Drop in stocks, bonds will hurt shares

01/13/2023

It is not new to hear about possible “creative accounting” at the retail chain Americanas. However, the disclosure of a R$20 billion misclassification in the funding of suppliers and financial expenses — which will affect profit, equity, and leverage of old financial statements — fell like a bomb among asset managers and analysts. Some portfolios will be hurt by the devaluation, but others were betting the stocks would fall and will reap gains.

Asset manager Moat reported that its funds’ positions in Americanas common stock amounted on Thursday to a maximum of 8% of Moat Capital FIA’s master equity and that all positions in that asset are in line with the risk metrics of the respective portfolios, despite the stress scenario. “Like the market as a whole, we were surprised by the company’s notice of material fact. We will do everything in our power to guarantee and protect our rights as a minority shareholder and in defense of our investors.”

ARX released a statement to shareholders with estimates of the impact on the shares of its corporate debt funds. The ARX Everest master and the ARX Denali pension fund version had the largest exposures, of 1.2% and 1%, facing adjustments of -0.542% and -0.449%, respectively. The managers declined to comment. Western Asset, in turn, says it is monitoring the unfolding news and is waiting for more information about the next steps taken by the controlling shareholders to have the dimension of the impact on the company shares.

As Americanas is a large issuer of debt, its shares are widely spread in the market and most assets have some exposure, says a credit manager. He says his firm’s funds have positions in short-term bonds, maturing in May and June, which have covenants clauses — a leverage measurement requirement that if it exceeds a certain level triggers early buybacks or upon waiver request. “The willingness of bondholders today is to demand prepayment of these debts at least.”

“I would be shocked if it were R$5 billion, R$20 billion is a lot,” says a stock manager who has small exposure in the shares. After attending the company’s conference, he says he got the feeling that not even the executives who had just taken over and resigned know the size of the problem. When you look at the liabilities, with a total of R$32 billion, of which R$5 billion are suppliers — [outgoing CEO Sérgio] Rial spoke of a little more — and there is a R$20 billion divergence, it gives the impression that there is something off the financial statement.”

He recalls that two years ago, when Via (owner of Casas Bahia) unveiled a labor liability of about R$2 billion, all hell broke loose. Now it is a R$20 billion event for a company that has assets of R$15 billion. The doubt is how much the trio of partners, Jorge Paulo Lemman, Beto Sicupira, and Marcel Telles, from 3G Capital, the controlling group, will be willing to contribute to the company’s capital injection.

For the creditor banks, it was difficult to make any credit assessment of the company because the financial statements of recent years are not reliable. If they stop paying the suppliers, the Americanas will cease receiving products on the shelf and the business will become unviable. Mr. Rial’s message, he says, was that if this happens, the solution stops being through capital injection and goes to court-ordered reorganization. “If the banks don’t pull the rug under the company, Americanas will keep going, and the capital injection will happen, who knows how big.”

This manager says he sees some contagion to other B3-listed retailers, but looking at the statements of Via and Magazine Luiza, there is apparently greater transparency on operations to the total supplier funds. “If you look at it maliciously, executives have always received an aggressive compensation package for hitting targets. Those who benefited were the executives with a fat bank account on top of profitability levels that didn’t happen.”

The decision, for now, was to keep the 1% exposure in Americanas shares in the portfolio, which after Thursday’s devaluation (77.3%) will fall to a residual slice of 0.25%. “Under normal conditions, I would have more or reduce to zero, but right now, given that there is no information, I don’t do anything because the loss has already come.”

Stunned by a failure that seems to have been repeated for years without being noticed by the board of directors, auditors, and creditors, a stock manager who does arbitrage strategies tells that he had a short position in Americanas because he observed an inefficient operating cash burn and a higher margin than its competitors, which didn’t seem compatible. “I didn’t think it had an accounting inconsistency, I saw numbers that the company couldn’t explain, that generated some discomfort,” he said.

He maintains that transparency compared to other 3G Capital ventures was lower, with Ambev on an international level, and Americanas more prone to omitting information. “There was a big governance gap between two companies that belong to the same economic group. It was always a little bit strange, which makes us separate what is a trade and what is an investment.”

