Trade groups try to avoid reform in arbitration law

Associations criticize bill that limits role of arbitrators, obliges disclosure of decisions

07/14/2022

Pedro Batista Martins — Foto: Leo Pinheiro/Valor

Pedro Batista Martins — Foto: Leo Pinheiro/Valor

A bill in progress in the Chamber of Deputies intends to change the Arbitration Law to limit the role of arbitrators (who act as judges in cases) and determine that procedures and rulings must be disclosed. Trade groups and representatives of law firms, however, see this new structure as a dismantling of arbitration in the country and are trying to block the bill.

Arbitration is an alternative means of conflict resolution to the justice system and has, among its main characteristics, the confidentiality of the proceedings. The bill, if approved, therefore, changes its entire structure.

Experts say it would create a “Frankenstein”, something that does not exist anywhere else in the world and would certainly cease to be used.

“If approved, it will be a serious setback. There is no other paradigm in any other jurisdiction with the kind of interference this bill seeks to implement. We will see the migration of arbitration outwards,” says lawyer Pedro Batista Martins, partner at Batista Martins law firm and one of the contributors to the Arbitration Law.

The law that is currently in force and that Mr. Batista Martins helped to draft – 9.307 – has existed for 25 years and has its roots in the model law of UNCITRAL, a UN organ that studies rules for the development of mercantile law. “It is approved by the international community,” the lawyer stresses.

Adherence to the mechanism is voluntary between the parties and is done by contract between them. Billions of reais are involved in these disputes. Arbitration is practiced in private chambers and is widely used by companies to discuss contractual issues, especially in the corporate area.

In 2019, for example, there were 967 ongoing processes in the eight main chambers in operation in Brazil, and, added together, they involved R$60.91 billion. This data appears in the latest edition of the research “Arbitration in Numbers and Values”, one of the main in the area, authored by lawyer and professor Selma Lemes.

Through this system, arbitrators – usually three – are chosen by the parties and decide the dispute. These arbitrators are not necessarily lawyers. The parties may nominate professionals who specialize in the topic under discussion. An economist or an engineer, for example. And the decision given by them is final.

The justice system cannot interfere in the merit, to say whether the party is right or wrong in its claim or defense. It is only responsible for what is called “legality control”, to verify, when questioned by the parties, whether the procedure was carried out as established by law.

The bill that changes the rules (PL n 3293) was filed by deputy Margarete Coelho (Progressive Party, PP, of Piauí) in October last year and, since then, has generated tension in the arbitration market. This month, however, tempers became much more heated.

Last Wednesday, July 6, seven deputies presented an urgency request for the bill to be considered. A new race began among experts to try to convince party leaders not to take the issue forward.

The urgency request is still pending deliberation in the plenary session. The bill is currently in the Constitution and Justice and Citizenship Commission (CCJC) of the Chamber of Deputies and its rapporteur is deputy Bia Kicis (PSL-DF).

The Institute of Brazilian Lawyers (IAB) issued a technical note on the subject on July 8 and, in the text, referred to the bill as the “Anti-Arbitration Bill”.

“In the best scenario, it will result in the reduction of cases, the migration of Brazilian arbitrations to other countries, and the elimination of the country as a possible seat for international arbitrations, generating, in the end, losses to the Brazilian economy,” says a note signed by attorney Joaquim de Paiva Muniz, member of the association’s permanent commission of arbitration and mediation.

The note also says that there is no urgency requirement for the project to be voted on in this pre-electoral moment and that it needs to be debated by representatives of the political and legal classes, which did not happen.

At least 30 other organizations had already manifested previously against the changes foreseen in the bill. Among them, are sectionals of the Brazilian Bar Association (OAB), arbitration chambers from all over the country, centers, and institutes linked to the legal profession and industry federations.

The bill deals with two sensitive changes: the disclosure of rulings and the performance of arbitrators. It limits, for example, the number of cases in which a single professional may act – a maximum of ten –, prevents the same formation of a court from being repeated in another, and determines that before accepting the invitation to act as a judge, the arbitrator will have to disclose the arbitrations in which he or she acts.

In the justification part of the bill, the author, Ms. Coelho, says that the idea “is to increase legal certainty and cohesion of decisions”. Contacted by Valor, she was not immediately available for comments.

The vision of specialists in the sector, however, is completely different. Besides misaligning the country’s rules with those practiced in the rest of the world, they say, there would be unconstitutionality. By limiting the role of arbitrators, for example, free enterprise would be restricted. It would be like telling a doctor how many patients he can see.

Nobody disagrees, however, that the discussions around the duty of disclosure of arbitrators are more latent. They gained momentum after an injunction decision by the Court of Justice of São Paulo (TJSP) suspending the sentence given in the arbitration in which J&F and Paper Excellence dispute shareholding control of Eldorado Brasil – in March 2021.

One of the reasons was the participation of one of the arbitrators. J&F claims that the judge shared an office with lawyers who work for the opposing party and did not disclose this information in the case.

Lawyers who work with arbitration say, however, that requests to challenge an arbitrator are a minority. At the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada, one of the leading ones in the country, for example, the decisions regarding requests to challenge arbitrators amount to less than 1% of all cases in progress.

In 2021, there were 427 proceedings in progress and only three decisions were rendered on challenges to arbitrators. In all cases, the arbitrators continued.

According to lawyers heard by Valor, Brazil adopts the same criteria as other countries that also practice arbitration and follows international doctrine and jurisprudence. In cases where there is a challenge request, it is necessary to verify whether the fact that was not disclosed may influence the judgment.

*By Joice Bacelo — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Rising interest rates drive distressed debt market

Investment funds operating in this segment report that supply of credits has been growing

07/14/2022

The rising interest rates and fast inflation cycle in Brazil, which makes credit more expensive and negatively impacts companies’ revenues, has driven alternative investments, especially distressed debt – loans in arrears or at risk of default. Investment funds that operate in this segment report that the supply of these credits has been growing in recent months, which increases the discount paid for the assets and, as a result, their potential return.

