Contagion by past rate grows with official inflation at 10%, study shows
08/22/2022
Daniel Karp — Foto: Carol Carquejeiro/Valor
Inertial inflation is expected to strengthen in the coming months and start losing momentum only by February, according to a study by economists Daniel Karp and Felipe Kotinda, with Santander. Inertial inflation is the phenomenon by which past inflation feeds future inflation.
The current discussion in Brazil on the subject began last year, when price indices started to rise rapidly after the most severe period of the pandemic. Considering 12-month inflation readings, the Extended Consumer Price Index (IPCA), Brazil’s official inflation index, has been above 10% since September 2021.
“A major part of the discussion [about inflation] is focused on how commodity prices, exchange rates, inflation expectations, and the output gap [a measure of economic slack] will drive the disinflation process,” the economists wrote.
“However, inertia plays an important role in inflation dynamics and is usually an overlooked driver,” they wrote. They also point out that in emerging countries inertia is “particularly” more important for price-setting policies than in developed countries.
Santander’s economists have created their own indicator to outline the scenario for inertial inflation. According to them, although it is used as a kind of proxy for inertial inflation in Brazil, services inflation does not include items that also have a high connection with the previous variation of prices, such as health insurance. Thus, services account for almost half of the lender’s indicator, but industrial goods, food at home, and regulated prices also enter the calculation.
According to Santander’s calculations, in July this year, the 12-month indices of services and inertial inflation were 8.88% and 9.51%, respectively.
The economists project that the trajectory of services prices will be around 9% until April next year. On the other hand, the inertial inflation indicator should “continue rising until a peak of 10.3% in February 2023.” “By the second quarter of 2023, we expect both will decelerate, both ending 2023 at around 6.3%.”
In the 12 months through July, the IPCA stood at 10.07%. Currently, to conduct the key interest rate Selic, the Central Bank must pursue the inflation targets for 2023 (3.25%) and, to a lesser extent, 2024 (3%). In both cases, there is a tolerance range of plus or minus 1.5 percentage points. But to “smoothens out the primary effects from tax changes” made by the federal government and Congress, the Monetary Policy Committee (Copom) has decided at the meeting earlier this month “to emphasize the projections for 12-month inflation in the first quarter of 2024.” For this period, the monetary authority projects a price trajectory of 3.5%.
In its latest minutes, the Copom said that “the components more sensitive to the economic cycle and monetary policy, with higher inflationary inertia, continue above the range compatible with meeting the inflation target.”
Economy Ministry sees risk of high default, vicious circle for borrowers
08/22/2022
Ronaldo Bento — Foto: José Cruz/Agência Brasil
The offer of payroll-deduction loans for beneficiaries of the cash-transfer program Auxílio Brasil, one bet of President Jair Bolsonaro (Liberal Party, PL) to draw low-income voters, is rejected by the country’s largest private-sector banks and faces resistance within the federal government as well. So far, even medium-sized lenders, which are more reliant on payroll-deduction loans, say they are unlikely to offer them.
In the past two weeks, banks such as Itaú Unibanco, Bradesco, and Santander have said that they will not offer the line because they consider that the target audience of Auxílio Brasil is a vulnerable one. There would be potential risks to the business and damage to their reputation. Sources say that public rejection by these lenders caused concern in the government, which now foresees that the measure will have a smaller scope. Still, there is no intention, for the time being, to postpone the launch of the credit, scheduled for early September.
Before the rejection of large banks, Citizenship Minister Ronaldo Bento advocated the measure and confirmed last week that the launch will not be delayed. He responded to critics by saying that the government’s goal is to “democratize access to formal credit” and that 17 lenders had been approved to work with this type of credit.
The ministry did not reply to several requests since Wednesday to provide this list of banks.
Not even among government officials is there a consensus on the measure. One source said that, after weighing the positive and negative aspects, the Economy Ministry preferred not to participate in the project. “We do not oppose it. We just don’t see great benefits,” the source said. The positive side is that “some people understand” that the measure can represent an exit door, through micro-entrepreneurship, for the program’s beneficiaries. “Someone can buy a popcorn cart and go into business,” he said.
However, the ministry considered that the high risk of default makes the rates too high, with chances of creating a vicious circle. “Families can get very indebted, and the Justice will evaluate, for example, that banks cannot collect the installments,” the source said, adding that something similar “already happens with retirees.” The Economy Ministry declined to comment.
Banks, which were not plaintiffs in the lawsuit, point out that there are many risks, including to their reputation because by offering such a line of credit, people could think that lenders are exploiting those living on the poverty line. There is also a legal risk, as borrowers may go to the courts to undo their contracts, claiming that they need the income for subsistence. Another risk is that of continuity, considering that, in theory, the Auxílio Brasil program will pay R$600 only by December.
Lenders fear the high credit risk, too. Besides not being able to prove other sources of income, beneficiaries of social programs are often underbanked, so banks do not have data on their payment history, for instance. “Credit risk is very high, which means that for the operation to be worthwhile for the bank, it would have to charge a huge interest rate. This is impractical. What if the person loses the benefit? It is very controversial,” a source in the industry says.
