Bunge, BP put joint venture up for sale

Abu Dhabi’s Mubadala fund, Raízen are among those interested in assets

08/09/2022

Bunge and BP created joint venture in 2019 — Foto: Divulgação

Bunge and BP created joint venture in 2019 — Foto: Divulgação

U.S.-based Bunge and British oil company BP have put up for sale the sugar-and-ethanol company BP Bunge Bionergia, a joint venture created by the two companies in 2019, sources say. With 11 sugar-and-ethanol mills and capacity to crush about 33 million tonnes, the deal attracted the interest of Abu Dhabi’s Mubadala fund and the giant Raízen, a partnership between Cosan and Shell, sources familiar with the matter say.

JP Morgan has been hired to advise on the sale of the company. The assets are valued between R$9 billion and R$10 billion, considering a price between $55 and $60 per tonne of crushed cane, according to a source in the sugar-and-ethanol sector.

This is not the first time that Bunge has tried to dispose of its sugar-and-ethanol business. Before creating the joint venture with BP, the U.S.-based agribusiness behemoth hired banks to sell assets in the sector.

The sale is still in the non-binding proposal phase, according to sources. In this phase, offers are received, but there is no exclusivity contract between the parties. Sources say any deal is unlikely to be cut before the elections, in October.

Initially, only Bunge wanted to sell its 50% stake in the business. In the last two months, however, BP has also decided to throw off its stake, people familiar with the matter say.

Raízen and Mubadala are said to be potentially interested in the whole business, but did not make an offer yet. The shareholders do not rule out selling the assets separately. The company’s mills are located in the states of Goiás, Mato Grosso do Sul, Minas Gerais, São Paulo and Tocantins, and have a crushing capacity of 32.4 million tonnes of sugarcane per harvest. In the harvest ending March 2022, BP Bunge Bioenergia’s net operating revenue totaled R$7.2 billion, with net income of about R$1.7 billion.

Raízen was among the groups interested in buying Bunge’s assets in the past, but the deal did not go forward. The largest sugar-and-ethanol company in Brazil, the joint venture between Cosan and Shell has a crushing capacity of over 100 million tonnes of sugarcane and 35 production units.

Last year, the group closed one of the largest M&A deal with the purchase of Biosev’s (formerly Louis Dreyfus) mills. Bunge and Louis Dreyfus, another giant in the sector, have made heavy investments in sugar and ethanol in Brazil, but have not obtained the return they expected from the deal.

Abu Dhabi’s sovereign wealth fund Mubadala is also looking at sugar-and-ethanol assets to verticalize its refining business in Brazil, sources say. Last year, the group bought the Landulpho Alves refinery (RLAM) in Bahia from Petrobras for $1.65 billion. The sovereign wealth fund raised earlier this year $322 million to invest in Brazil — last week, the fund made an offer for the control of the fast-food chain Burger King in the country.

BP and BP Bunge Bioenergia said they do not comment on market speculations. Mubadala, Raízen and JP Morgan also declined to comment.

In a statement, Bunge said it “continues to evaluate options to exit its participation in the sugar and bioenergy joint venture.” The company stresses in the statement that it is satisfied with the performance of the business, but the assets are not essential to the overall strategy of its business.

*By Monica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Banks wary of high cap for payroll-deduction loans

Total margin can reach 45%, compromising almost half of customers’ income

08/08/2022

Changes in payroll-deduction loans put in place by the law signed Wednesday by President Jair Bolsonaro (Liberal Party, PL) are still being analyzed by banks, but a cautious tone prevails because of the delicate moment of the Brazilian economy.

With the creation of a benefit card for this type of credit, the total margin can reach 45% in the case of retirees and pensioners, compromising almost half of customers’ income. Some banks are wary of this increased cap and are likely to put the new card on the shelf without actively offering it to customers. The possibility of offering payroll-deduction loans linked to social benefits, on the other hand, is rejected by virtually all private-sector banks. As a result, this type of loan is expected to be extended only by state-owned banks after the regulation is published.

