflation target, favoring a moderated tightening cycle that brings the Selic to 13%, with a series of 50-basis-point hikes, beginning with this week’s meeting. “Given the data, I believe the Central Bank could move even faster, but signals from its directors suggest otherwise,” he notes.
Central Bank officials recently attended meetings in Washington during the International Monetary Fund (IMF) and World Bank annual gatherings, where market participants gauged that the threshold for a sharper 75-basis-point hike remains high. This perception has reinforced expectations of a 50-basis-point hike cycle.
Despite these expectations, the yield curve is pricing in an extended tightening cycle. As of Friday, the market projected the Selic rate would reach between 13.75% and 14% in 2025, essentially returning it to levels seen until 2023, when the Central Bank initiated the easing cycle.
Considering current inflation trends and recent currency pressures, Barclays’s chief economist for Brazil, Roberto Secemski, sees “a clear upside risk” to his projected 12% peak for the Selic rate by the cycle’s end.
However, a slight reduction in fiscal stimulus, emerging signs of potential economic slowing, and easing wage pressure from recent employment data have led Barclays to maintain its current outlook of two more 50-basis-point hikes followed by a final 25-basis-point hike in January.
Mr. Secemski is watching closely for the communication strategy the COPOM will use this week, particularly in a climate of heightened volatility from domestic fiscal risks and the upcoming U.S. election. “The COPOM will have to decide whether to leave its guidance open, as it did in September, to preserve credibility or indicate an intention to continue the current pace for the next decision,” he explains.
Mr. Secemski notes that these options carry trade-offs. If the COPOM avoids guidance on its next steps, the yield curve could respond by pricing in a possible acceleration in December. Conversely, if the committee signals a commitment to 50-basis-point hikes in December, this may cap the market’s expectations, which could be seen as restrictive and counterproductive as the Central Bank seeks to bolster credibility.
Mr. Secemski’s baseline scenario is that the COPOM will likely opt for open-ended guidance, “especially given domestic fiscal uncertainty and the approaching U.S. elections.” The Barclays economist believes the Central Bank will likely prioritize flexible communication rather than locking itself into a specific future course.
Luiz Felipe Maciel, chief economist for Brazil at Bahia Asset Management, expects the tone of the Central Bank’s communication to remain “tough.” He anticipates that the COPOM’s inflation projections will indicate further deterioration, even with the elevated interest rates factored into the Focus Bulletin.
Mr. Maciel does not foresee a meaningful reduction in fiscal stimulus in 2025, which he believes will keep the economy heated and inflation under pressure. “Some fiscal stimuli directly benefit those more likely to spend. There’s fiscal injection happening, and states and municipalities are also increasing their expenditures,” he says. He notes that if the government implements significant fiscal adjustments, it could alleviate pressure on the Central Bank, marking “the first concrete signal since the administration began that spending could indeed decrease.”
Given the current economic environment, Mr. Maciel sees the risk tilted toward even higher interest rates than Bahia Asset’s 13% projection. “With unemployment heading toward 6%, everyone will need to revise their inflation forecasts,” he adds.
While he initially disagreed with the Central Bank’s decision to resume tightening in September, André Leite, chief investment officer at TAG Investimentos, now projects that the Selic rate will reach 12.5% by the end of the cycle. According to the Central Bank’s model, this level should bring inflation down to 3.15%, provided rates remain high for an extended period. However, Mr. Leite expects political pressure on the Central Bank to intensify by the second half of next year, with interest rate cuts beginning in September and bringing the Selic to 10% by 2026.
“This 13.5% priced in by the market would likely bring inflation closer to 2% rather than 3% over the relevant horizon. Even with our projection of 12.5%, maintaining that rate for 18 months seems unsustainable given the level of pressure to reduce rates,” says Mr. Leite. “We expect the Central Bank to begin rate cuts by September 2025, continuing down to 10% by 2026. We believe the decision to start cutting will be driven more by political than technical considerations.”