What puts pressure on companies is the high Selic rate, which increases the debt service, while inflation compresses cash generation and the companies’ margins, says Luiz Prado, with Makalu Partners. But, in his opinion, the improvement of the banks’ credit recovery departments and the growth of the capital markets contribute to contain defaults. “I still don’t see a distressed scenario, but we will certainly have restructurings,” he says.

Strategi Capital has been much sought after by banks sitting on nonperforming loans – those greater than 90 days in arrears –, many of them resulting from loans taken even before the pandemic, founding partner Cristian Lara says. The fund, which raised R$75 million by December, is managing to allocate these funds 50% faster than projected because of the largest offering of these assets, Mr. Lara says.

“In many cases, the banks have already rolled over and restructured the debt, but the company has reached a situation where it will not be possible to recover the credit, or the asset no longer makes sense for the bank,” he said. These assets being considered nonperforming are the result of loans to companies of different sizes and sectors. But Mr. Lara sees a relevant presence of restaurant chains, as well as companies in the real estate industry. “These are companies that were helped by the government during the worst period of the pandemic, and that could not survive when these incentives came to an end,” he says.

On the other hand, faced with a more hostile environment, banks feel greater pressure to eliminate assets in arrears from their portfolios. This is different from the situation seen during the worst moment of the pandemic, when there was still a perspective of normalization of economic activity and, consequently, of credit recovery. By selling the asset, the credit is no longer part of the bank’s default statistics.

At the same time, if the bank sees that the situation can take a long time to be resolved, the higher interest rates favor a higher discount on the sale of that asset, Mr. Lara says.

Guilherme Ferreira — Foto: Carol Carquejeiro/Valor

Guilherme Ferreira — Foto: Carol Carquejeiro/Valor

Banks’ first-quarter financial statements already showed around R$100 billion of nonperforming debt – with 90 to 180 days in arrears – , up 20% compared with the final quarter of 2021 and a record volume, says Guilherme Ferreira, the founding partner of Jive Investments. But for him, these figures still refer to the debts of companies that were taken on before the pandemic, and which were renegotiated or restructured at the worst moment of the crisis.

“We are not seeing anything that happened in the last six months,” Mr. Ferreira says. In other words, the negative impact of high inflation on the capacity to consume and, consequently, on the companies’ revenues, besides the higher key interest rate, has not yet been reflected in the statistics. “The availability of new credit has shrunk because everyone knows that the quality of this credit has worsened. And this tends to generate more defaults,” he says. This situation will be perceived more clearly in companies’ ability to pay off debt this year and throughout 2023, Mr. Ferreira says. “The supply of credit portfolios has not yet increased significantly, but we believe that next year will be extraordinary for this type of asset,” he says.

For now, the asset manager says there is a gradual increase of stressed asset sales, but still contained by debt restructuring by banks. At the same time, Jive has been more sought after by companies that have a hard time accessing the capital markets or obtaining bank credit, and that need solutions. “Some good companies are facing this kind of difficulty,” he says.

Möbius Capital has also noticed such demand. The firm works with two strategies: litigation assets and structured credit, which has also grown driven by the more challenging economy. “We can enter restructuring debt but also financing companies that are doing very well and want to take advantage of the challenging moment to make acquisitions,” says founding partner Murilo Moura.

Mr. Moura sees an increase in the supply of litigation assets – receivables linked to lawsuits that, according to him, have been a relevant source of liquidity at this moment. The fund usually looks at more than 300 assets to buy just one, such is the rigor that is needed when selecting this type of credit. But in recent weeks, using the same criteria, Möbius has managed to close four purchase options, which reflects the fact that more companies are turning to these types of assets to raise funds. “At the current moment, companies face less liquidity and want to sell these assets soon, which ends up improving the quality of the assets and reducing the discount paid for them,” he says. “This is a peculiar moment because no large company went bankrupt despite the pandemic crisis, but trying to project this scenario forward is dangerous. We can’t work with a scenario where the credit will be smooth.”

In the last two years, the distressed market was marked by a lack of assets or very high prices thanks to the higher number of funds focused on this segment, which increased the demand, says Rafael Fritsch, founding partner of Root Capital. But there was also a certain optimism about the recovery of the economy and, consequently, the situation of the companies. “Now, with reality knocking at the door, the companies’ need for liquidity is going to grow, which is causing a certain repricing of these assets,” he says.

A good example is the negotiation of writs known as “precatórios” – securities that represent government debt from loss of a court dispute. Four years ago, these securities were traded at around 70% of face value, he says. In the past two years, they started to be traded at 94% of face value. Now, they have already gone through a correction, being negotiated close to 50% of face value. “A year ago, we saw law firms, medium-sized banks, brokerage houses buying precatórios. These players are now gone,” he says, recalling that a proposal to amend the Constitution (PEC) allowed the government to pay in installments, which contributed greatly to the change in this market.

Another sign that there is a scenario of worsening credit quality for companies, Mr. Fritsch says, is that the fund has been sounded out by banks interested in selling their portfolios, given the risk that part of this credit will default. “Banks won’t be able to roll it over, as they have done up to now,” he says.

“We see many embattled companies trying to raise capital through litigation assets,” says Luiza Oswald, a partner and head of structured credit funds at JGP. She says that this market, previously very incipient, has been gaining strength in recent months and the companies themselves have started to recognize and see value in this type of asset. This helps the funds’ allocation efforts and widens the discount to be paid for the assets, she added.