This manager believes that the problem with Americanas, on the audit side, is even greater than it was with Petrobras, where a lot of things went off the earnings report, according to the investigations disclosed during Operation Car Wash. In the current case, it was inside the statements. “It seems to have a worse reputational issue and raises questions about similar practices in other companies.”

The firm’s funds will report a positive result for Thursday. The manager says that the short position would continue to make sense, but that the rental market has practically dried up, with rates rising from 20% to almost 100%.

A credit manager who held Americanas bonds in the local market but was short on the company’s bonds overseas will also reap profits. It is worth making adjustments now, but he does not reveal why the strategy was not executed. “The most important thing is how this impacts the credit market as a whole. For now, we haven’t seen any forced selling.”

The stock analyst at an asset management company says that the R$20 billion figure is a legacy of the previous management, but instead of making a mega provision, downgrading to a loss whatever was necessary to put the house in order, Mr. Rial decided not to take that risk. “If it was just an accounting practice in the classification of the operation, putting the gain that should be financial and changing the line, taking it from operational to result, okay, but it’s trickier when it affects the gross profit.”

Ilan Arbetman — Foto: Leo Pinheiro/Valor

The accounting inconsistency raises questions about whether the episode will unfold into a systemic risk, which goes beyond the companies in the retail sector, said Ilan Arbetman, an equity analyst at Ativa Investimentos.

“When you are faced with a notice of material fact that has the resignation of the CEO and the institutional relations officer 10 days after they took over, under the justification that there may be a line of suppliers that overnight goes to more than R$20 billion from R$5 billion, it makes us rethink the analysis of financial statements as a whole,” he says.

Despite the questions about how Americanas will come out of this, he says that the operation between companies, suppliers, and banks is good for the whole chain, but if such a hole is proven, it becomes clear that an adjustment in this accounting is necessary. “The same way this is hidden in Americanas, it would set a precedent to at least investigate whether there is something of the same nature in other retailers, which often share market practices,” he says. “Thinking about the stock market and the capital market, it could spill over and raise the risk level of how Brazilian assets are viewed.”

Mr. Arbetman, with Ativa, evaluates that the case is more of an accounting failure than some kind of purposeful action to make up the numbers, but that there may be a loophole on the regulatory side that allows some kind of interpretation that caused this snowball. “I see that if the company and the auditors knew of the existence of this situation and the possibility of the numbers being contested, there could have been some kind of indication, either on the financial statement or in the press release, but it was not done.”

The analyst says that “luckily” he didn’t have the shares in his recommended portfolio since late last year, lowering the indication from “buy” to “neutral.” The asset will undergo a new re-evaluation.

Mantaro Capital also no longer had the shares in its fund, due to the assessment that the company was already in a weaker competitive position, especially in the e-commerce activity, says Andreas Ferreira, retail analyst at the asset. “The company had already been on a quarter-to-quarter leverage trajectory and had a problem with working capital, it burned a lot of cash,” he said.

Mr. Ferreira cites that, by the adjustments he makes internally, the debt/Ebitda ratio was already around six times and that, when considering this new surprise, the leverage could explode. For now, he adds, everything is preliminary, it is still necessary to know what the impact of the reclassification will be on the old financial statements and how the capital injection will take place. “Possibly, the company will have to downsize, make its operations more efficient, will enter survival mode, and will find it more difficult to retain and attract good people.”

Mr. Ferreira says that it is common in the retail sector to have operations in which the company assumes the drawn risk when banks advance funds to suppliers, but that in general they account for this correctly. Another possible contagion would be to the banks, but the sector in Brazil is solid and the risk seems to be well distributed.

An asset manager evaluates that the fact that the controlling shareholders are almost “celebrities” in the business world helps the market to have patience with the company, after the success of the creation of Ambev, a result of the merger of the Brahma and Antarctica breweries. “This ended up hiding a controversial governance history,” he says, citing, for example, the conversations that resulted in the merger with Interbrew, in 2004, in which the Belgian group agreed to buy the “bad Ambev”, with the shares that the controlling shareholders had, and in exchange, Ambev took a Canadian brewery using preferred shares and paying a high price for it.

The deal, valued at R$8 billion, provided for shared management even with a larger Belgian share in the combined operations that gave rise to Inbev, which would later become the world’s largest brewery. “Everybody forgot about it because it was a fantastic success.”

*By Adriana Cotias — São Paulo

Source: Valor International