Under the new law, those included in the Auxílio Brasil program will be able to borrow up to 40% of the monthly benefit. This means that those who receive R$600 can pay installments of up to R$240 per month. The term is limited to 24 months and there is no limit to the interest rate charged. Valor Investe, Valor’s website for investors, reported last month that ads on the websites of some banks and social media offered loans of R$2,000 and R$2,500 with rates of 5.63% and 5.91% per month – nearly 100% interest per year.
“This is not the right product for a vulnerable audience, so the bank preferred not to offer it,” Itaú CEO Milton Maluhy Filho said in a conference call.
Bradesco CEO Octavio de Lazari Jr. went in the same vein. “It means a very high interest rate, and people will receive the aid for a defined period, so we think it is better not to offer it because we are talking about vulnerable people,” he said. Santander, another large private-sector bank operating in Brazil, said in a note that “it does not offer payroll-deduction loan for beneficiaries of Auxílio Brasil.”
Among the smaller banks, Pan and Agi are also expected to join. State-owned banks Caixa Econômica Federal and Banco do Brasil are expected to offer the line of credit, but are still studying it technically and evaluating risks.
“We are doing an analysis on how it will be implemented. It will be a technical decision,” Banco do Brasil CEO Fausto Ribeiro said in an interview after the release of the quarterly results.
Last Thursday, Caixa’s chief financial officer Rafael Morais told Valor that the bank will offer the line of credit to the beneficiaries of the social program – especially because these people are already its customers – and that it will offer the lowest rates in the market.
When asked about the interest rates charged, he said that this is still under study. “We don’t have any guidance from the President of the Republic. Our decision is extremely technical. We are still waiting for these loans to be regulated, but we expected to participate. We still don’t know what the interest rates will be, and every approval of new products goes through the bank’s governance, through committees,” he said.
Other smaller banks told Valor they are unlikely to join. “We are still thinking about it. We haven’t made a decision. It is a new product. But if I had to say, we are more likely not to offer this product than to offer it,” Banco Inter CEO João Vitor Menin said.
Daycoval has not yet made a definitive decision, but chief investor relations officer Ricardo Gelbaum said that the bank is not very excited about it. “The board and the management team are seeing the movement, but we are not very excited. I don’t see much excitement in the internal discussions of the bank,” he said in a recent interview.
Agi says that the measure represents access to credit for millions of Brazilians who need money for some project or even for basic needs. The bank says it is “an important mechanism for financial inclusion.” Pan, on the other hand, said that it is getting ready for the line of credit. “At the moment, any activity is limited to the discussions about the lines.” The decision to offer the line of credit “is subject to the effective regulation by the authorities and other applicable legal, administrative and operational provisions,” the bank said.
The Brazilian Federation of Banks (Febraban) said in a note that, after the regulation, it is up to each lender to offer or not the line according to its business strategy. “Some large banks have already announced that they will not offer it,” it says. “As with other types of credit, the offer will be evaluated by banks and borrowers in order to prevent over-indebtedness.”
*By Guilherme Pimenta, Álvaro Campos, Estevão Taiar — Brasília, São Paulo
Covid-19 pandemic, last year’s booming revenues helped improve expenditure by 12.4%
08/19/2022
Ursula Dias Peres — Foto: Silvia Zamboni/Valor
The various and successive extraordinary conditions that have marked the current term of office of governors — such as the Covid-19 pandemic and last year’s surprising tax revenues — resulted in a larger share of state spending for education and health in the first half of 2022 while security and social security expenses lost space. Driven by higher investments in an election year, areas linked to infrastructure, such as transportation, urban planning, housing, and sanitation, also grew. In the general scenario of the 26 states and the Federal District, the highlight is social assistance, which has small participation but expanded at an accelerated pace under the effect of income transfer programs that states started to offer to mitigate the social impact of the health crisis.
A survey by the Center for Metropolitan Studies (CEM), a public think tank run by the University of São Paulo, shows that the fiscal situation of the states favored public policies in the first half of the year. The technical note produced by Ursula Dias Peres and Fábio Pereira dos Santos indicates, however, that in addition to the deficit in the demand for services in several areas, the recent reduction in sales tax ICMS rates in important collection sectors brings uncertainties for the second half of the year and the future sustainability of the favorable picture of the first half of the year.
Health and education combined absorbed R$133.09 billion in state spending from January to June this year, with a real increase of 12.4% against the same months last year and 16.5% compared to 2019. These expenditures include personnel, costs, and investments. The total expenses of the states, discounting compulsory transfers, grew at a much slower pace, of 6.1% and 6.2%, respectively. The faster-than-average pace made the combined share of health and education improve from 27.6% to 30.3% of total expenses from 2019 to this year, also considering the first half. They considered the expenses paid, with values updated by the benchmark inflation index IPCA. The data were taken from the fiscal reports submitted by the states.
In the same period, security, which reached from January to June this year spending of R$46.6 billion and a share of 10.6% of total spending, lost 0.6 percentage points of share against equal months of 2019. The share of the most representative of the functions, Social Security, was also reduced to 22.9% from 24.1%. States spent R$100.37 billion in the first half of this year.