The government says the measures are intended to “mitigate the effects of the economic crisis that hit Brazilian households during the pandemic.” However, they are also seen as part of the list of initiatives to help Mr. Bolsonaro’s reelection.

Among the largest lenders, there is still caution about whether to expand the margin to 45%. Only state-owned banks show some appetite, at first. Today, payroll-deduction loans total R$535.4 billion, including R$301.1 billion for civil servants alone. The default rate of these loans is 2.5%, compared to a rate of 3.5% in non-earmarked loans.

Banco do Brasil told Valor it is analyzing the possibility of increasing the margin through credit cards because it already operates with an extended margin of 35% for payroll-deduction loans for pensioners and retirees. Caixa Econômica Federal, another state-run bank, said the financial and operational viability of the benefits card is under evaluation.

Large private-sector banks are more resistant. Itaú says it does not offer a payroll-deduction benefit card and has no prospects of offering one. “Therefore, the margin will still have a 35% cap,” the bank said. Santander said it will increase the margin of the payroll-deduction card “as required by law.” Bradesco only said it will “operate according to the rule.”

Among medium-sized banks, there is a division about the new payroll-deduction card for benefits. Lenders that only extend credit – without the borrower having an account – tend to offer the product, which in theory would have a different function than the typical payroll-deduction credit.

The fear, however, is that this other card will have the same fate as the payroll-deduction credit card. Created as a kind of financing for consumption with the possibility of withdrawing cash at an ATM, it ended up becoming a personal loan.

The benefit card cannot be the same as the payroll-deduction credit card. Banks will have to issue another plastic, with a different design. In addition, it is necessary to offer some benefits, such as insurance, drug coupons, or funeral assistance.

The executive of a medium-sized bank, which has payroll-deduction loans among its main products, explains that typical credit of this type accounts for more than 95% of the total volume, while the payroll-deduction credit card gets the remainder. “We have this product, but we don’t push it to the client. The same thing is likely to happen with the benefits card.”

A source in another bank says the new benefits card can be a good product. “We are interested in this product, regardless of whether we increase the payroll-deduction margin. It adds value for the client, brings benefits. We will respect the market rules and comply with the laws against over-indebtedness.”

The new credit has the power to “boost” economic activity, said economist Julia Braga, a professor at the Fluminense Federal University. “For some families, it may be difficult to pay the debt in the future. But for others, it may be an opportunity to roll over an old or more expensive debt from another line of credit,” she said.

Isabela Tavares — Foto: Silvia Zamboni/Valor

Isabela Tavares — Foto: Silvia Zamboni/Valor

Isabela Tavares, an economist with consultancy Tendências, sees some risks in the 45% cap. “Even if interest rates are lower because banks have a guarantee, this still puts pressure on households, compromising a portion that could be directly destined to the consumption of essential goods as inflation pressures budgets,” she said.

As for payroll-deduction loans linked to social benefits, most private-sector banks will not offer them for now. Executives say they will adopt a wait-and-see approach and let Caixa, a state-owned bank, start operating first. They point out many risks, including for reputation, as the society may understand that banks are “exploiting” people who live on the poverty line.

Legal risk is another concern since borrowers may go to court to undo their agreements saying that they need the income for subsistence. Continuity risk is also taken into account since the cash-transfer program Auxílio Brasil, for instance, will pay R$600 only by December.

Credit risk is also on the radar. Beneficiaries of social programs, besides not being able to prove other sources of income, are often underbanked, so lenders do not have data on their credit history. “Credit risk is very high, which means that for the transaction to be worthwhile for the bank, it would have to charge a huge interest rate. This is impractical. And what happens if the person loses the benefit? This is a very controversial issue,” one source said.

Despite this, some medium-sized banks already offer on their websites the possibility to simulate payroll-deduction loans for those who receive social benefits.

*By Álvaro Campos, Guilherme Pimenta — São Paulo, Brasília

Source: Valor International

https://valorinternational.globo.com/
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Syngenta buys input retailer Agro Jangada

With the acquisition, the company’s chain in Brazil will have about 60 stores

08/08/2022

Agtech giant Syngenta announced Friday the acquisition of the input retailer chain Agro Jangada, headquartered in the state of Mato Grosso do Sul. With the acquisition, the seed and pesticide manufacturer controlled by Chinese capital will expand operations in regions it considers strategic to its business plan.