From a communication perspective, Mr. Leite suggests that “the ball is in the fiscal court.” He describes the upcoming meeting as “more about buying time than making a significant shift in monetary policy.”
*By Gabriel Caldeira, Gabriel Roca, Victor Rezende — São Paulo
Proposal was introduced by the Socialism and Freedom Party (PSOL) in bill establishing Goods and Services Tax committee
10/31/2024
Brazil’s Lower House rejected the creation of a Wealth Tax (IGF) and, with this decision, completed the second phase of tax reform regulation on Wednesday (30). The proposed tax was introduced by the Socialism and Freedom Party (PSOL) within the bill to create the administrative committee for the upcoming Goods and Services Tax (IBS). The text now moves to the Senate.
The committee will be comprised of state and municipal representatives to manage administrative operations, oversight, and the allocation of the IBS, which will replace the Tax on the Circulation of Goods and Services (ICMS) and the Service Tax (ISS) under the new tax system. The bill sets operational guidelines for the committee and outlines the transition to the new framework, including fund distribution among states and municipalities.
The primary debate in the Lower House focused on PSOL’s amendment to create the Wealth Tax, which was rejected by a vote of 262 to 136. The proposal called for a 0.5% annual tax on wealth between R$10 million and R$40 million, 1% on assets between R$40 million and R$80 million, and 1.5% on wealth exceeding R$80 million.
Congressman Ivan Valente (PSOL, São Paulo) argued that the payment would be a “pittance” for multimillionaires and would still include deductions. He noted that the tax is already provided for in the Constitution but has never been regulated.
On the other hand, Congressman Gilson Marques (New Party, Santa Catarina) criticized the tax proposal, arguing that the wealthy would move their money out of Brazil. “Multimillionaires invest in cities, create jobs, and support the economy,” he said.
The initiative only gained support from left-leaning parties: PSOL, Brazilian Socialist Party (PSB), Workers’ Party (PT), Communist Party of Brazil (PCdoB), and Green Party (PV). Meanwhile, the Social Democratic Party (PSD), Brazilian Democratic Movement (MDB), Republicans, and Podemos, from the governing coalition, along with opposition parties Liberal Party (PL) and New Party, voted against taxing millionaires and billionaires. The coalition of the Brazil Union Party, Progressive Party (PP), Brazilian Social Democracy Party (PSDB), Citizenship Party, Democratic Labor Party (PDT), Democratic Republican Party (PRD), and Solidarity allowed members to vote freely due to internal differences.
Despite advocating for taxing the wealthy, the Lula administration remained neutral due to disagreements among coalition parties in Congress. “The government understands that the world is debating this and that it will be a central issue at the G20 discussions next week,” said Congressman Reginaldo Lopes (PT, Minas Gerais), who is also the deputy government leader.
On the other hand, lawmakers upheld a provision for a five-year review of products and services with reduced tax rates to assess the effectiveness of these tax expenditures. The PL had called for the removal of this requirement, but the proposal was rejected by a 292-106 vote.
Other adjustments made on Wednesday were the result of agreements between parties and the bill’s rapporteur, Congressman Mauro Benevides Filho (PDT, Ceará). He introduced four changes to the base text approved by the Lower House in August.
The Lower House rejected a proposal to apply the Inheritance and Gift Tax (ITCMD) to VGBL (Free Benefit Generator Life) pension plans left as an inheritance. This tax was requested by governors, who claim that these instruments are used to bypass inheritance taxes, but it faced resistance from plan operators.
The rapporteur also accepted that companies contracting self-employed business owners for services will not be held liable for unpaid taxes. “If an Uber driver doesn’t pay tax, the platform should pay. But now, no one will be responsible,” Mr. Benevides criticized. However, he included this amendment as part of the agreement to pass the bill.
Additionally, the bill removed the provision to apply the ITCMD tax to the disproportionate distribution of profits among business partners and the ban on companies within the same economic group from transferring the ICMS or future IBS credits to one another.