The salary hikes, the initial projections of higher sales tax ICMS collection for 2022, and the compensation for expenses that have already fallen in 2020 contributed to the advance of 24.9% in real spending on education in the first half of 2022 against the same period last year considering all the federated entities, said Ms. Peres, who is a professor of public policies at the University of São Paulo’s School of Arts, Sciences and Humanities. She also recalled that states that did not meet the constitutional minimum of 25% of revenues in 2021 must do so by 2023, which drives spending on education this year.
In health, the expenditure from January to June 2022 advanced only 0.7% compared with the same months last year. The area, however, has a high base of comparison as spending has been boosted since 2020 because of the health crisis. The total increase since the first half of 2019 was 17.5%. Mr. Santos, a researcher associated with CEM, evaluates that health is expected to continue presenting real expenses above the pre-pandemic level at least in the next few years, due to services that began to be offered and that generated new demands. Ms. Peres also highlights the additional demand for public health services generated by the demand restrained during the pandemic and by the patients with sequelae of Covid-19. There is also the effect of investments in health facilities, which generate annual current expenses of up to 90% of the value of the work, as is the case of hospitals, she said.
The evolution of spending on social security and security, on the other hand, was diverse. Although with a real increase of 2.9% from January to June of this year in comparison to the same period last year, social security spending was only 0.9% above that of the first half of 2019. The reduction in the share of pension spending, Mr. Santos points out, was generally not due to structural measures such as pension overhauls. The stagnation of spending, he says, is related to the restrictions of Complementary Law 173, which in 2020 limited hiring and salary increases to civil servants in return for extraordinary transfers to tackle the effects of the pandemic. The effect is explained because there is still a strong link between the salaries of workers and retirees.
The same restriction, says Mr. Santos, weighed on security, whose spending increased 4.9% this year, in real terms, compared with 2021, with an increase of only 0.6% compared to 2019, also considering the first half of the year. For Ms. Peres, the restriction on hiring also weighed on security, which probably did not have staff personnel replaced in all states.
The areas related to investments in infrastructure also drove state expenses. Altogether, the areas of housing, sanitation, transport, and city planning reach expenses of R$25.28 billion in 2022, up 72% year-over-year and almost doubling the R$12.99 billion in 2019. The four areas together grew to 5.8% this year from 3.1% of total expenditures in 2019, keeping the comparison from January to June.
The performance reflects in part the evolution of total investments, which advanced to 6.5% from 1.9% of total spending over the same period. From 2019 to date, investments jumped to R$31.4 billion from R$8.6 billion. Compared to the previous year, with investments affected by the elections, spending almost tripled, also considering values adjusted by the IPCA.
Lot with airport in São Paulo and other 10 was auctioned for R$2.45bn; Aena was the only interested buyer
08/19/2022
Main lot includes São Paulo’s Congonhas airport and 10 others in Mato Grosso do Sul, Minas Gerais, and Pará — Foto: Edilson Dantas/Agência O Globo
Brazil’s new round of airport auctions had little competition and was market by XP Asset’s debut in the industry. The main lot, which includes São Paulo’s Congonhas airport and 10 others in Mato Grosso do Sul, Minas Gerais, and Pará, was won by the Spanish company Aena. Despite the lack of competitors, Aena placed a bid of R$2.45 billion, or 231.02% over the minimum price.
Besides this initial payment, variable payments are foreseen throughout the contract, equivalent to a percentage of the gross revenue, which will reach 16.15% as of the ninth year of the concession.
Capital expenditure of R$5.9 billion is foreseen in the lot, in a 30-year concession. According to the feasibility studies, the forecast for passenger traffic in the lot in 2023 is 24.7 million. The projection for 2052 is 37.5 million passengers.
Besides crown jewel airport Congonhas, the lot includes the airports of Campo Grande, Corumbá, and Ponta Porã, in Mato Grosso do Sul; Santarém, Marabá, Parauapebas, and Altamira, in Pará; Uberlândia, Uberaba, and Montes Claros, in Minas Gerais.
Aena joined the Brazilian market by winning an auction to operate six airports in the Northeast region in 2019 – with fierce competition at that time. Today, the company operates terminals in Recife (Pernambuco), Maceió (Alagoas), João Pessoa (Paraíba), Aracaju (Sergipe), Juazeiro do Norte (Ceará), and Campina Grande (Paraíba). The company plans to reach an investment figure of R$1.4 billion by the end of 2023 in these assets. Globally, the group operates 46 airports in Spain (including Barajas, in Madrid), one in the United Kingdom (London-Luton), 12 in Mexico, two in Colombia, and two in Jamaica.
The operator is controlled by the Spanish government, which holds a 51% stake. The remaining shares are traded on the stock exchange.
In the business aviation lot, the winner was the infrastructure fund XP Infra IV FIP, which took the airports of Campo de Marte, in São Paulo, and Jacarepaguá, in Rio de Janeiro. The group, which was the only interested buyer, placed a bid of R$141.4 million for fixed concession payment, the minimum amount foreseen in the call for bids.