The company did not disclose the value of the deal. If antitrust regulator CADE approves the operation, Syngenta will take control of the six Agro Jangada distribution centers located in the municipalities of Itaporã, Dourados, Naviraí, Nova Andradina, Laguna Carapã, and Caarapó.

Syngenta’s network in Brazil — formed by Atua Agro (Paraná and Rio Grande do Sul) and Dipagro (Mato Grosso), the latter acquired last year — will have around 60 stores with Agro Jangada.

“We try to guarantee access [to the market] with some specific injections, as in this case, mainly in regions that are subject to a slightly faster transformation process, due to the arrival of new players,” Juan Pablo Llobet, head for Brazil and regional director for Latin America, told Valor. Agro Jangada was already a partner of the company.

The input sector, which is close to R$100 billion per year, according to consultants, is going through a strong consolidation. Investment funds and multinational input giants, such as Syngenta, are the main responsible for this movement.

“There are more or less 2,000 distributors in the country,” says André Savino, head of the company’s commercial platform. As part of its strategy, the company decided to establish regional anchors to ensure that its products and solutions, including financial ones, reach farmers, says the executive. The first step was to open its own stores, under the brand Atua Agro, in the South region.

The company has made acquisitions in places where it detected that organic growth would not be enough. In these cases, Syngenta keeps the brand and the essence of the acquired companies to take advantage of the relationship they already have with local producers. The company commercializes inputs and technological solutions both in its own network and through 200 other partners, such as resellers and cooperatives.

*By Érica Polo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Legal battle may create multi-billion hole in power industry

CTG Brasil, controlled by Chinese company, questions change in firm energy of its plants; R$500m have already been charged from consumer

08/05/2022

CTG’s hydroelectric plant in Rosana — Foto: Henrique Manreza/Divulgação

CTG’s hydroelectric plant in Rosana — Foto: Henrique Manreza/Divulgação

A legal imbroglio in the power industry may open precedents for a multi-million hole in the consumers’ electricity bills. The hydroelectric plants of CTG Brasil, controlled by China Three Gorges, caused an impact of R$496.1 million in the electric sector due to an injunction that prevents the review of the firm energy of the Capivara (643 MW), Chavantes (414 MW), Taquaruçu (525 MW) and Rosana (354 MW) plants, sources say.

In technical jargon, firm energy is the volume of power that an project can deliver to the system and determines the form of remuneration of the companies. In May 2017, the Ministry of Mines and Energy (MME) published Ordinance No. 178/2017, which defined the new firm energy values for power from centrally dispatched hydroelectric plants, valid from January 2018.

It is the up to the ministry to define every five years the maximum energy that can be sold by the power plants, since new concessions for multiple uses of water have changed the flow of rivers. The measure reduced by 4.9% the firm energy of CTG’s hydroelectric plants in relation to the one in effect in December 2017.

Before that, when CTG bought Rio Paranapanema Energia, it modernized the plants and requested an extraordinary revision of the firm energy to the Brazilian Electricity Regulatory Agency (Aneel). In the lawsuit filed against the federal government, CTG says that there are illegalities in the ordinance, since the reduction of the firm energy was made before the five-year period since the last revision.

The Capivara, Rosana and Taquaruçu plants were the subject of extraordinary reviews in May 2015, and the Chavantes plant, in June 2013, and, according to CTG, the value of firm energy could only be reviewed again in May 2020 and June 2018, respectively.

The Ministry of Mines and Energy says that this argument does not apply to extraordinary reviews. In addition, CTG presented a contribution in the public consultation without questioning the revision process.

The Chinese company also says that the reduction of firm energy in more than 4.8% causes distortions, since the plants have a history of generating 22.1% more. However, as recommended by the Federal Court of Accounts (TCU), the federal government reviewed the firm energy of the plants involved because it considered them overestimated, and also to standardize the criteria for firm energy calculations for all players.