*By Raphael Di Cunto, Marcelo Ribeiro, Valor — Brasília
Strategy is being used in bankruptcy processes involving multiple creditors
10/31/2024
The conversion of debt into equity during company restructurings has firmly established itself as a debt reduction and deleveraging strategy in the Brazilian market. This mechanism has been increasingly employed in major bankruptcy processes, with more creditors, including financial institutions, more comfortable with the idea of becoming shareholders in restructured companies. This approach also enhances the recovery potential of loans previously considered irrecoverable, thereby avoiding more drastic write-offs.
In the case of retailer Americanas, banks became shareholders as part of a debt conversion, a necessary step in efforts to rescue the company, which was embroiled in a fraud scandal. Another example is the logistics company Sequoia. For Brazilian airline Azul, debt conversion is also on the table as a solution to its crisis. This practice is included in Light’s restructuring plan. It is similarly part of the out-of-court recovery plan for 2W.
In Brazil, significant cases of debt conversion first emerged between 2015 and 2016, such as construction firm OAS, in the wake of the anticorruption task force Car Wash. Companies owned by former billionaire Eike Batista also ended up in creditors’ hands, like MPX, now known as Eneva. According to experts, in many instances, conversion was the only viable alternative. In Eneva’s case, the energy sector company managed to recover.
Giuliano Colombo, a restructuring partner at law firm Pinheiro Neto, explains that the trend of converting debt into equity in restructuring processes is on the rise, a shift noticeable after the 2020 amendment to the Bankruptcy Act, which reduced the risks associated with creditors becoming shareholders. “A better legal framework was established, and now the perception is that it’s possible to manage the risk,” he states.
According to Mr. Colombo, before this legislative change, banks historically failed to capture potential operational improvements in companies to which they were creditors. Today, financial institutions feel more at ease participating in conversions, especially in processes involving publicly traded companies, since monetizing shares is easier when they can be sold in the secondary market.
In some negotiations involving conversion, a lock-up period—market jargon for a temporary restriction on selling shares—may be established, although this is not a standard practice.
“Some creditors have the flexibility to receive shares through other vehicles [within the financial institution], such as FIPs [private-equity investment funds],” Mr. Colombo notes. “This perspective shift is here to stay,” he adds.
Mr. Colombo highlights that the effect of conversion is immediate in calculating a company’s value, as debt can be quickly reduced, which also reflects in the value of shares traded on the stock market, since the cost of debt servicing, which was consuming cash flow, is reduced.
The Pinheiro Neto partner also explains that conversion is often a component in restructuring strategies and creditor negotiations, alongside other options like receiving discounted payments or issuing new debt with a longer maturity, allowing creditors to be paid later but without a discount.
Thomas Felsberg, one of Brazil’s leading bankruptcy experts, says that debt conversion is “extremely useful” for adjusting the capital structure of insolvent companies. “Reducing debt can make a company viable. Often, this may even result in a change of control.” Mr. Felsberg notes that conversion is often partial and involves debt considered “unpayable.”
Mr. Felsberg points out that this instrument is quite common in the United States, where notable restructuring successes have involved debt conversion into equity. A well-known example is General Motors, where creditors who converted debt into shares recovered more than those who received cash.
Daniel Lombardi, a partner at G5 Partners, notes that debt-to-equity conversion is not new but is increasingly used in crafting debt solutions for companies undergoing restructuring. He emphasizes that such conversions are complex, especially for commercial banks. Public banks, he reminds, face restrictions on this type of operation.
The G5 executive mentions that there are now funds specializing in special situations, or “special sits,” that lend to companies with mechanisms for equity participation in problem cases and are prepared to take over management—unlike banks. “Commercial banks have less incentive for this solution.”
Mr. Lombardi explains that, within the framework designed to cater to various creditor profiles, debt conversion is one of several options. Other components of a solution can include debt extension and asset sales. These alternatives are pursued when others do not adequately address maturities. “It’s a mosaic of solutions, and debt conversion is one more option,” he says.