The move meant the entry of XP Asset into the industry. The asset management company signed a partnership with the French company Egis, which had already participated – not very successfully – in the airport concessions market in Brazil. The company holds a 2.94% stake in Aeroportos Brasil Viracopos, which controls the airport of Campinas (São Paulo), together with companies Triunfo and UTC. Today, the contract is on its way to being returned amid a turbulent process. In January this year, the French group was joined by the fund Tikehau Capital, which holds now a 40% stake. The French state-owned company Caisse des Dépôts, which previously held control of the company, now holds 34%. The remaining 26% portion is held by executives and employees.
The only lot that attracted competition was the North one, which includes the airports of Belém (Pará) and Macapá (Amapá) and foresees investments of R$875 million in construction works. The Novo Norte consortium (Socicam and Dix Empreendimentos) won the bidding, after a long dispute through an open outcry auction. The company offered a fixed concession payment of R$125 million, or 119.78% more than the minimum value defined in the call for bids.
The company beat Vinci Airports, which offered R$115 million, or 102.19% more than the minimum value.
The 30-year contract foresees a capital expenditure of R$875 million. Besides the fixed concession payment offered in the auction, there will be variable fees starting in the fifth year of the concession. The percentage will reach 7.09% starting in the ninth year of the contract.
The airports included in the lot are expected to draw 4 million passengers in 2023. Passenger traffic is projected at 9 million in 2052, according to feasibility studies.
Socicam, which runs bus terminals, has started operating smaller airports in recent years and today controls 24 facilities in seven states. Pernambuco-based Dix Empreendimentos is already working in partnership with Socicam in the concession of 11 regional airports in São Paulo, won at an auction last year.
Monetary authority’s autonomy law foresees fixed four-year terms for president and directors with one reappointment
08/19/2022
Roberto Campos Neto — Foto: Billy Boss/Câmara dos Deputados
Central Bank President Roberto Campos Neto said he will not accept a new term after 2024. “When the autonomy rule was made, I was against reappointment. I wanted to remove it from the bill,” he said Thursday at an event held by BTG Pactual.
“I think that it is not healthy because it creates fragility in the middle of the term because there will be a Central Bank president interested in being reappointed who will be exposed at that moment to the will of the Executive branch. Other countries go through this, and I don’t like it, I don’t think it is good. So the answer to the question is I do not [want it].”
The Central Bank’s autonomy law provides for fixed four-year terms for the president and directors, with one reappointment. Thus, Mr. Campos Neto must hold the post until the end of 2024 and could have the term extended until 2028.
In the event, Mr. Campos Neto made it clear that the change in the monetary authority’s focus on inflation over the relevant horizon will not be permanent. According to him, when uncertainty decreases, the policymakers will go back to considering the full-year index.
In its last decision, the Central Bank’s Monetary Policy Committee (Copom) emphasized the 12-month inflation in the first quarter of 2024, projected at 3.5%, and not the full-year index. According to the statement, the period “reflects the relevant horizon, smoothens out the primary effects from tax changes, but incorporates their second-round effects on the relevant inflation projections for monetary policy decisions.”
Mr. Campos Neto stressed that calibrating the Copom’s statements is the main challenge in an uncertain environment. “We have different estimates [in the market] about how much [of the government’s tax cut] was going into the following year. In the time dimension, everyone was sure it would come back in the first quarter [of 2024]. We found it easier to act on the when,” he said.
The central banker highlighted, however, that this is a one-off change and does not mean a change in the “inflation target.” “We made it clear that we are talking about the relevant horizon and not the target. We had to adapt our reaction function. It is not permanent, it is temporary,” he said.
Mr. Campos Neto also said that Brazil is the only country where the market is pricing a drop in interest rates. “It means that agents understand that much of the [monetary policy] work has been done.”
The executive highlighted that inflation is still quite pressured in Brazil, but that the regulated price index shows the impact of the government’s measures, which reduces prices in the short term. “Food at home is still high and so are services,” he said.
In his view, the tax cuts this year should generate inertia for the coming years, but it is necessary to “understand what is structural.” “We are starting to see better news [on inflation], as in the diffusion part. We think that there is inertia for next year, but there is uncertainty,” he said.
As for the economic activity, he emphasized that the market has revised upwards the projection for this year due to the government’s expansionary policy, but also due to the better-than-expected performance of some sectors. “Our projection is a little above 2%, it should come out soon,” he said. In the most recent quarterly inflation report, the Central Bank estimated a growth of 1.7%, and this figure will be revised in the September document.
Prices estimated for December show that Brazilian wheat will be among the most expensive in the world
08/18/2022
Even with the prospect of a record wheat harvest and supply problems in the Northern Hemisphere, Brazil is unlikely to gain ground in the international market. This is because the prices estimated for December – when the current crop will have been harvested – show that Brazilian wheat will be among the most expensive in the world. This scenario seems bad for exporters, but does not bring tranquility to the domestic market either.