Another argument of the company is that the action represents an act of confiscation, because it restricts the right to economically exploit its concession. Power generation companies heard by Valor, which are in the Energy Relocation Mechanism (MRE), a risk-sharing system to avoid shortages during periods of drought, have another understanding.

The plants have an interconnected operation and when a company wins a concession, it must submit to the rules of the sector and the operation is commanded by the national grid operator ONS. This happened, for example, in the water crisis, when the ONS needed to save water in the Paranapanema basin and requested that some hydroelectric plants reduce their generation.

Of the R$496.1 million, nearly 60% was paid by the energy consumer and the rest was borne by the MRE companies. The situation raises the concern that other companies will go to court to avoid a reduction in the firm energy of their plants.

“Distribution companies are bothered because they foot the bill and fear default, power generation companies bear part of the burden, and the average consumer has not yet realized that they are paying most of this cost,” says a source who asked not to be named.

CTG Brasil said that the judgment of the appeal filed by the company in the review process of the firm energy of its plants is still in progress. “An eventual favorable outcome to the company will not bring impacts to the energy market, since the company’s request is aimed at preserving the firm energy amounts of its plants, which were reduced in disagreement with the legislation,” it declared in a statement.

Marcos Meira, a lawyer and president of the Special Infrastructure Commission of the Brazilian Bar Association (OAB), disagrees. For him, a decision that is eventually favorable to a generation company causes an imbalance in cascade, generating several other lawsuits of competing ventures. In other words, decisions handed down in these cases have the potential to impact the entire system, because it operates like a communicating vessel.

“A favorable decision obtained by CTG will arouse the interest of other companies, which will also seek to reverse the proposal to reduce the firm energy of their plants in the courts. The arguments are almost always the same … ranging from the economic-financial imbalance of the contract, to exogenous political interference,” explains Mr. Meira.

Much larger power plants, like Jirau, Santo Antônio, and Teles Pires, have had extraordinary reviews recently and in theory could use the same thesis as CTG.

To Valor, the leader of an association, on condition of anonymity, points out the lack of a more incisive action of the Ministry of Mines through the Federal Attorney General’s Office (AGU) in solving the case. The matter was under the care of the then-executive secretary Marisete Dadald, but with her departure, the ministry has not given the case the proper attention.

“At the hearing of the case, the oral argument was made only by the CTG’s lawyer. The government, which was the one who created the rules and should watch over this, didn’t show up. An incomprehensible disregard.”

Without giving any details, the ministry only informed that it is working on the suit so that the injunction is denied.

In the event of an unfavorable decision to CTG, the doubt remains as to how this amount will be reimbursed to consumers, since, according to the Electric Energy Trading Chamber (CCEE), any recalculation of the amounts cited will depend on the terms defined by an eventual court decision.

*By Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Interest rates plummet, boost Brazilian stocks

Assessment that key rate Selic will stay at 13.75% prevails, sustains rally of risk assets

08/05/2022

Benchmark stock index Ibovespa showed a firm rise on Thursday — Foto: Silvia Zamboni/Valor

Benchmark stock index Ibovespa showed a firm rise on Thursday — Foto: Silvia Zamboni/Valor

A clearer signal from the Central Bank’s Monetary Policy Committee (Copom) about the end of the cycle of Selic hikes was all it took for the market to start a rally in Thursday’s trading session.

The indication by the committee that in September it will evaluate the need for a residual adjustment in the key rate brought down future interest rates, insofar as market participants were waiting for the Central Bank’s signal to set up positions betting on a drop in interest rates. The inflow in the interest and fixed income markets helped to bring down the foreign exchange rate and, in face of such an intense fall in future rates, benchmark stock index Ibovespa showed a firm rise and even tested the 106,000-point level throughout the session.

The entire yield curve showed a sharp decline in Thursday’s trading session, with emphasis on medium- and long-term rates. The interbank deposit rate (CDI) for January 2025 fell to 12.09% from 12.47%, while the CDI for January 2029 retreated to 12.3% from 12.65%.

Although Copom has kept the door open for a residual adjustment in the Selic in September, the change in the committee’s communication, now saying that it will evaluate if an additional hike is necessary, reinforced the perception among market participants that the cycle may have ended on Wednesday, when the Selic reached 13.75%.

