Credit rating agency also affirmed country’s BB- rating

07/15/2022


Fitch says revision reflects better-than-expected evolution in public finances amid successive shocks in recent years — Foto: Matt Lloyd/Bloomberg

Fitch says revision reflects better-than-expected evolution in public finances amid successive shocks in recent years — Foto: Matt Lloyd/Bloomberg

Fitch has revised Brazil’s outlook to stable from negative and affirmed the country’s long-term foreign currency rating at BB-.

According to Fitch, the revision of Brazil’s outlook reflects the better-than-expected evolution in public finances amid successive shocks in recent years since the firm assigned a negative outlook in May 2020.

“Last year, Brazil recorded its first primary fiscal surplus since 2013, highlighting revenue outperformance and the authorities’ commitment to withdraw stimulus implemented during the pandemic,” the agency says. “A sharp reduction in the public debt ratio in 2021 is projected to be followed by another mild fall in 2022, considerably improving the starting point before a gradual projected rise in 2023 and beyond.”

According to the agency, “near-term growth dynamics have outperformed Fitch’s prior expectations, and incremental progress on reforms could benefit medium-term investment prospects.”

“The central bank’s decisive monetary policy tightening, supported by its new formal autonomy, highlights its commitment to addressing inflation,” the agency added.

The agency stresses in the statement that fiscal and growth challenges persist, and the October elections pose uncertainty around how these will be addressed.

“Nevertheless, these challenges are already captured in Brazil’s BB- ratings, and Fitch expects broad macroeconomic policy continuity after elections.”

Fitch added that Brazil’s ratings are supported by its large and diverse economy, relatively high per-capita income, and capacity to absorb external shocks underpinned by its flexible exchange rate, robust international reserves, sovereign net external creditor status and deep local debt market.

“This is counterbalanced by high government financing needs and indebtedness, a rigid fiscal structure, weak growth potential and a difficult political landscape hampering policy predictability and timely progress on reforms.”

The Economy Ministry said in a note that it “affirms its commitment to the fiscal consolidation necessary for the continuity of the economic recovery scenario.”

*By Eulina Oliveira — São Paulo

Source: Valor International

https://valorinternational.globo.com/

Indicator reflects cautious atmosphere in markets and follows depreciation of Brazilian currency, stocks

07/15/2022


Brazil risk rose to 332 points on Thursday, according to IHS Markit — Foto: Silvia Zamboni/Valor

Brazil risk rose to 332 points on Thursday, according to IHS Markit — Foto: Silvia Zamboni/Valor

Brazil risk measured by five-year credit default swap (CDS) contracts reached the highest levels since May 2020 amid a risk-averse environment both abroad and in the domestic market. The Brazil risk rose to 332 points on Thursday, according to IHS Markit, which is now a part of S&P Global.

The worsening in country risk is recorded at the same time as other Brazilian assets are penalized. The future interest rates remain under pressure throughout the entire term structure of the curve; the foreign exchange rate is close to R$5.5 to the dollar; and the Ibovespa falls firmly – Brazil’s benchmark stock index was close to the 96,000-point threshold.

“The U.S. inflation figures continued to be very high. This generates discomfort and a feeling that the Fed [U.S. Federal Reserve] will have to raise interest rates more than it initially thought. When U.S. interest rates rise, it strengthens the dollar and makes stock markets more vulnerable,” says José Tovar, founding partner at Truxt Investimentos. “The market had calmed down, but with yesterday’s [Wednesday’s] inflation data, we had a new increase [in risk aversion].”

Mr. Tovar reveals Truxt’s multimarket funds are betting that U.S. and Canadian interest rates will rise and is long on the dollar against the real and the euro. “These are positions in the direction of more interest rates in the developed and emerging markets,” he says. As for Brazil, he points out that the measures adopted by the government have generated positive trends for the country’s growth this year. “But this drives inflation and forces the Central Bank to keep raising interest rates, which are likely to rise to around 14%” per year, he says.

Rogério Boueri, head of the Special Advisory of Economic Studies of the Ministry of Economy, said fiscal policy is not the reason for the higher Brazil risk measured by five-year CDS contracts, the worsening of the public debt financing conditions, the weakened real against the dollar, or stock market swings.

The CDS rate is rising for all countries, not just Brazil, he said. “International conditions are worse, but Brazil is in a better shape compared with emerging peers,” he said. “It is not a domestic fiscal problem in Brazil what is causing the worsening of the CDS.”

The “real problem” that explains this development, in the official’s view, may be the five-year nominal interest rate in the United States, whose average is at the highest level since 2008.