Fabiana Balducci, a partner at BR Partners in the restructuring area, notes that a complication in debt-to-equity conversion arises because many fixed-income funds have statutory restrictions against holding shares. Today, she says, many managers are seeking more flexibility to avoid significant write-downs on receivables.
Azul, Light, Sequoia, Americanas, and 2W declined to comment.
Exclusive agreement for the acquisition was renewed this week, with expectations that the deal will be finalized by year-end, according to people close to the Brazilian steelmaker
10/31/2024
Benjamin Steinbruch’s Companhia Siderúrgica Nacional (CSN) announced the sale of up to 11% of its mining subsidiary to Japan’s Itochu Corporation, in a deal potentially exceeding R$4.3 billion, people familiar with the matter told Valor. The funds will be used to reduce the steelmaker’s leverage, providing greater financial strength as the group also negotiates the acquisition of InterCement, owned by Mover.
The sale of the minority stake includes a premium ranging from 20% to 30% over the current stock price of the mining company on Brazil’s B3 stock exchange, according to sources. CSN stock ended the Wednesday’s session up 2.23% at R$11.94, while CSN Mineração shares dropped 0.67%, closing at R$5.91.
Based on Tuesday’s closing price, the 11% stake is valued at around R$3.6 billion, with the premium pushing the deal’s total value to over R$4.3 billion. However, people close to the deal noted that some steps remain before the transaction is finalized, including the signing of a definitive agreement and approval from Brazil’s antitrust authority, CADE. The deal is expected to close within 30 days.
CSN had previously indicated its intention to sell a portion of its mining business and to seek a minority partner for its energy division to reduce debt. Itochu already holds just under 10% of CSN Mineração’s shares.
As of June, CSN’s net debt-to-adjusted EBITDA ratio stood at 3.36 times, driven by the depreciation of the real in the second quarter and higher investment levels. The company’s goal is to reduce this ratio to between 1 and 2 times. Adjusted net debt totaled R$37.2 billion at the end of Q2.
For analysts from Itaú BBA and Bradesco BBI, the sale of 11% of CSN Mineração at Tuesday’s closing price would reduce financial leverage by 0.3 to 0.4 times, which they considered modest compared to CSN’s target.
In parallel with the mining sale, CSN is continuing negotiations to acquire InterCement, owned by Mover (formerly Camargo Corrêa). The exclusive agreement was renewed this week, with sources close to CSN expecting the deal to be signed by December.
Negotiations are progressing, though pressure remains for Mover shareholders to fully assume the liabilities tied to the deal, which total R$4 billion. Initially, part of this amount—R$1.5 billion—was to be covered by creditor banks, said a person close to InterCement.
Another sensitive issue for CSN is the involvement of lawyer Thomas Felsberg as an advisor in the transaction, as he is known for handling corporate restructuring for companies facing bankruptcy.
People with knowledge of the situation indicated that InterCement’s out-of-court restructuring process is advancing, with no immediate risk of a bankruptcy filing.
If the company seeks protection from creditors, asset sales would occur through productive units.
CSN is interested in acquiring InterCement’s Brazilian operations, which would position it as a competitor for leadership in the cement sector alongside Votorantim, as well as a 51% stake in Loma Negra, providing CSN entry into the Argentine market.
A person close to the negotiations said CSN does not plan to use cash or take out loans to finance the acquisition, given InterCement’s high debt. Instead, CSN aims to restructure InterCement’s liabilities as part of its out-of-court recovery, with a portion of the purchase price financed through debt.
Another portion of InterCement’s debt would be converted into equity in the resulting company formed by combining CSN Cimentos and InterCement, with creditor banks holding shares. While an agreement is expected to be signed by year-end, the transaction itself would likely close in 2025.
Negotiations gained momentum at the end of the first half, with the automatic renewal of CSN’s exclusivity agreement. In August, InterCement initially declined to renew the deal, but talks continued, and a new exclusivity agreement was signed in September.