*By Lucinda Pinto — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Petrobras unlikely to draw buyers for refineries

Just three months ahead of presidential elections, potential investors do not believe that sale process will be concluded this year

07/14/2022

Petrobras resumed sales of three refineries in June — Foto: Divulgação Petrobras/Diego Pisante

Petrobras resumed sales of three refineries in June — Foto: Divulgação Petrobras/Diego Pisante

The sales of three Petrobras refineries may not be competitive, sources say. The oil company starts receiving non-binding proposals as of this Thursday for three units: Abreu e Lima (Rnest), in Pernambuco, Presidente Getúlio Vargas (Repar), in Paraná, and Alberto Pasqualini (Refap), in Rio Grande do Sul. The move includes logistics assets integrated into these facilities.

Just three months ahead of the presidential elections, potential investors do not believe that the sale will be concluded this year. Petrobras is being advised by Citi. Sources within the oil company said the deal is unlikely to be concluded by October.

As former president Luiz Inácio Lula da Silva leads the polls, the concern is that the sale of assets may be interrupted if he wins the presidential race. According to Mr. Lula da Silva’s government plan, he is against the privatization of Petrobras.

Even in a scenario in which incumbent Jair Bolsonaro (Liberal Party) is reelected, potential buyers don’t feel safe either, said on condition of anonymity one businessman who is still evaluating whether to bid for one of the units. “All these moves of the president concerning the change of command at Petrobras and trying to intervene in the price policy make investors feel insecure,” he said.

According to sources, Ultra, owner of the Ipiranga gas station chain, does not intend to bid for Petrobras. The group had once advanced in the process of buying the Refap unit, in Rio Grande do Sul. However, in October last year, the two parties announced that the negotiations had fell apart. The purchase of Refap would be strategic for Ultra in the oil and gas industry. Sources say that Petrobras tried to renegotiate a higher price for the refinery, higher than the group’s previous bid.

The Cosan group, a producer of bioethanol, sugar, and energy, is still evaluating whether to make an offer. Last year, it made a bid for Repar, but it fell short of the oil company’s intentions to sell. Sovereign wealth fund Mubadala, the owner of the Mataripe unit (formerly Landulpho Alves), is not interested in making an offer for one of the units in the South region either, sources say.

The sale of the refineries is part of the agreement signed in 2019 between the oil company and the antitrust regulator CADE for the sale of eight units, so to attract other companies to the industry. The assets for sale account for about half of the state-owned company’s processing capacity.

So far, only the sale of the Bahia refinery has been concluded. Petrobras has already signed contracts for units SIX, in Paraná, and Reman, in Amazonas, but the deals have not been closed yet.

The unsuccessful sale process of Rnest was terminated in August 2021, after the interested parties gave up submitting binding proposals. As a result, Petrobras opted to include in the business plan the conclusion of the project’s second refining train, with planned investments of $1 billion. According to the company, the intention is to broaden the interest of potential buyers.

According to a specialist in the oil and gas industry, Petrobras took too long to take the sale process ahead. For him, CADE should have put more pressure. “Now it has lost the timing. The price [intervention] still weighs.”

This source understands that this sale process does not favor competition, since the refineries in São Paulo and Rio de Janeiro were left out of the Petrobras divestment process. “If the idea is to foster competition, CADE should include refineries from those states. But Petrobras does not want to give up its best assets.”

In a note, Petrobras stressed its commitment to the broad transparency of its divestment projects and portfolio management and said that the subsequent stages of the project will be disclosed in due course. Cosan and Ultra declined to comment. Mubadala did not immediately reply to a request for comment.

*By Mônica Scaramuzzo, Gabriela Ruddy — São Paulo, Rio de Janeiro

Source: Valor International

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Development Bank shortlists four companies for privatization this year

Ceasaminas, CEEE-G, CBTU, and ES Gás are seen as moving forward despite elections in October; Santos Port Authority, previously a priority, is unlikely to be sold in coming months

07/14/2022

Fábio Abrahão — Foto: Leo Pinheiro/Valor

Fábio Abrahão — Foto: Leo Pinheiro/Valor

The Brazilian Development Bank foresees that it is still possible to sell at least four more state-owned companies this year. These processes are being structured by the bank: Ceasaminas (food supply center), power generation company CEEE-G, Belo Horizonte-based urban mobility company CBTU, and gas distributor ES Gás.

Brazil will hold elections in October, but they are unlikely to impact the sales processes, said Fábio Abrahão, head of concessions and privatization at BNDES. “These are projects in a more advanced stage, which have already gone through internal stages in the Executive and Legislative branches. So we see no interference,” he said.

Santos Port Authority (SPA), the company that manages the Port of Santos, was also high on the federal government’s privatization list, but the sale is unlikely to be concluded on time as well. “We want to launch the public notice this year in order to have the auction ready [for 2023]. This is a very complex process, which has to be done carefully,” Mr. Abrahão said.

The IPO of Companhia Riograndense de Saneamento (Corsan) was on the list before being canceled on Wednesday after the Rio Grande do Sul Court of Accounts (TCE-RS) determined the suspension of the process. The state government is now working on a new model to sell all shares in the company.

Corsan CEO Roberto Barbuti said it is still feasible to hold the auction in 2022, at least from a technical standpoint. The idea would be to launch the call for bids soon after the second round of elections, in October, and hold the competition in December.

The executive evaluates that the studies required for the new modeling are not that complex. The idea is to repackage the work done so far, he says. Some steps will not have to be redone, such as the negotiation with the municipalities. However, the new model must include public hearings and new rounds of talks with the market, since the profile of the interested parties tends to change.

In the sector, however, the prevailing assessment is that it will be very difficult to conclude the process in 2022, mainly due to the elections.

In addition to political turbulence, each specific project faces its own particular challenges of attractiveness and pricing.