Part of the market still points to the chance of a 25-basis-point increase in September, while banks such as Bradesco, Barclays, Itaú Unibanco and Banco do Brasil have maintained their projections of a Selic rate of 13.75% at the end of the year.

In the interest rate market, the willingness to risk was substantial, and in the first deals of the day, the rates already showed relevant drops. The movement intensified throughout the day, as more players built positions in an attempt to take advantage of the downward movement of rates.

Citi, for example, has set up a position to gain from falling rates for the interbank deposit (DI) in January 2025. “We like this point on the curve to capture more cuts,” said strategists Andrea Kiguel and Dirk Willer in a report sent to clients, where they justify the position.

They note that the 1-year rate is now below the Selic level, which historically indicates that the cycles tend to change direction, unless there are risk aversion events that make this dynamic unfeasible in the market. For Ms. Kiguel and Mr. Willer, “the risks for the trade include another global inflationary shock or stronger than expected inertia, which would make the Central Bank more hawkish in relation to expectations, in addition to electoral noise.”

For Victor Candido, chief economist at RPS Capital, “when the end of the cycle is announced, the positions go in the same direction and the fixed interest rate melts.” He believes the movement is natural, but points out that, despite his long position and the fact that he likes this position, he has doubts about the sustainability of the movement ahead.

“I think the level of interest rates in this cycle will be higher than the market wants to believe. There’s a lot of stimuli in the economy and the government is putting even more into an economy with the labor market gap closed. I think activity will remain challenging for the Central Bank. What can help – and has already contributed a lot – is the fact that commodity prices, especially oil, are falling a lot and this encourages the market even more with this trade of lower interest rates,” says Mr. Candido.

Adverse surprises on the fiscal front and in the economic activity scenarios may even push the Copom to act again in September, but the committee decision on Wednesday gave the impression that the monetary authority “would prefer to leave interest rates where they are,” said Roberto Secemski, chief economist for Brazil at Barclays, whose baseline scenario indicates that the tightening cycle has come to an end with the Selic at 13.75%.

In his view, if medium-term inflationary expectations do not change much until the September meeting, the Copom may keep interest rates unchanged at 13.75%. “Of course, adverse surprises on the fiscal, labor market and/or growth fronts could also push the Central Bank to act, but our impression is that, all else being equal, it would prefer to leave interest rates where they are, also because of the extension of the relevant horizon into 2024 (when it wants to avoid the risk of going below target),” says Mr. Secemski.

The market’s good mood with the fall in interest rates was reflected in a greater demand for fixed-rate government securities in the weekly auction held by the National Treasury, which increased the supply of securities. The Treasury managed to sell in full 9 million National Treasury Bills (LTNs) maturing in January 2025, in addition to 300,000 fixed-rate bonds (NTN-Fs), which are longer term fixed-rate securities usually in demand by foreign investors.

Laszlo Lueska, a partner and manager at Octante Capital, says that the softer-than-expected decision by the Copom, indicating the end of the monetary tightening cycle, “generated optimism in foreigners, who brought dollars today to invest in fixed rate.” Not by chance, on a day when the dollar was weaker worldwide, the domestic forex market managed to benefit. Thus, the exchange rate ended the trading session at R$5.2219 to the dollar, down 1.06%.

The Ibovespa took advantage of the significant drop in long interest rates and ended the Thursday up 2.04%, at 105,892 points, the highest level since June 10. “The recovery will not be a straight line. We will have volatility, but a big restriction on Brazil seems to be behind us. My scenario for Brazil is less negative than the market average, despite the risks (fiscal and political). There seems to be enough risk premium in local assets and margin of safety,” said Dan Kawa, chief investment officer at TAG Investimentos.

Ibovespa’s best performing companies were, precisely, those linked to the local economic activity, such as the retail and construction sectors. The common shares of Magazine Luiza, for instance, jumped 13.99%, while those of Via rose 12.6%.