In addition to InterCement’s heavy debt load, sources pointed to CSN’s financial leverage and the relative delay in selling assets that could improve liquidity as hurdles for the acquisition. In the case of CSN Mineração, iron ore price volatility this year prolonged talks with potential buyers. Negotiations related to CSN’s energy business, including the Rio Grande do Sul-based CEEE, were also impacted by damage caused by heavy rains in the state in May.
In 2021, Mr. Steinbruch’s company acquired the Brazilian assets of Swiss cement maker LafargeHolcim, in a transaction fully approved by the CADE without conditions. This added 10 million tonnes of capacity, making CSN the third-largest cement producer in Brazil.
In 2023, Brazil sold 62 million tonnes of cement, a 1.7% decline from 2022, which had already seen a 2.8% drop, according to the National Cement Industry Union (SNIC). The volume sold in 2023 matches the levels seen in 2011.
CSN said it had no further comment beyond its statement to the Securities and Exchange Commission of Brazil (CVM). InterCement and Mr. Felsberg also declined to comment.
Twenty-six analysts from the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) signed a report recommending the environmental permit denial for Petrobras to drill a well in Block FZA-M-59, located in the Foz do Amazonas Basin on the Equatorial Margin, should be upheld. The team listed technical issues they believe prevent reversing the previous decision against granting the permit.
Although higher-level authorities supported the report, IBAMA’s president, Rodrigo Agostinho, sent an official letter to Petrobras allowing the state-owned oil company to provide “clarifications” on the points raised in the report before a final decision is made. Petrobras did not immediately reply to a request for comment.
IBAMA’s recommendation comes as a setback for Petrobras, which, under Magda Chambriard’s leadership, has been stressing the need to open new exploratory frontiers in oil and gas. Last week, the company’s chief exploration and production officer, Sylvia Anjos, said, “We will do everything that IBAMA requests.”
In May 2023, IBAMA had denied Petrobras’s request for an environmental permit to drill a well in deep waters in the Foz do Amazonas. Petrobras appealed to the agency and submitted several documents revising environmental plans to overturn the decision. Key points in the revised plans focused on the impact of air support operations at Amapá’s Oiapoque Airport on Indigenous communities and a wildlife rescue plan in the event of spills.
In Report 223/2024, reviewed by Valor, the 26 environmental analysts argued that Petrobras’s revisions do not present a “viable alternative” to adequately mitigate biodiversity loss in case of an oil spill. This issue, according to the analysts, is “especially critical” given what they described as “significant marine biodiversity” and the “high environmental sensitivity of ecosystems likely to be impacted.”
“Thus, we did not find, in the documents analyzed, sufficient elements to reconsider the recommendation to deny the environmental permit and archive this licensing process,” the 26 analysts said. The report was electronically signed between October 10 and 11. However, subsequent communications have left room for further input from the company until IBAMA’s president issues a final decision.
Following the report’s release, IBAMA’s offshore oil and gas exploration licensing coordinator, Ivan Werneck Sanchez Bassères, issued an official letter acknowledging “significant” technical improvements by Petrobras in emergency response plans but still considered information regarding wildlife rescue strategies for oil-affected animals insufficient to reconsider the process’s archival recommendation, advising that the license denial be maintained.
IBAMA’s general coordinator for marine and coastal project licensing, Itagyba Alvarenga Neto, recommended sending the report to Petrobras for “review and addressing of all issues raised by Ibama’s technical team,” calling this step a “reasonable alternative.” Mr. Alvarenga disagreed with Petrobras’s positions on the impact of air traffic on Indigenous communities but acknowledged progress on the wildlife plan, though he did not find the advancements sufficient for plan approval.
IBAMA’s licensing director, Claudia Barros, aligned with Mr. Alvarenga’s approach: “It is deemed reasonable to forward the Technical Report … to the company for review and response to all issues raised by IBAMA’s technical team,” Ms. Barros said. In September, she had estimated a resolution on the matter by the end of the year.