A study by consultancy T&F shows that the estimated price for Rio Grande do Sul wheat in December is R$102 a bag, while the FOB price (arriving at the Port of Rio Grande) will reach $385 a tonne, taking into account transportation costs and the foreign exchange rate at R$5.08 to the dollar. Luiz Carlos Pacheco, an analyst and partner at T&F, said that, at this price, the Brazilian wheat would reach Algeria, which is a major buyer, at $465 a tonne, above the prices of wheat produced by Argentina ($450), Canada ($416), United States (durum, $408), France ($383), and Russia ($315).
“This means that, in order to export, the price paid to the farmer should be R$88 a bag, something unimaginable given the high production costs,” he said. Therefore, the large Brazilian harvest, estimated by the National Supply Company (Conab) at more than 9.2 million tonnes, should be almost fully distributed in the domestic market.
Despite the larger harvest, Mr. Pacheco does not see a sharp drop in the prices of wheat and its products in Brazil. “It’s off-season now, so it would be natural for prices to rise and then fall again as of October. But farmers are flush with cash and I don’t see any of them interested in getting rid of their production at the current price,” he said.
At the same time, the mills accelerated their work until April and May in view of the strong demand and the war in Ukraine and managed to supply wholesalers and retailers. “It seems that everyone is overstocked, which would clearly indicate falling prices. But this is not happening because costs have gone up so much and margins have become so tight that no one wants to negotiate at lower prices,” he said.
Daniel Kummel, the head of Paraná’s wheat industry union (Sinditrigo-PR), said that the Brazilian grain market has always been detached from the Chicago exchange, which is the international benchmark. But after the Covid-19 pandemic and the war in Ukraine, there is a 90% correlation. “We started to export and that took us to the international market,” he said.
According to him, whose trade union represents 67 mills in the state, companies are really stocked up and working far from total capacity to wait for information about the harvest. “A cold front, with frost, as is forecast for next week, can compromise the Paraná harvest and hold up prices,” he said. “The mills are waiting to close new contracts with doubts about demand, costs, and prices.”
The only hope for any drop in wheat prices in the domestic market is the arrival of the summer harvest and the impossibility of producers to store soybeans and corn where the grain is. “Supply or demand will not bring down prices. Farmers will,” the analyst said.
Considering the prices that reach consumers, wheat rose 27.47% in the year to July, while baked goods including breads, cakes, and cookies saw an increase of 15.54%.
Wheat crop in Paraná: production costs help keep price high — Foto: Dirceu Portugal/Fotoarena/Agência O Globo
Consortium, which won its second concession in Minas Gerais, plans to study new assets
08/18/2022
Equipav, a group with interests in a range of sectors including infrastructure and mining, and asset management company Perfin plan to develop together a highway concession platform in Brazil. The partnership started with two concessions in Minas Gerais, but there are plans to study new assets.
The consortium formed by the two companies won on Wednesday the auction to build the Sul de Minas lot through a public-private partnership (PPP). Last week, the group had already won a road concession in the region known as Triângulo Mineiro. The idea is that, from now on, the partnership will be consolidated, said José Carlos Cassaniga, director at Equipav Rodovias.
“The idea is that Equipav and Perfin will now look at the road concession industry together, on this platform, with a qualified look, and with capital discipline. This is our purpose,” he said. “It is a partnership that complements each other.”, he said.
In the auction of the Sul de Minas Lot, the consortium beat the offer of its only competitor, Monte Rodovias, after an open outcry auction. It ended with a final ended with a proposal of R$378 million, or a discount of 14% over the maximum payment defined in the public notice.
The lot includes 454.3 kilometers of roads. The estimated investment is R$2.3 billion, and operating expenses are estimated at R$2.3 billion more over the 30-year contract period. The Triângulo Mineiro Lot, won last week in a non-competitive auction, includes 627 km of roads and foresees R$3.2 billion in construction work.
The two lots will allow some synergies in the administrative field and contract management, Mr. Cassaniga said. “It is the same regulation, the same government.”
The auctions mark the debut of Equipav and Perfin in the highway sector. Equipav is a shareholder of Aegea Saneamento and has worked in highways in the past. Perfin was already active in the infrastructure sector, but the areas of electricity and basic sanitation. The asset management company has more than R$23 billion under management, of which about R$6 billion are allocated to infrastructure funds.
The auction ends the sequence of three road auctions started last week by the Minas Gerais government. In addition to the two lots, the Belo Horizonte beltway was auctioned – and won by the Italian company INC.
By the end of this year, the Minas Gerais government plans to launch other concession projects, said Fernando Marcato, the state’s infrastructure, and mobility secretary.
One concession is that of the Belo Horizonte subway, to be held in partnership with the federal government. The secretary said he will be in Brasília on Thursday to meet Federal Court of Accounts (TCU) members Vital do Rêgo (rapporteur of the auction process) and Antônio Anastasia. “There is already a favorable opinion from TCU officials. If the court greenlights the project, and we expect it to do so, we can launch [the bidding] later this year, maybe in a month,” he said.
In the segment of highways, the government is working on three other projects. One of them, the BR-356, which will link Belo Horizonte and Ouro Preto, will require a public contribution. The funds may be unlocked by the compensation agreement being negotiated between the state and mining company Vale linked to the damage caused by the Mariana dam collapse.