*By Victor Rezende, Igor Sodré, Augusto Decker — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Antitrust body sees cartel in airport café bids

Case involves five companies, eight individuals and a relevant discussion about fines for all cases of anticompetitive conduct

08/04/2022

CADE's building in Brasília — Foto: Jefferson Rudy/Agência Senado

CADE’s building in Brasília — Foto: Jefferson Rudy/Agência Senado

Antitrust regulator CADE has acknowledged the existence of a cartel in bids held for the installation of cafés in airports in São Paulo (Congonhas), Florianópolis, Recife, Campo Grande, Curitiba and Maceió. The case involves five companies, eight individuals, and a relevant discussion about fines for all cases of anticompetitive conduct.

The judgment has an important aspect for competition law: the calculation of fines imposed as a penalty on businesspeople and employees involved in cartels and other competition violations. In this case, the amount of the individual penalty for two individuals goes from R$139,000 to R$28,000, depending on the criteria used.

The bids were conducted by state-owned airport operator Infraero. The complaint of alleged anticompetitive conduct was filed with CADE by the company. According to the investigation conducted by the state-owned company, five companies and eight individuals have acted in a coordinated manner to defraud seven public tenders held by Infraero.

The companies involved are: Alimentare Serviços de Restaurante e Lanchonete, Boa Viagem Cafeteria, Confraria André, Delícias da Vovó and Ventana Manutenção e Serviços.

The rapporteur, CADE member Sérgio Costa Ravagnani, voted for the dismissal of the process in relation to one defendant who died, and for the condemnation of the others – cafés and individuals. He was defeated only on the way to calculating the penalties.

Law 12,529 of 2011 sets penalties for cases of anticompetitive conduct. Companies are fined between 0.1% and 20% of the value of gross revenues in the last fiscal year before the administrative proceeding was started. And it must not be less than the advantage gained when it is possible to estimate.

As for individuals, managers can be fined between 1% and 20% of the value defined to the company. Others, such as employees and associations, may have to pay amounts ranging from R$50,000 to R$2 billion.

CADE member Gustavo Augusto’s vote prevailed in the judgment on the fines. In his view, the economic capacity must be considered in the calculation, even if not as a determinant.

*By Beatriz Olivon — Brasília

Source: Valoar International

https://valorinternational.globo.com/
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Fertilizer imports gain steam in Northern ports

Terminals in Brazil’s North region account for a quarter of inputs from abroad

08/04/2022

As grain crops grow in the Matopiba region (bordering the states of Maranhão, Tocantins, Piauí and Bahia) and in northern Mato Grosso, the Arco Norte (North Arch) ports become increasingly attractive to logistics service providers. In the wake of the growth of soybean shipments, fertilizer imports are increasingly gaining space in the ports of the North and Northeast regions.

The main ports of the Arco Norte – Santarém and Belém (Pará), Itaqui (in São Luís, Maranhão), and Salvador (Bahia) – handled 4.4 million tonnes of fertilizers between January and June. They accounted for 25% of the total volume imported by the country, and the volume handled grew 39% year-over-year.

“The increase is directly related to the expansion of soybeans in Matopiba and northern Mato Grosso,” said Luigi Bezzon, a fertilizer and vegetable oil analyst at U.S.-based consultancy StoneX and author of the survey based on federal government data.

The larger grain cultivation in these regions has driven structural changes in roads and ports. According to Mr. Bezzon, the increase in the supply of trucks, for example, improves freight prices because farmers can send grains to the port and bring fertilizers to the interior on the return trip.

From January to June, soybean shipments through Arco Norte grew 8%, while in the South-Central region there was a 16% decrease compared to 2021, according to StoneX. The largest increases in volume handled were seen in Itaqui and Salvador.

In the first half, the arrival of fertilizers through Itaqui grew 51%, to 1.62 million tonnes, the survey shows, and the soybean shipments grew 19%, to 7.1 million tonnes. “Ports connected to railroads, such as Itaqui, make perfect sense [for expanding logistical alternatives],” says Marcos Pepe Bertoni, chief operating officer at Corredor, Logística e Infraestrutura (CLI).