The next privatization auction is expected to be that of Rio Grande do Sul-based CEEE-G (Companhia Estadual de Geração de Energia Elétrica). This is the second attempt to sell the company. The first one, in March, was canceled due to the lack of interested buyers. Since then, the public notice was reformulated, and the minimum value for the purchase of shares was reduced to R$837 million from R$1.25 billion. The delivery of bids is scheduled for July 26 and the public session for July 29.

Rio Grande do Sul holds a 66.23% stake in the company. In addition to acquiring control of the company, the new operator will have to shoulder a fixed concession payment of at least R$1.66 billion to take over the concession of the generation plants. CEEE-G’s assets total 1,270 MW of authorized power, or 13.3% of the state’s generation.

Another project expected to be launched in the coming months is the privatization of Belo Horizonte-based Companhia Brasileira de Trens Urbanos (CBTU), which foresees service concession for 30 years. The competition is expected to take place on September 15. However, the contract still lacks the approval of the Federal Court of Accounts (TCU), a public spending watchdog not related to Brazil’s Judiciary system.

The project is ambitious. In addition to changes in the current structure, it provides for the construction of Line 2 of the subway in the capital city of Minas Gerais. The contract includes investments of R$3.7 billion. Federal and state contributions are foreseen to make the project feasible. The federal government will inject with R$2.8 billion, while the Minas Gerais state will disburse R$428 million.

Interest in the contract has been high, Mr. Abrahão said. “In addition to local groups, there are new international players in the market and European companies.”

BNDES also plans to privatize ES Gás later this year – the auction is scheduled for December 21. The amounts involved in the operation were not disclosed. The gas distributor is controlled by the Espírito Santo state, with a 51% stake, and has Vibra Energia (former BR Distribuidora) as a partner, with 49%. Vibra has signaled its intention to sell its stake as well.

“It is a lean company, which operates a relatively small network. The advantage is the potential for expansion. Espírito Santo boasts a strong industrial base and domestic consumption capable of providing stability to the operation,” Mr. Abrahão said.

On the privatization list, there is also the sale of Contagem-based Ceasaminas (Centrais de Abastecimento de Minas Gerais), which operates six warehouses.

The BNDES head sees this as a smaller deal, but an important one. “There is a potential impact of transformation and huge efficiency gains.” He says there are several interested buyers, mainly logistics operators.

Besides the state-owned companies, the development bank plans to sell some properties, which are likely to be sold in lots – assets of Furnas, Eletrobras, and Cais Mauá, among others. These auctions could total R$1 billion by the end of the year, Mr. Abrahão estimates.

*By Taís Hirata — São Paulo

Source: Valor International

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Congress passes budget guidelines law for 2023

Rapporteur removed article that made payment of amendments compulsory

07/13/2022

Rodrigo Pacheco — Foto: Geraldo Magela/Agência Senado

Rodrigo Pacheco — Foto: Geraldo Magela/Agência Senado

The plenary of the National Congress concluded the analysis and passed Tuesday the Budget Guidelines Law (LDO) for 2023.

The vote took place even after a reaction from the so-called “Centrão,” a cluster of center-to-right parties that supports the Bolsonaro administration, which showed dissatisfaction with the decision of the rapporteur, Senator Marcos Do Val (Podemos of Espírito Santo), to remove an article that made the payment of the rapporteur’s amendments (also called PS-9) compulsory.

Currently, only individual amendments and those from state legislatures are compulsory. In the case of the rapporteur’s amendments, this requirement is foreseen in the Constitution, but was not included in the version of the LDO sent by the federal government.

The president of the National Congress, Rodrigo Pacheco (Social Democratic Party, PSD, of Minas Gerais), denied that he has come to advocate the end of mandatory rapporteur amendments after he was accused of using this mechanism to ensure his election to office.

The accusation was made by Senator Do Val. He told newspaper O Estado de S.Paulo that he received compensation in rapporteur amendments for having helped elect Mr. Pacheco to the post.

“There has been my position against this for quite some time. This precedes any kind of discussion that took place in this episode of Senator Marcos do Val,” Mr. Pacheco said.

The PS-9 issue is not the only innovation in the bill presented by Marcos Do Val. His bill also suggests dividing the power of the budget rapporteur with the head of the Joint Budget Committee of Congress, federal deputy Celso Sabino (Brazil Union of Pará), on the order and priority of the release of the rapporteur’s amendments.

The “secret budget,” as the opposition calls it, has become the main instrument of Congress to allocate resources to its electoral bases and has caused the Bolsonaro administration to expand its governing coalition in the Legislature, but it is attacked by former president Luiz Inácio Lula da Silva (Workers’ Party, PT), who promises to end the mechanism if elected.

Today, the control of the release of these funds falls only to the budget rapporteur, which for 2023 is Senator Marcelo Castro (Brazilian Democratic Movement, MDB, of Piauí), an ally of Mr. Lula da Silva. With the division of power, Mr. Sabino will also have to be consulted about the distribution of this money. Mr. Do Val included that, in case the congressman is not elected, the power will remain with a congressman of the same party as Mr. Sabino (Brazil Union), and not with the future head of the commission next year.

In his opinion, Mr. Do Val also made room for more spending next year by saying that the projections used by the federal government for inflation are constantly lower than what is officially verified. For this reason, said the senator, the Congress itself can take the initiative to decide which indicator to use when voting on the Annual Budget Law (LOA) in December, whether the index most updated by the market or the percentage indicated by the federal government.

“The projection of the [Brazil’s benchmark inflation index] IPCA variation from January to December 2022 will be used, both by the federal government and the Legislature, to correct the cap of federal government spending applicable to 2023. For this reason, the clean bill provides that the National Congress may use a more updated projection for the index, without this being restricted to using the projection to be informed by the federal government on November 22,” he said.

This decision, explained the rapporteur in his opinion, will also imply a revision of the fiscal target for 2023, adjusted proportionally to the revision of the spending cap rule, which limits the growth of federal government’s primary expenses above inflation.