“Everyone is forecasting interest rate increases in the U.S., and this has an impact around the world, including in the [Brazilian] Treasury’s funding rate,” he said. “Brazil is not an island. We are impacted. But we are not the only ones.”

Despite the influence, Brazil’s nominal rates are not rising faster than the U.S. rates, he said. “We see stability in the rate differential with the U.S.,” he says. “Our rates go up domestically because of international conditions.”

To demonstrate this thesis, he says Brazil’s five-year nominal interest differential is lower than the average of two similar economies: Mexico and Colombia. The data shows an improvement in Brazil’s funding conditions, he said. Considering real rates for ten years, the differential of the funding rate between Brazil and the United States shows an improvement, according to him.

*By Victor Rezende, Lu Aiko Otta, Estevão Taiar — São Paulo

Source: Valor International

https://valorinternational.globo.com/

Partners Novonor, Petrobras are in no hurry to negotiate due to worsening economic scenario

07/15/2022


The process of selling the petrochemical company Braskem, whose shareholders are the Novonor group (formerly Odebrecht) and Petrobras, is stuck again. Sources familiar with the matter told Valor the two partners have made little effort to move the negotiation forward, largely because the market is not favorable to a stock offering.

However, internal issues at Petrobras, including the change of the CEO, and uncertainties about the state-owned company’s strategy have removed the sale of Braskem from the priority agenda, at least for now. At Novonor, which is advised by Morgan Stanley, there has been no definition of a new timeline after the suspension of the preferred stock offering in January.

A source connected to the company’s creditors said that the current price of the shares is well below what is necessary to pay off debts and below the interest of Novonor to get rid of its participation in the business. The total debt of the banks that have shares in guarantee is about R$15 billion. A good part of Braskem’s dividends has been assigned to reduce debts and interests on this debt.

The petrochemical company is also waiting for market conditions to improve in order to go ahead with the secondary offering. Since the second half of last year, the capital market has been closed to offerings. Thursday the stock price closed the day at R$33.02 on B3, the Brazilian stock exchange. This year, the shares aggregated a fall of 40.39%, according to a Valor Data survey. The petrochemical company’s market capitalization is R$26.7 billion.

According to a source close to Braskem, the company is practically ready to go to the Novo Mercado — the strictest governance segment of B3. However, the operation has not yet materialized because the plan is to conduct the secondary offering together with the migration.

As the interest rates are on the rise, the stock exchange is no longer an interesting option for the sale of the petrochemical company. A merger and acquisition process would make more sense and would bring more value to the company, said another source.

The company’s shares have been falling since last year. The strongest pressure came from the energy crisis in the world, which reduced the margins of the Brazilian petrochemical company. The higher prices of natural gas and oil, and consequently of naphtha and is expected to continue to weigh on the company’s results.

Earlier this month, Bank of America (BofA) reduced its estimates for the company between 2022 and 2024, resulting in a new target price of R$55 per share, much lower than the previous R$80. However, the bank maintained its recommendation to buy the shares, given the potential for appreciation and expectations regarding the Novo Mercado. Today, the stocks are traded at B3 at low multiples, with an enterprise value (EV) of around 4.3 times the EBTIDA projected for 2022.

Braskem, J&F, Novonor, Petrobras, Ultrapar and Unipar declined to comment on the matter.

*By Mônica Scaramuzzo, Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/

Prices increased 28.5% on average, much more than volume shipped, which is up 2.1%

07/14/2022


Cargo handling in Paranaguá: exports of soybeans, meal and oil remained at top of export list — Foto: Divulgação/Claudio Neves/Portos do Paraná

Cargo handling in Paranaguá: exports of soybeans, meal and oil remained at top of export list — Foto: Divulgação/Claudio Neves/Portos do Paraná

Brazil’s agricultural exports remained strong and yielded $15.7 billion in June, up 31.2% year-over-year, according to data from the Secretariat of Foreign Trade (Secex) compiled by the Ministry of Agriculture. The ministry says this was a new record, once again influenced by the high prices of commodities in the international market.

In a note, the ministry stressed that while it dropped 4.7% between May and June, the World Bank’s food price index rose 22.8% in June year-over-year and that a similar move was seen in the food price index calculated by FAO, the UN’s food and agriculture branch. “In other words, despite an apparent slowdown in food inflation, as captured by both indices, international prices remain at very high levels.”

In the case of Brazilian agricultural exports, prices rose 28.5% year-over-year on average – much more than the average volume shipped (2.1%) – which ensured the announced result. As imports grew 19.8% in this comparison, to $1.5 billion, the sectorial surplus increased by 32.6% and reached $14.2 billion last month. As for imports, the highlight was the 187% growth in fertilizer purchases, to $3.3 billion, due to a 17.5% increase in volumes and a 144.4% higher average price.