There are still four other lots being structured in partnership with the Brazilian Development Bank (BNDES). Investment values will be updated accordingly to the new input inflation scenario. The big challenge, according to the secretary, is in drawing investors.
Company mulls deals in renewable power; CEO Marcos Lutz says operational efficiency is a priority
18/08/2022
Marcos Lutz — Foto: Claudio Belli/Valor
Grupo Ultra, one of the largest companies in Brazil, will focus on putting its house in order and then return to growth after raising about R$8.5 billion by selling two of its main businesses. The highly anticipated arrival of CEO Marcos Lutz is seen by the market as the turning point for the group that owns the gas station chain Ipiranga, LPG distribution company Ultragaz, and liquid bulk storage company Ultracargo.
For those betting on a more aggressive expansion drive, however, Mr. Lutz said efforts are concentrated on management and process improvement for now. “The goal is to end 2022 with better operational efficiency than at the beginning of the year,” the executive told Valor in his first interview after taking office.
He returned to the group last year as a shareholder in the company’s controlling group and joined Ultra’s board of directors in April 2021. Next year, he will replace Pedro Wongtschowski as the company’s chair.
Large mergers and acquisitions are not in the group’s plans for now. This does not mean Ultra is not analyzing business opportunities. The group is capitalized after selling, in recent months, its pharmaceutical retail division Extrafarma, the specialty chemicals business Oxiteno, and a 50% stake in the electronic toll collection company ConectCar.
The group is in talks over a potential partnership with a renewable power company through Ultragaz, sources say. Ultra still has a small operation in this segment with the sale of retail power in two states.
Mr. Lutz declined to comment on possible expansion moves through acquisitions. The company plans to get back into the M&A game later on, with the confidence that the balance sheet is strong enough to absorb potential deals.
The executive says there is also room for the arrival of partners in current operations or new businesses, but would not say if there are talks underway. “In the future, I see the group having partners in businesses that create value beyond the financial value,” he said.
In the executive’s view, the three current businesses – infrastructure and logistics (Ultracargo), energy (Ultragaz), and fuel distribution (Ipiranga) – still offer growth possibilities. It would make sense for Ultragaz, for instance, to join the power commercialization market, benefiting from the LPG company’s robust customer base.
The refineries put up for sale by Petrobras are not totally out of the plans, but there is much work to be done internally, especially at Ipiranga, before seeking large deals, the executive said. Ultra was very close to buying Refinery Alberto Pasqualini (Refap), in Rio Grande do Sul. Mr. Lutz said that Ultra analyzed the assets of the petrochemical company Braskem as well, but the return on capital was not so attractive.
With irregular performance in recent years, the fuel distribution company is the group’s largest business, and also its Achilles’ heel. Because of inadequate supply and pricing strategies in the past, Ipiranga is behind its main competitors Vibra (formerly BR Distribuidora) and Raízen (a joint venture between Cosan and Shell) in terms of margins. The Covid-19 pandemic, which brought down the demand for fuels, widened the gap.
The recovery trajectory has already started and the group projects that this gap will be bridged by the end of the year. Analysts covering the group, however, believe that this work may take longer and continue in 2023.
The executive acknowledged that it is necessary to deal with the natural anxiety of investors for the long-awaited turnaround of the group. “There is a lot of questioning about what opportunity is going to emerge. Refinery is not an object of desire, but an opportunity,” he said.
“You have to separate shareholders into two categories: those who think more in the short term (stock market investors) and those who think in the long term (of the controlling group),” he said. According to him, the shareholders of the company’s controlling group want operational quality, support inorganic expansion, and are somewhat conservative. In his view, Pátria, a fund that is a partner in the company and is also in the controlling group, is in the middle of the road. “They seek operational efficiency, but [support] projects that create value,” he said.
Mr. Lutz said he has not faced resistance from the oldest shareholders in the group – which is about to turn 85. “There is a process of [management] change indeed, but there is no resistance. I was raised here, I started as a trainee and was a manager at Ultracargo.”
After leaving Ultra, Mr. Lutz went to CSN, owned by Benjamin Steinbruch, and then was one of the main executives of the Cosan group, owned by Rubens Ometto Silveira Mello. While in Cosan, Mr. Lutz led important changes in the company, which was originally a sugar-and-ethanol company, and later became one of the largest fuel distributors in the country and an infrastructure company.
With the return of Mr. Lutz as a shareholder and CEO since earlier this year, the market expected that he would start a revolution. And high interest rates in Brazil mean a tailwind for the company’s short-term strategy, in his view.
With rising rates, it is not bad to be deleveraged, Mr. Lutz said. In June, leverage measured by the net debt-to-EBITDA ratio had already dropped to 2.2 times, compared with 3.1 times in the previous quarter, thanks to the proceeds from the sale of Oxiteno and the better operating result.
“After such a deleveraging, we will discuss the group’s pipeline,” he said. The proceeds from the sale of assets, which account for more than half of the group’s current market capitalization of just over R$15 billion, were expected to finance the strategy of focusing on the energy and infrastructure sectors and the purchase of Refap. As the deal with Petrobras fell apart, the funds will be partly directed to reduce indebtedness.