The rapporteur also prohibited cost cutting in 19 sectors, which will make it difficult for the government to reallocate money. Among the activities that cannot have their funds cut by unilateral act of the federal government are education, science and technology, digital inclusion, sports, defense of children and the elderly, demarcation of indigenous lands, public security, investments in the Armed Forces, rural insurance, animal health, infrastructure, basic sanitation, climate change monitoring and the fight against the Covid-19 pandemic.

Egress from the police, Mr. do Val previously authorized that the federal police careers have restructuring and salary increases next year. The measure is a nod to the electoral base of the rapporteur before the protests of these workers against the Bolsonaro administration for not honoring the promise of granting these benefits. Despite this, the increase will still depend on prior authorization in the 2023 LOA, just like all other civil servants.

The opinion also removes the prohibition for cities with up to 50,000 inhabitants to receive federal voluntary funds if they are in default on previously signed agreements, and authorizes federal funds to be used to install solar power in public health units and even in private entities that provide services to SUS, Brazil’s public healthcare system.

Finally, the text innovates by forcing the federal government to transfer by June 30 the amendments of direct transfers, transferred from the federal government to states and municipalities without the need for agreements or breakdown of spending to be executed. Currently, there is no deadline for sending these funds. Additionally, the city government will have to present to the Legislature a plan within 30 days to explain how it will spend the money received from the federal government.

*By Renan Truffi, Vandson Lima — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Brazilian power companies stand out for returns

Roland Berger highlighted Alupar, Engie, Equatorial and Enel Brasil in Brazil in survey with 201 listed firms around the world

07/13/2022

Eletrobras’s power transmission towers — Foto: Custódio Coimbra/Agência O Globo

Eletrobras’s power transmission towers — Foto: Custódio Coimbra/Agência O Globo

Alupar, Engie, Equatorial and Enel Brasil are among the 23 electrical companies with the world’s best performance, a study by Roland Berger shows.

The consultancy surveyed 201 power companies listed in the U.S., Canada, Europe, Asia and Latin America, with revenues exceeding $1 billion, and for which there is public performance data over the past 10 years.

Between 2016 and 2020, the segment saw shareholder value added rise, with a return on invested capital (ROIC) higher than the weighted average cost of capital (WACC) in all years except 2017. In the five-year period, value creation reached $210 billion.

Companies in Europe and the United States accounted for 96% of the value created, while Asia and Latin America changed their positions since the previous study.

“Asia destroyed $11 billion of value while Latin America built $20 billion of shareholder value,” says Jorge Pereira da Costa, Roland Berger’s managing partner, stressing that the perception of risk in Latin America is still very high.

In the same period, the Brazilian power industry created value in every year despite the pandemic, with over $12 billion in shareholder value added. This is the first time Brazilian power companies are among the global 23 Top Performers – the ones that proportionally grew the most in sales and offered better remuneration to shareholders and investors, the executive says. Alupar stands out in transmission, Engie in generation, Equatorial in distribution, and Enel for its efficiency in asset management.

“Despite the challenges in Brazil, these companies are capable of being among the best performers in the world using very specific levers. Alupar took advantage of a regulatory window to invest heavily in transmission and good execution capabilities. Equatorial has a regulatory strategy, knew how to take advantage of its asset base, operational efficiency and diversification. Engie is leaving the thermoelectric power plant market, and has invested in services and power commercialization as a growth lever. Enel, on the other hand, is a highlight due to growth, the purchase of Eletropaulo and the capacity to extract value from this asset,” he said.

Enel is not a listed company, but parent company Enel Americas is, Mr. Costa says. The study considered the contribution of Enel Brasil to Enel Americas. “There are 22 companies plus one,” he said. The use of these listed levers, he says, will shape the future of the power industry by better addressing the structural problems. These are included in Bill 4,141, which deals with the modernization of the industry.

Another finding of the survey is that the Brazilian power industry is impacted by the performance of state-owned companies, which have wiped out $1.8 billion in shareholder value. Eletrobras accounts for more than 80%, or $1.5 billion.

Alupar CEO Paulo Godoy says that the study proves the efficiency in the company’s capital allocation, the experience to identify and execute new projects, technical competence and the financial discipline, ensuring the profitability of the business.

Engie Brasil CEO Eduardo Sattamini says that 95.8% of the generation comes from renewable sources and that the performance in diverse and complementary segments creates synergy, increasing resilience to risks and driving opportunities that emerge from trends and challenges.

Equatorial CEO Augusto Miranda highlighted the financial discipline and capacity to allocate capital efficiently, with a focus on the long term, and the delivery of growth and results, which translates into shareholder return.

Enel’s country manager in Brazil, Nicola Cotugno, said that the result comes from the company’s commitment to energy transition in the country, which brings opportunities for competitors that operate in an integrated manner in the power industry.

*By Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Embraer to have key 3Q for deliveries

Shortage of electronic components and lack of skilled labor in the U.S. are obstacles

07/13/2022

Francisco Gomes Neto — Foto: Carol Carquejeiro/Valor

Francisco Gomes Neto — Foto: Carol Carquejeiro/Valor

Embraer, the leader in the regional jet market, is on course to fulfill its forecast of aircraft deliveries for 2022, despite persistent challenges in the global supply chain. But the current quarter will determine whether, in fact, it will be possible to achieve these goals, according to the company’s CEO, Francisco Gomes Neto.

“The scenario is still challenging. The third quarter will be key for us to have a final vision,” he told Valor. The shortage of electronic components, manufactured mainly in Asia, and the lack of skilled labor in the United States, which compromises the production programs in one of the most important suppliers of parts for the aircraft industry, are the main obstacles on the way to deliveries of 60 to 70 commercial airplanes and 100 to 110 executive jets this year. These estimates include growth compared to 2021.