CLI, which is controlled by asset management company IG4 Capital and has just acquired two terminals in Santos from Rumo (also connected to railroads), is one of four companies that make up Consórcio Tegram, charged with operating grains in the Maranhão port. Mr. Bertoni said the company is looking with interest at providing services in the fertilizer market.

According to him, grain exports in Itaqui are advancing rapidly, so “it will inevitably” be necessary to think about return cargo to improve costs for the client. “It is necessary to ‘tie up’ the logistics to improve effectiveness,” he adds. CLI expects to handle 4 million tonnes of grain in 2022.

The biggest local player for fertilizer imports is the Companhia Portuária Operadora do Itaqui (Copi), owned by the Fertipar and Rocha groups. Copi is charged with handling 80% of the volume of fertilizers received in Itaqui, and wants to expand its services. In 2021, Itaqui handled 3.2 million tonnes of the input.

*By Érica Polo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Migration to fixed income linked to interest rates, not customer profile

According to association of securities firms, class accounts for 61.3% of investments volume in first half

08/03/2022

Investments by individuals in retail, high income, and private banking reached R$4.65tn in the first half of the year, Anbima says — Foto: Silvia Zamboni/Valor

Investments by individuals in retail, high income, and private banking reached R$4.65tn in the first half of the year, Anbima says — Foto: Silvia Zamboni/Valor

The giant flow of individuals into fixed income is more related to the rising interest rates than to the inadequate supply of riskier options during the era of ultra-low interest rates in Brazil, says Ademir Correa, head of the distribution forum of the Brazilian Financial and Capital Markets Association (Anbima).

“What we actually see is that even clients with a bold profile are scared with the movement, with the prolongation of this scenario that has affected even the seasoned ones. It doesn’t have much to do with whether the profile is right or if [funds] are correctly allocated,” said Mr. Correa, during the virtual press conference with the presentation of the individual investments data for the first half of the year.

Investment funds lost 3.5% of their stock in the first half, to R$1.42 trillion. Hedge funds had a decrease of 5.1%, or R$35.2 billion, despite the good performance of asset managers in the period. Stocks portfolios have also shrunk, with a loss of R$38.6 billion from January to June, a decline of 18%. In the same period, fixed-income portfolios grew R$20.3 billion, up 4.5% year-over-year.

Overall, fixed income now accounts for 61.3% of the investment volume of the traditional retail, high-income, and private-banking audiences combined, compared to 57.1% in December.

Savings accounts are still the main retail product, with a 32.9% share, followed by certificates of bank deposit (CDBs), with 19.9%.

Mr. Correa, also an executive with Bradesco, said he sees great demand from clients for fixed-income products as a safer haven. “The scenario for variable income is still very troubled worldwide with the inflationary environment and stock markets down. We don’t see a recovery yet, it’s a moment of great mistrust of investors with the market. They are waiting for the next steps.”

A potential recession amid rising interest rates in developed countries, the Russia-Ukraine war, and the elections in Brazil are all ingredients of this uncertainty.

For Mr. Correa, the movement towards diversification is not exhausted, however, with rising interest rates and the Selic back to double-digit levels, at 13.25% per year. “The falling interest rates [in the past] has forced people to explore new investment opportunities with higher returns and this has brought a greater knowledge of the customer of this market,” he says. “What we notice is that high-income investors generate more demand for diversification, which is a healthy movement.”

Anbima has been working on an agenda to improve suitability, or the correct fitting of the offer to the risk tolerance profile. “With falling interest rates, we have seen a strong movement of clients looking for options with higher volatility and financial firms placing more and more products available for smaller ticket sizes.”

Within Anbima, the idea is to update self-regulation, standardizing the financial firms’ policies and establishing minimum risk levels for the products.

Another work that the distribution forum is expected to develop this year is to establish some regulation for financial firms that hire digital influencers. These professionals would be subject to the same requirements as those who serve the customer directly when recommending investments.

In the first half of the year, investments by individuals in retail, high income, and private banking reached R$4.65 trillion, up 2.8% year-over-year.