UBS has a positive view of Ultrapar, which has become “a new company after the sales of Oxiteno and Extrafarma and by completing the succession planning,” UBS analysts Luiz Carvalho, Matheus Enfeldt, and Tasso Vasconcellos wrote in a report this week.
According to the bank, the next step is the election of the new board of directors, in April, to prepare the group for the next two years. “The composition of the board is key to provide the necessary support for the capital allocation journey and potential diversification that will follow,” they highlighted. UBS has a buy recommendation for the company, with a target price of R$18 in 12 months. The company was traded at R$13.7 on Wednesday’s close.
According to the original plans, Mr. Lutz would not take over the company. “I didn’t come to Ultra to be CEO. I came to be a partner, that was the initial invitation,” he said. No eye like the master’s eye.
*By Stella Fontes, Ivo Ribeiro, Mônica Scaramuzzo — São Paulo
Moderna, Pfizer offer shots to fight both original virus and omicron variant
18/08/2022
U.S.-based drugmaker Moderna and Zodiac, its partner in Brazil, started March contacts with health regulator Anvisa with the intention of making a new vaccine available in the country at the beginning of 2023. Pfizer is also working to bring to the Brazilian market its shots with updated formula and expects to file a request for authorization with Anvisa this month.
The two laboratories have developed for the global market the so-called bivalent vaccine, designed to attack the omicron variant, which has become dominant in several countries including Brazil, and also to tackle the original strain of the coronavirus. So far, all vaccines used in the world are based only on the original strain. The bivalent shot, however, promises to be more effective.
This week, the United Kingdom became the first country to approve Moderna’s bivalent vaccine for use as a booster dose as autumn approaches in the Northern Hemisphere. The company’s new shot is being reviewed by health authorities in the United States, Canada, Australia, and in European and Latin American countries.
Moderna and Pfizer work with messenger RNA technology. Unlike the technology that inoculates the attenuated or inactivated virus into the body, they “teach” the body to synthesize a protein that stimulates the immune system to respond to the virus. This technology also allows vaccines to be updated more quickly.
Pfizer’s conventional Covid vaccine has already been used in Brazil since last year, as have those from AstraZeneca, Janssen, and Sinovac/Butantan. Pfizer’s bivalent vaccine would therefore mark the second stage in the company’s activities in Brazil to fight Covid-19.
In Moderna’s case, once the company has Anvisa’s approval to commercialize its Spikevax Bivalent vaccine, it will be its debut in the Brazilian market.
To operate in Latin American countries, Moderna signed in February a partnership with the Uruguay-based pharmaceutical group Adium. By the agreement, Adium became Moderna’s operational arm in the region, responsible for the registration request with the health authorities, for the logistics, for the information work to physicians, and for the dialogue with the health ministries. In Brazil, the operation is run by Adium’s subsidiary, Zodiac — which has been operating in the country for 31 years.
Alexandre Seraphim — Foto: Silvia Zamboni/Valor
“We are moving fast. It is a very complex process that involves state-of-the-art technology. Anvisa is one of the best regulatory agencies in the world and, therefore, a very demanding one,” Alexandre Seraphim, general manager of Zodiac in Brazil, told Valor.
“We have talked to Anvisa, received material from Moderna, and are preparing the documentation [of the new vaccine] to submit to Anvisa in the coming months,” he said. Mr. Seraphim says he is considering a scenario in which Moderna’s new vaccine will be available in Brazil by the beginning of 2023. “After the approval, the availability is fast.”
The executive said that the company has also already started talking with officials of the National Immunization Program so that Moderna’s vaccine is included in the federal program.
The vaccine Moderna plans to bring to Brazil will be aimed at those over 18 years old. Studies about the bivalent vaccine for children are still being carried out.
Moderna’s vaccines will come ready to use. Moderna has seven plants and more than 1 billion people have already been inoculated with the company’s traditional Covid vaccine in 70 countries. A vaccine that includes subvariants is on the plans for both companies.
Pfizer in Brazil said that it is considering submitting test data for its bivalent vaccine to Anvisa in the coming days. “We expect to file with Anvisa this month the adapted bivalent ComiRNAty vaccine BA.1 for regulatory evaluation,” the company said in a statement.
As for the arrival in Brazil of Pfizer’s bivalent vaccine, the company says this “estimate will depend on regulatory analyses, as well as definition with the Ministry of Health.” It added that “Pfizer’s vaccine supply contract in Brazil includes delivery of potential adapted vaccines and or for different age groups.”
Zodiac’s chief medical officer, the immunologist Glaucia Vespa, recalled what seems to be the dominant perception among health experts: despite a reprieve from the pandemic, the coronavirus will continue to circulate. “We are in a transition phase. We have the pandemic period, and we may have the seasonal period [of Covid-19]. Now we are living through that transition period,” she said. “And even though there may be discussions [about the evolution of the pandemic], Sars-Cov-2 is clearly here to stay.”