Air traffic and potential impacts on Indigenous communities in the area were among the reasons Petrobras appealed the license denial. In its revised studies, Petrobras argued it would “use the pre-existing, licensed airstrip within its already established operational capacity without expanding capacity,” and that the noise from aircraft is not a direct impact of drilling but rather of the airport, which is licensed by the State Environment Secretariat of Amapá.
In the report, the analysts noted that IBAMA did not question the Oiapoque airstrip’s legality, which Petrobras will use as a support base for drilling activities. They also pointed out that Petrobras’s environmental study indicates the airport’s use “represents a 3,000% increase in its activity,” with flights over areas where no other routes exist.
“The fact that the airstrip is licensed and the company’s intended use falls within its operational capacity does not mean the project will not cause specific impacts due to its presence in the region,” the report says.
Petrobras had also proposed a new Wildlife Protection Plan, which included setting up a wildlife rescue base in Belém, but IBAMA deemed the distance too long in case of an accident. Petrobras then proposed establishing an advanced wildlife response base in Oiapoque, enabling access by sea, river, or air, and potentially installing a mobile reception unit in Vila Velha do Cassiporé, a district of Oiapoque.
The rescue proposals in Oiapoque were considered to have the potential to reduce response times in case of an oil spill, but the analysts noted “inconsistencies” in the rescue strategy, including the definition of response teams, travel times, adverse “metoceanographic” conditions, and the inability to use the drillship or rescue and stabilization vessels.
New guidelines, part of the 2024 regulatory agenda, take effect on July 1, 2025
10/30/2024
The new rules concerning the so-called OPAs—public takeover bids—were issued on Tuesday as part of the Brazilian Securities and Exchange Commission’s (CVM) regulatory agenda for this year. These measures will come into force on July 1, 2025.
Public takeover bids, conducted outside organized securities markets, can take several forms and aim at acquiring shares of a publicly traded company. They may occur, for instance, during a change of control block, delisting, and other scenarios.
The CVM has issued two norms: the first, Resolution 215, establishes a new regulatory framework applicable to OPAs, replacing CVM Resolution 85, which has been in effect since 2022. The second, Resolution 216, modifies other rules to align them with the new regulation.
The regulation was well-received by experts consulted by Valor. Among the innovations, they highlight the simplification of the criteria that mandate an OPA for increased participation, which was previously calculated based on a formula applied by the CVM that was sometimes challenging to apply in practice, causing legal uncertainty.
Now, in an OPA for increased participation, the CVM has determined that the operation will be mandatory whenever the acquisition of outstanding shares by the controlling shareholder or an affiliated person leads to the reduction of the total outstanding shares of the same class and type to below 15%.
Another significant change is the possibility of combining a takeover OPA with an OPA for delisting.
“This was a long-standing market demand, previously prohibited based on case-specific decisions, and now it is explicitly allowed,” said Evaristo Lucena, a partner in the transactional area at Trench Rossi Watanabe.
In the case of a differentiated quorum (OPA for delisting), it was established that a simple majority would suffice when the number of outstanding shares of the “target company” is less than 5% of the share capital.
According to Marcos Sader, a partner at I2A Advogados, the simplification acknowledges that companies with a smaller number of outstanding shares relative to total capital (“free float”) can have a lower quorum for a delisting OPA. “Thus, the quorum shifted from two-thirds of circulating shares to a simple majority. This facilitates the closing of capital when there is little shareholder dispersion.”
In cases of automatic waiver of the valuation report, the new regulation allows the price of the shares subject to the OPA to be determined based on alternative criteria that serve as a reference for fair value.
In the OPA auction, the hiring can be automatically waived in situations of low shareholder dispersion or when the auction costs are disproportionately high compared to the offer’s value. The new regulation also covers the roles performed by the intermediary and establishes rules for registration procedures and confidential consultations.
CVM President João Pedro Nascimento said that the resolutions consider previous practical experiences and reflect market developments and international standards.