The exports of soybeans and soybean products (meal and oil) remained at the top of the export list. Shipments increased by 31.9% in June, to $8.1 billion. “Because of the smaller harvest in 2022, soybean exports retreated to 10.1 million tonnes from 11.1 million tonnes in June 2021 (-9.2%). The 34.4% increase in the soy price, however, allowed for an expansion of 22.1% in the exported value of the oilseed, which reached a record $6.32 billion for the month of June,” the ministry said. China was the destination of 64.5% of the raw material exports, even with a drop of 8.2% in purchases compared to June last year.

Brazilian meat shipments (beef, chicken, and pork) totaled $2.4 billion in June, up 32% year-over-year. Beef shipments grew 36.9%, to $1.1 billion, and China was also the leading purchasing country, with 65.9% of the total value. Chicken sales, also driven by China, increased 46.7% to $932.1 million, a record for June, while pork sales were 19.1% lower ($216.6 million).

Among the other groups of products most exported by the Brazilian farmers, forest products increased by 23.1%, to $1.5 billion, sugar and ethanol advanced by 0.3%, to $1.1 billion, and coffee rose 73.6%, to $788.7 million. In total, China was the destination of 36.3% of the revenue from Brazilian agricultural exports in June, or $5.7 billion.

Thus, in the first half of the year, Brazilian agricultural exports reached $79.3 billion, 29.4% more than in the same period last year. Imports grew 8.5% in comparison, to $8.1 billion, and the surplus was 32.3% higher ($71.2 billion).

From January to June, shipments of soybeans and soybean products increased by 30.1%, to $37.8 billion; meat products climbed 35.3%, to $12.2 billion; forest products rose 29.1%, to $8.3 billion; sugar and ethanol declined 6.9%, to $4.3 billion, and coffee exports were 55.5% higher ($4.6 billion). In the first half of the year, China absorbed 35.6% of Brazilian agricultural exports ($28.3 billion).

*By Fernando Lopes — São Paulo

Source: Valor International

https://valorinternational.globo.com/

Study evaluates chances of partnerships to prosper in 26 countries

07/14/2022


Study compares countries based on 106 indicators, grouped into five categories — Foto: Fernando Martinho/Valor

Study compares countries based on 106 indicators, grouped into five categories — Foto: Fernando Martinho/Valor

Brazil tops an Inter-American Development Bank (IDB) survey on the environment for public-private partnerships (PPP) in Latin America. Conducted with the Economist Intelligence Unit (EIU), the study “Infrascope LAC” evaluated, for the first time, the chances of such initiatives prospering in each of the 26 countries in the region.

This is the seventh edition of the ranking. However, because it is the first conducted with updated methodology and with all Latin American countries, it is not comparable with previous editions. In 2019, in the last edition, Brazil was ranked 16th out of a total of 21 nations surveyed.

“Public-private partnerships represent a great opportunity to expand markets, generate jobs, contribute to economic recovery and growth in Latin America and the Caribbean, as they foster sustainability, efficiency, and innovation,” said IDB President Mauricio Claver-Carone.

In all, the study compares the countries based on 106 indicators, grouped into five categories: regulation and institutions; project preparation and sustainability; financing; risk management and contract monitoring; and performance and impact evaluation. From a 0 to 100 score, Brazil reaches 76.3 points, slightly above Chile, in second place, with 75.3 – the region’s average was 47.3 points.

Of these five categories, Brazil only does not lead the ranking in two: risk management and contract monitoring, where it loses the lead to Chile, and regulation and institutions, where it is twelfth.

“Brazil is one of the most active markets for PPPs in Latin America and the Caribbean, accounting for more than 40% of infrastructure investments of this type between 2011 and 2020,” the IDB points out.

The study lists four challenges for PPPs in Brazil: ensuring an appropriate division of risk between the private and public sectors, improving coordination between the different agencies involved, strengthening the legality of contracts, and implementing social and environmental evaluation mechanisms. The authors point out that the new biddings law, signed into law last year, is a step in the right direction, but “progress depends on its full implementation, which has been left until 2023.”

They also criticize the lack of clarity on compensation mechanisms for early termination or default of contracts, or on the characterization of force majeure, which represent a source of uncertainty for the private sector. “The case of the Linha Amarela concession in Rio de Janeiro, in which the government expropriated the concessionaire’s assets without a prior process, represents a warning point, although this type of occurrence is not common,” they point out.

The authors emphasize, finally, that the environmental and social issues are taken into account in the structuring of the projects, but are left out of the later stages of monitoring and evaluation of results.

*By Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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/

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/

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

https://valorinternational.globo.com/

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

https://valorinternational.globo.com/

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/