In Brazil, according to the Ministry of Health, 178.7 million people took the first dose and 159.9 million took the second one. The booster dose was administered to 104.7 million. The second booster dose, however, has reached a much smaller audience so far: 19 million. And the additional dose, only 4.8 million.
Brazil will continue vaccinating its population throughout 2023 – as will most countries. And manufacturers of the new bivalent vaccines see themselves in a more competitive condition to meet this demand next year.
Thiago Barbosa, head of vaccines at Zodiac, says that one vision for 2023 is that there will be a global positioning for a boost of bivalent vaccines. “I see a big challenge next year regarding vaccine availability for the whole globe, thinking of two companies that would be with ready-made vaccines that include the omicron issue,” he said. He added that the company has been working to meet this future demand from Brazil and the region.
“Brazil is the second-largest market in the world for vaccines, including Covid vaccines, by revenue. Brazil occupied the fourth position in the global scenario before the pandemic in the public and private-sector market and, with the pandemic, the country went up to the second position,” he said. “It is an extremely strategic country for any organization that wants to develop a vaccination platform.”
Debenture issuers seek creditors to review contracts
08/17/2022
The number of companies that have had to sit down with creditors has grown amid a worsening economic scenario and rising interest rates and inflation. This was made clear by the increase in the number of meetings of bondholders held in recent months. In most cases, the meetings between issuers and creditors were used to renegotiate the payment schedule and guarantees. Yet, there are also examples of non-compliance with the so-called covenants, or the restrictive clauses in contracts.
Considering only public companies, the number of calls for bondholders’ meetings has more than tripled. From January to July, 71 were called, while in the same period last year there were 22, according to a survey carried out by Valor based on documents sent to the Securities and Exchange Commission of Brazil (CVM). The scenario is the same in the field of private companies, trustees told Valor. These entities, whose activity is regulated by CVM, act as intermediaries in the relationship between bondholders and issuers.
“In 2020, we had that shock in the economy with the pandemic. Now we see the consequences very clearly, with companies in need of restructuring their debts, asking creditors to adjust to the new reality,” said Karolina Vangelotti, a partner and director at Pentágono. From January to July, Pentágono attended 656 such meetings. The number corresponds to almost 80% of those held in 2020. Last year, there were 1,097 in total.
Vórtx, another trustee, saw the number of meetings related to corporate debt increase 40% in the first half of the year, to nearly 100.
Eugenia Souza — Foto: Silvia Zamboni/Valor
One of the most common requests made by borrowers was the approval for changes in payment flow or rates, said Eugenia Souza, a partner and head of corporate trust at Vórtx. “We saw indexers skyrocket, which made debts more expensive. When looking at the cash flow, companies decided to negotiate, for example, to make semi-annual payments instead of monthly disbursements,” she said.
CVC and Metalfrio Solutions are examples of companies that managed to change the amortization and remuneration payment dates for bondholders in the first half of the year.
Requests for substitution of guarantees have become more frequent in the meetings. It is common, for example, that in the case of subsidiary issues, the debt is guaranteed by a suretyship from the parent company. With an eventual decrease in the holding company’s capacity to cover the debts of all its subsidiaries due to a decrease in dividends received, it has become necessary to exchange the guarantee for other security interests.
The fear of a decrease in the capacity to generate profit has also led companies to move before an eventual non-compliance with financial indicators. “They understand that they won’t have an EBITDA as previously projected and prefer to ask for a covenant exchange,” Ms. Ms. Souza said. “When the issuer has good faith, he prefers to negotiate rather than wait and see an acceleration of maturity.”
Of the meetings related to corporate debt with Vórtx’s participation in the first half of the year, almost 20% were for declaration of acceleration of maturity – of companies that failed to comply with the agreed terms and therefore had to pay what they owed earlier than planned.
Since companies don’t usually make a single issue and know that they will eventually tap the debt market again, having an acceleration of maturity can affect their reputation as good payers. “The company wants to come back to the market looking good, so there are people who get ahead of the curve and do the restructuring before they can’t deliver,” said Antonio Amaro, head of fiduciary services at Oliveira Trust.
ISA Cteep, for example, asked bondholders in March for a remission, considering the possibility that it would not be able to meet the agreed debt-to-equity ratio at the time of debt issuance. As justification, the energy company said it was studying potential asset acquisitions and that revenues had been affected by the Covid-19 pandemic. These factors could impact the financial statements and make it unfeasible or impossible to meet the target, the company said in documents.
From the investor’s standpoint, the economic uncertainty scenario imposed a more careful look on the compliance with what was agreed with the company at the time of issuance. “When everything is calm, investors are calm. When the payment is in the account every month, they usually forgive if the company delays a report, for example. In a crisis scenario, all monitoring becomes more rigorous. They want deadlines punctually met and begins to call more meetings,” Ms. Souza said.
According to the Brazilian Corporation Law, the meetings can be called either on the initiative of the issuers, the trustees, the CVM, or investors, if they represent at least 10% of the outstanding debt. The trustee has the obligation to attend the meeting and provide bondholders with the information they are requested to provide, according to the law.
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