In the more affluent customer segment, more exposed to the international classes and to higher risk alternatives, assets shrank 1.7%, to R$1.75 trillion, while high income retail had an increase of 5.4%, with R$1.29 trillion. In the base, the traditional retail totaled R$1.61 trillion, with a high of 5.9% in the first half.

Mr. Correa avoided qualifying the low growth of 2.8% in the volumes of the individuals, but with Brazil’s benchmark inflation index IPCA at 5.49% until June, portfolios failed to grow above the official inflation rate. “It shows the volume drop in private banking. It has to do with the drop in the stock market, a product that has a higher concentration of this type of investor.”

In periods of greater uncertainty such as the electoral period, he said, there may still be a migration of wealthier audience for investments abroad. Anbima’s data do not include, however, the positions of private-banking clients in international accounts.

*By Adriana Cotias — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazilian businesspeople to sue BofA in New York in $1bn case

Companies reportedly facing losses are preparing class action

08/03/2022

Brazilian businesspeople from some traditional families that allegedly rented U.S. aircraft through leasing offered by Bank of America (BofA) plan to go to the courts in New York to ask for compensation for losses resulting from the operation. Since they have already lost or are in danger of losing their luxury jets, they are preparing a class action against the bank. The combined loss is estimated at $1 billion.

Lawyers are preparing to convince the U.S. courts that when seeking financing BofA offered them an “off-the-shelf product,” which the businesspeople believed to be lawful and bought without knowing potential tax contingencies.

But such operation has consequences in Brazil. If the Secretariat of Federal Revenue finds out that the aircraft is American but flies more on Brazilian routes than abroad, it can understand that the aircraft was imported, not leased. Brazil’s customs legislation considers imports without payment of taxes as contraband or smuggling, the penalty for which is the loss of the good.

Representatives of these businesspeople call the practice illegal tax shelter. BofA allegedly bought the planes in the United States through a trustee and leased them to businesspeople in Brazil. However, the bank reduced the depreciation resulting from the use of the aircraft from the tax base to be paid in the U.S.

Experts in international taxation, however, highlight another aspect: these businesspeople did not sign a contract directly with BofA, but through a company in a tax haven. Thus, in addition to avoiding the payment of Import Tax and social taxes PIS and Cofins, they also avoided paying withholding income tax (15% or 25%).

The operation led to an investigation by the U.S. authorities, which has already resulted in a first trial by the New York Supreme Court. On that occasion, whose session is available on YouTube, BofA was ordered to disclose the bank records of the aircraft lessors.

The court decision reportedly revealed operations involving 27 aircraft. Sources involved in the case say that 24 families of well-known Brazilian businesspeople are involved. Clans cited in the 2012 Federal Police report on Operation Pouso Forçado (Forced Landing), such as Esteves and Auriemo, are among them.

Based on the U.S. court decision, which determined the disclosure of bank records, a group of businesspeople is preparing to file a mass action in the U.S. This is a class action that allows the individualization of damages of each person involved.

Leonardo Antonelli — Foto: Divulgação

Leonardo Antonelli — Foto: Divulgação

But each case is a case. According to the lawyer Leonardo Antonelli, who represents some of the Brazilian businesspeople involved in the imbroglio, one client took the aircraft to the United States for revision and, the next day, the bank reportedly seized it. “It was worth $20 million and was auctioned for $7 million. The difference is the loss,” he said.

Another four clients, according to Mr. Antonelli, were required to make deposits averaging $4 million to collateralize the transaction. The lawyer says the bank converted the funds into income for itself. “Brazil’s Secretariat of Federal Revenue confiscated the aircraft of another client because it considered the transaction an illegal import,” the lawyer said.

The issue must be discussed in the New York Court because all contracts with BofA were signed there. The New York law allegedly takes such claims based on the theory of unjust enrichment and/or fraud.

“The theory of unjust enrichment, on a first analysis, resembles the institute of unjust enrichment in the Brazilian Civil Code,” Mr. Antonelli says.

The goal is the reimbursement of all tax losses (fines, interest, confiscation of aircraft), in addition to other financial losses (return of the aircraft, retention of deposits, structuring costs) resulting from the operation with the bank.

Bofa declined to comment.

*By Laura Ignacio — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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