To circumvent the challenges in the supply chain, Embraer has placed more than 20 of its professionals inside plants of suppliers and sub-suppliers to assist them in the production programs. So far, the measure has ensured the arrival of the necessary components, although with delays. But it has not been able to prevent delays in aircraft deliveries.

At the same time, with the resumption of demand in commercial aviation and the various campaigns underway, the company is expected to have good news in sales ahead, confirming the new business expansion cycle. The Farnborough Airshow, which takes place next week in England, is the main event in the world’s civil aviation calendar, and the traditional stage for announcing new orders. Embraer will be at the show.

“We will take the message that we are ready to grow,” said Mr. Gomes Neto. For some time now, the executive has been indicating that, after putting its house in order, Embraer will experience a period of growth between 2023 and 2026. For 2022, the expectation is a return to net profit, after four years of consecutive losses.

The dramatic drop in the production of commercial jets, due to the Covid-19 pandemic, and the end of the agreement that would result in the sale of commercial aviation to Boeing led the company to promote important structural adjustments. Now, the time is to gain muscle, with more efficiency.

Among other initiatives, Embraer recently signed an agreement with Toyota to apply the concepts of the Toyota Production System in the industrial operation, in search of greater operational efficiency. By the end of 2023, the goal is to reduce the time spent in the production of aircraft by 40%. At the end of last year, the reduction was at 17%.

The backlog also grew again, reaching $17.3 billion in March, the highest since the second quarter of 2018. “The pandemic brought the biggest crisis in aviation history. But it also brought changes, such as the strengthening of domestic aviation and the greater demand for smaller jets,” said Rodrigo Silva e Souza, Embraer’s chief marketing officer for commercial aviation.

In this new market moment, the plan is for Embraer’s E2 jets to repeat the success of the E1s. The E195-E2 has already proven to be the most efficient of the single-aisle jets, and competition with the A220 does not seem to be a concern. Besides the economic and technical advantages demonstrated over its rival, the Brazilian company’s focus is on the market below 130 seats, while Airbus targets larger segments.

For the Brazilian company, the global demand for commercial aircraft up to 150 seats will be 10,900 units by 2040, including 8,640 jets and 2,260 turboprops, in a market estimated at $650 billion.

Embraer is developing its new high-tech turboprop (TP), whose project may result in partnerships with suppliers or investors, just like Eve did a short time ago. According to Mr. Silva e Souza, the TP suppliers are likely to be chosen this year and the project is expected to be submitted to the board of directors for approval by mid-2023. Several customers from North America and Asia have already shown interest in the 70-90 seat aircraft.

Eve’s project is more advanced. Listed on the New York Stock Exchange (NYSE) two months ago, the subsidiary of the urban air mobility market plans to certify its eVTOL — the flying car — by 2025.

In Defense, the business perspectives are also optimistic, despite the new reduction in orders for the KC-390 Millennium by the Brazilian Air Force (FAB). The invasion of Ukraine by Russia and the increase in defense spending by the world’s great powers, particularly in Europe, are opening up important markets for its military aircraft. Embraer is also evaluating potential partnerships in this area.

Less than a month ago, the Dutch Ministry of Defense indicated that it had chosen the KC-390 to replace its C-130 Hercules, in a communication marked by praise for the Brazilian military aircraft. “Defense is coming from a more difficult period. The war in Ukraine brought interest for the C-390 and the Super Tucano,” Mr. Gomes Neto said.

Embraer is expected to announce this month the deliveries of the first semester, usually weaker than the second half of the year. From January to March, there were six commercial aircraft and eight executive jets, totaling 14 units.

*By Stella Fontes — São José dos Campos, São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Itaú Unibanco’s private bank plans to surpass R$1tn in assets

With a 28% share, bank is leader in Brazilian market

07/13/2022

Percy Moreira, Fernando Beyruti and Felipe Nabuco — Foto: Silvia Zamboni/Valor

Percy Moreira, Fernando Beyruti and Felipe Nabuco — Foto: Silvia Zamboni/Valor

The new structure of Itaú Unibanco’s private bank, put in place at the beginning of the year, seeks to consolidate a global vision for the whole business with the unification of the domestic and international segments of the group. In an exclusive interview with Valor, the three executives who took over the wealth-management branch of Brazil’s largest private-sector bank, which serves people with at least R$10 million in investments, say that one of the strengths of this integration and total customer service comes from the migration of systems to cloud computing.

“With the change, there will be a single system for all the bank’s units, including Brazil, Switzerland, the United States, and Portugal,” says Fernando Beyruti, who took over Itaú Private Bank as global head in January. “The technological transformation will allow the bank to have much more customer data, provide a reduction of the inefficiency of the legacy systems and integrate solutions and products from all businesses of Itaú, from investment banking to asset management,” adds Felipe Nabuco, the private bank’s head of investments and client relations.

The third member of Itaú’s new structure is Percy Moreira, CEO of Itaú USA and head of international private bank, assuming a position that belonged to Mr. Beyruti in the old structure: “In this model, we end up playing more closely together,” Mr. Moreira points out.

The trio now runs a business that gathers R$700 billion in assets under management and a 9,500 client base. With a 28% share, Itaú is the leader in this market in Brazil. Itaú Private Bank’s global head explains that the goal is to exceed R$1 trillion in assets and reach a 35% market share.

Mr. Beyruti considers that there is no specific deadline to reach those goals. “This growth will be a consequence of our mission of providing 360-degree service to clients,” he says. “It is to meet the demands of the client’s life, both local and international investments, as well as succession planning, tax, and other needs.”

According to the executive, “we do not doubt that personal contact in private banking is something that will not be lost,” he says. “As we go down the generations, the client wants to have self-service, he wants to have the digital part.” For this reason, the integration of all systems into just one will allow, in Mr. Beyruti’s view, great flexibility, agility, and efficiency to implement new products and platforms. “We have a slogan of having ‘a bank for each client’, and this requires a just as good as technology infrastructure.”

The private bank’s global head added that before the migration to the cloud, changes to systems could take months. “In the old system, anything new that came along, whether it was a regulation, or a new product could take about six months to develop. Now with APIs [sets of protocols that allow rapid integration between systems] and systems in the cloud, it’s much easier to develop any solution in a few days.”

Data analysis also becomes much more effective and faster, which allows the bank to foresee some demands and offer conveniences, Mr. Beyruti says. “For example, if we know that a customer travels a lot, why don’t we automatically unblock his card [for use abroad]? Or if a customer often goes to a certain restaurant, we can create a specific promotion for the specific place to offer an experience, obviously respecting privacy.”

According to Mr. Nabuco, “a major advance in this new structure is that, besides the banker, who usually considers the commercial aspect, the investment team now also has global thinking.” According to the executive, “we used to have an investment team focused on the Brazilian market and another one focused on the international market, but it is no longer possible to have one person thinking about Brazil and another one thinking abroad. You have to be always thinking in a much more comprehensive way.”

In Mr. Nabuco’s evaluation, “when you look at the platform, it is not only about investment.” According to the executive, “investment is a stretch of the journey, which is made up of services and conveniences.” Mr. Moreira adds that “we really aspire to use [the experience] out there as a great gateway to the private banking world for new experiences for the Brazilian client.” Besides, considers Mr. Beyruti, “one of the advantages of Itaú is that it is a universal bank: I can offer the private banking client investment banking services, credit, insurance, I can offer everything, right?”

Another expansion strategy for Itaú’s private-banking business is a more intense regionalization process. According to Mr. Nabuco, “outside the largest local markets, there are places where private banking has no physical presence and, in these places, our market share drops to 15%.” According to the global head, “in this regionalization project, the idea is, with the broad bases we have today, that the íon investment offices will be our investment agents in places where we do not yet have a physical presence of the private banking.”

The íon (Itaú’s investments platform) offices started to open in March 2021 and already have R$400 billion in assets under management. The network already has 110 offices open and the goal is to have 129 locations, with 2,500 specialists, by the end of the year throughout Brazil. In the coming months, units will be opened in Recife (Pernambuco), Rio de Janeiro, São Paulo and Petrópolis (Rio de Janeiro state). According to Mr. Nabuco, “with this network, we will be able to identify potential private clients.”

In Mr. Beyruti’s view, in this arrangement “we can detect the affluent [client], that is, the one that is going to be a client of the private bank at some point and we already have him on the radar.” This way, “much earlier we have someone there helping this client in his growth.”

Another new feature that is starting to be implemented is to have specialists per area to identify specific demands from clients. “We started with technology, we have a banker who will serve the tech segment, so he knows the demands and what we can offer to this client and his company.”

Itaú’s private bank has also strengthened the events business, such as those aimed at preparing the new generations that will assume responsibilities in the family businesses. “We have several in the pipeline,” says Mr. Beyruti. “For example, we are going to take some clients to attend a course on venture capital at Harvard, and we have another one in which we bring together several families to meet and learn from each other.”

*By Sérgio Tauhata — São Paulo

Source: Valor International

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Brazil’s rail industry bets on exports, services amid standstill

Train makers seek alternatives to prop up businesses after losing steam amid economic crisis, pandemic

07/12/2022

Brazil’s rail industry is at a virtual standstill. Without large orders from cargo and passenger operators, train makers in the country are sustaining their businesses thanks to exports and revenues from services like overhauls and updates of equipment already on the streets. In the segment of passengers, the idleness in train manufacturing – considering that each train is made of one locomotive and eight cars – is at 80%. In the cargo field, including locomotives and cars, it is nearly 100%.

After an exceptional year in 2015 – with 4,700 cars, 129 locomotives and 322 passenger cars manufactured – the industry started to lose steam amid the economic crisis in the following years. In addition, the expectation for a better decade was delayed for at least two years due to the effects of the pandemic in the passenger segment and the postponement of investments in rolling stock by cargo transporters.

The pandemic reduced drastically revenues of companies operating subway and commuter trains, impacting the capacity of these companies to invest. Cargo transportation, on the other hand, saw demand rise in the meanwhile, but not to the point of increasing orders.

The industry hit bottom in 2019, with only 1,000 cars and 34 locomotives made for the cargo segment. In the passenger segment, according to the Brazilian Association of the Rail Industry (Abifer), the last contract for delivery of new trains was signed in 2013. In 2020, 72 cars were made. Competition from Chinese companies is now the biggest challenge for Brazilian companies in both segments. The landscape is now compounded by the input inflation, which hits steel particularly hard.

Vicente Abate — Foto: Anna Carolina Negri/Valor

Vicente Abate — Foto: Anna Carolina Negri/Valor

Vicente Abate, head of Abifer, highlights the hurdles but is still upbeat. “We believe in growth in the next years [in cargo transportation]. Rail transportation tends to strengthen, and that will have repercussions in the industry. The aim at increasing railroad share in cargo transportation to 40% from 20% by 2035.” As for passenger trains, Mr. Abate sees room for commuter trains and interstate services, besides longer tracks for subway and light rails.

But he changes the tone when talking about competition from Chinese companies. Mr. Abate warned that the federal government’s decision to reduce the tax on imported products could increase difficulties in the sector. The 14% rate may be reduced to as down as 8.4%. “They [Chinese] do not intend to produce here. Brazil’s productive chain is in condition of meeting any need from them.” The executive argues that any tax reduction should be followed by a lower Brazil cost to level the playing field.

Foreign companies are seen as taking space from the local product but can also offer alternatives. After failing to produce for an entire year, Alstom ended 2021 with good perspectives in the foreign market as it won auctions of €2 billion in the region. Half will be made in Mexico and the other half in Brazil. The Brazilian production will supply orders in Chile, Taiwan and Bucharest, besides the São Paulo subway system.

There is no shortage of demand for passenger transportation in Brazil, said Michel Boccaccio, Alstom’s vice president for Latin America and chief executive in Brazil. In his opinion, there is shortage of funds for states to invest in commuter trains and subways. “São Paulo is doing the right thing in seeking partnerships with the private sector for its projects.”

Alstom had two plants in Brazil: one in the city of São Paulo and the other in Taubaté (São Paulo state). The company was forced to close the former due to the lack of orders and spent the recent years betting on services – the engineering team took part in global projects in the period. “Brazil excels at [making] stainless steel cars.”

The Taubaté plant has now 1,000 cars in the backlog. “The unit is going from zero production to the start of assembling later this year or in early 2023,” Mr. Boccaccio said. The company will invest €10 million to prepare the plant and hire 850 people. Alstom’s headcount is 800 now.

Marcopolo Rail, a Brazilian newcomer, was created during the crisis. The rail division of the traditional bus maker started to operate in 2017 and has bet on passenger niches. The company will supply the trains for the so-called People Mover, a system that will link the terminals of Guarulhos International Airport. Petras Amaral Santos, Marcopolo Rail’s business head, said that during the pandemic the company invested in light rail, and there is already an equipment operating in Bento Gonçalves (Rio Grande do Sul) and deals secured for 2023.

Mr. Santos believes that there is space for every type of passenger vehicle, and that each city will have to choose the best solution according with its demand. “We lack good projects,” he said. “If the study is well executed, there will be financing, and the project will be feasible.”

Being part of a large group makes it easier for the division to face the downturns in the sector and to get better prices with input suppliers. In addition, the objective is to take advantage of Marcopolo’s international structure to export, especially to neighboring countries in Latin America.

Asked about competition from Chinese companies, Mr. Santos summed up the sector’s prevailing assessment. “Which country do we want? We have to think about that. We want an industrialized country.”

*By Carlos Prieto — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil in talks to import diesel from Russia, Bolsonaro says

Move is aimed at reducing costs locally after federal measures failed to reduce diesel prices at pumps as much as those of other fuels

07/12/2022

Hungary’s president Katalin Novák and Brazil’s president Jair Bolsonaro met on July 11 in Brasília — Foto: José Cruz/Agência Brasil/Agência O Globo

Hungary’s president Katalin Novák and Brazil’s president Jair Bolsonaro met on July 11 in Brasília — Foto: José Cruz/Agência Brasil/Agência O Globo

President Jair Bolsonaro said Monday the Brazilian government will try to make it possible to start importing diesel from Russia within 60 days.

The move is aimed at reducing costs locally after federal measures to reduce sales tax ICMS levied on fuels failed to reduce diesel prices at the pumps as much as gasoline and ethanol prices. The rate charged by states on diesel was already lower than the 17% cap defined as of this month for services considered essential.

“It is agreed. In 60 days, it can already start arriving here. There is already this possibility,” said Mr. Bolsonaro, in an interview at the presidential palace, in Brasília. “We import almost 30% [of the diesel consumed in the country]. You have to import diesel from those who are selling it cheaper, not from those who are selling it even more expensive [than before].”

Less than three months before the elections, the president has been pressuring Petrobras not to pass on any price increases. The diesel price hike, besides the impact on inflation, directly affects truck drivers, who massively supported Mr. Bolsonaro when he was elected president, in 2018. Brazil will hold elections on October 2. Mr. Bolsonaro, who is running for reelection, is trailing former president Luiz Inácio Lula da Silva in the polls.

Referring to the new CEO of state-owned oil company Petrobras, Caio Mário Paes de Andrade, Mr. Bolsonaro also called for prices at the pump to fall if oil drops below $100 a barrel.

“If prices increase here, so does Petrobras’s profit. Petrobras now has a CEO that will respect the social purpose imposed by the state-owned companies’ law. Brent oil has fallen from $100 then it went back up a little. I believe that if it is consistent, a little below $100, there is room to reduce prices in refineries,” he said.

As for imports of diesel from Russia, the president celebrated the evolution of partnerships with the country and its decision to remain neutral after Russian leader Vladimir Putin decided to invade Ukraine, launching a five-month war.

“Russia continues to do business with the whole world. It seems that the economic sanctions didn’t work out. So much so that Germany has now had 40% of its gas cut off. Europe is largely dependent on gas imports from Russia. The ruble, which people thought would melt down, is the currency that appreciated the most this year. It is a great country, twice the size of ours. And Brazil maintained a balanced position. Of course, we would like there not to be a war,” he said.

After receiving the official visit from the president of Hungary, Katalin Novák, Mr. Bolsonaro made another statement, assuring that he will do his best for peace in the conflict. He also unveiled he will speak with Ukraine President Volodymyr Zelensky on July 18.

If confirmed, this will be the first contact between Mr. Bolsonaro and the president of the country that has been waging a war against Russia since February, when its territory was invaded.

“We exchanged some remarks about the conflict going on near Hungary, the Russia-Ukraine issue. I told her that I have a phone call with Zelensky scheduled for July 18, just as after my visit to Russia, before the conflict, I had another conversation with President Putin,” Mr. Bolsonaro told reporters. “We want, more and more, to do what is possible for peace. We know that the truth often hurts, but there is no other way.”

In the speech, the president thanked Hungary for its support of the Mercosur-European Union trade agreement and Brazil’s accession to the OECD.

During his visit to Eastern Europe in February, days before the war started, Mr. Bolsonaro met with the Prime Minister of Hungary, Viktor Órban. At the time, he referred to the far-right leader as “brother” and highlighted the political and ideological affinities between the two.

* By Matheus Schuch — Brasília

Source: Valor International

https://valorinternational.globo.com/
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