Concerns arise over optimistic revenue estimates and tightening discretionary spending amid fiscal constraints
08/26/2024
Antonio Anastasia — Foto: José Cruz/Agência Brasil
As the Executive branch prepares to send the 2025 Annual Budget Act (PLOA) to Congress in about a week, Brazil’s public spending watchdog TCU has concluded that the government’s projection for next year’s primary balance carries significant risks. These risks stem from potential revenue shortfalls, increases in mandatory spending, and limitations on budgetary contingency measures.
The findings are detailed in a report by the TCU, which analyzed the 2025 Budget Guidelines Act (PLDO). The fiscal target for next year is zero deficit, with the PLDO forecasting a surplus of R$10.8 billion. The body’s plenary issued a warning with these findings to the economic team, with Antonio Anastasia serving as the rapporteur.
TCU auditors determined that the primary net revenue estimates presented in the PLDO are “optimistic,” exceeding market-based projections by R$35.6 billion to R$50.7 billion. This raises concerns about potential revenue shortfalls.
The technical team also noted that the projected increase in total primary expenditures exceeds the new fiscal framework’s limit of 2.5% real annual growth. This would compress discretionary spending, which includes public investment and operating costs.
The risk becomes even more pronounced in 2027 and 2028, according to the watchdog’s experts. During these years, projections for net discretionary spending, excluding congressional earmarks and minimum requirements, drop to R$11.75 billion in 2028 from R$100.94 billion in 2024—an 88% reduction over the period. This means there would be virtually no funds for investment or operational costs.
“Without legislative revision, the increase in mandatory expenses and expenditures tied proportionally to revenue could lead to a shutdown of government operations or compromise the fiscal anchor of the new framework,” the auditors said.
They also pointed out that while the 2025 PLDO includes measures to review expenditures, it lacks concrete proposals to amend legislation and address the risk of squeezing discretionary spending.
A third risk to meeting the fiscal target in 2025 arises from restrictions on budgetary cuts, should the zero-deficit target be threatened. The auditors noted that, under the new framework, the primary balance is allowed a tolerance range. The government has been targeting the lower bound of the target, rather than the midpoint, explicitly saying this in the 2025 PLDO.
The TCU has emphasized that aiming for the lower bound for cost-cutting purposes, while not illegal, could create “long-term inconsistencies in debt trajectory” and hinder the achievement of the fiscal target. The 2025 PLDO allows for a deficit of up to R$31 billion in 2025.
Another limitation on cost-cutting measures is the stipulation that only the portion of expenditure growth exceeding 0.6% in real terms may be frozen. The legality of this provision is under review by the TCU in a separate ongoing case.
“The scenario presented by the estimates will likely force the Executive branch to choose between two mutually exclusive options: either ensure the proper functioning of the federal administration or preserve the primary spending limit. Both appear to be incompatible under the projected scenario,” the TCU noted.
Finally, the TCU’s technical body said that the assumptions used by the government in the project—namely, spending growing at a slower pace than revenue and a rising primary balance starting in 2026—may be “unrealistic” without a revision of either mandatory or revenue-linked discretionary expenditures.
The ministries of Finance and Planning declined to comment.
With Brasília covered in smoke, President Lula calls an emergency meeting; minister says there is an “unusual situation”
26/08/2024
Smoke from fires in the Amazon covered Brasília on Sunday — Foto: Eraldo Peres/AP
On Sunday, Environment Minister Marina Silva compared the fires in São Paulo to the “Day of Fire” in 2019. In light of suspicions that they may be the result of criminal actions, she has called in the Federal Police to investigate the origins of the fires that led 46 municipalities in the countryside of São Paulo to declare a maximum alert and close two airports in the state after covering the federal capital in smoke.
“There is an unusual situation [with the fires in São Paulo]. You start to see several municipalities burning at the same time, practically within a week, in just two days. This is not part of our experience,” said Ms. Silva. “Just as we had the ‘Day of Fire,’ there is a strong suspicion that it is happening again.” The so-called “Day of Fire” occurred in August 2019 when land-grabbers and rural producers coordinated efforts to set fire to areas of the Amazon rainforest.
“In São Paulo, it is not natural, under any circumstances, that in just a few days there would be so many fronts of fire and that so many fronts of fire would involve multiple municipalities at the same time,” Ms. Silva said at a press conference after a meeting with President Lula to assess the situation at the headquarters of Brazil’s environmental protection agency IBAMA in Brasília, which woke up covered in smoke from nearby fires and dry weather.
The Federal Police has opened two investigations to investigate possible criminal acts related to the fires. With these, the institution has 31 ongoing investigations regarding forest fires, with the previous ones relating to the Amazon rainforest and the Pantanal wetlands.
The head of the Federal Police, Andrei Rodrigues, said he has mobilized 15 police stations in São Paulo “so that we can identify the issues involving the fires.”
“It’s an unusual movement, but conclusions will only come with the completion of the police investigations,” he said. “There are two investigations in São Paulo looking into possible criminal fires, one has already been initiated,” he added, clarifying that both investigations concern the hypothesis of criminal fires and are separate “due to jurisdictional issues.”
The São Paulo government informed that two people were arrested over the weekend in the cities of São José do Rio Preto and Batatais on suspicion of involvement in criminal fires.
Ms. Silva said she spoke with Governor Tarcísio de Freitas of São Paulo about the fires. She also informed that the federal government has made a KC-390 cargo plane available to assist in fighting the fire, but the aircraft was unable to take off due to the smoke covering the Ribeirão Preto region in the countryside of the state.
Also present at the meeting with Mr. Lula, the minister of Institutional Relations, Alexandre Padilha, reinforced the government’s suspicions that there was a criminal action. “My grandmother used to say, ‘Where there’s smoke, there’s fire.’ If she were alive, she would say, ‘if there’s coordinated fire at the same time, in an unusual manner, there must be a crime,’” he said.
When asked about the federal government’s responsibility regarding the fires, Ms. Silva said that the situation would be much worse if the current administration had not been acting preventively since the government transition at the end of 2022. She also denied that there had been any failures.
“The federal government is responsible for federal areas and conservation units, but we are acting in all areas, including private properties. Unlike deforestation, you don’t have an agent inside your farm or house checking if a fire will be set. Therefore, it cannot be said that it is a failure, because awareness campaigns and all processes have been carried out,” she said. “The investigations are to determine if there is intentional action in the case of São Paulo. In other cases, there are strong suspicions of intentional action. [The situation in] São Paulo is also under investigation for that reason.”
The emergency meeting took place at the headquarters of Prevfogo (National Center for Prevention and Combat of Forest Fires), part of IBAMA. Besides Mr. Lula, Ms. Silva, the president of IBAMA, Rodrigo Agostinho, Mr. Padilha and Mr. Rodrigues were also present.
At Prevfogo, Mr. Lula and the ministers visited a situation room where IBAMA experts monitor the fires. The president, who had spent the night in São Paulo, landed early in the afternoon at the Brasília Air Base and went directly to the meeting accompanied by First Lady Rosângela da Silva.
According to Ms. Silva, Mr. Lula said he would participate in a routine meeting to monitor the fires, which takes place weekly at the Planalto Palace. He said he would call in governors of states affected by the fires. “[The president] expressed his decision to participate in the ordinary meeting, which is held every week in the Chief of Staff Office and involves more than 20 ministries. In this meeting, we will summon the governors of the states affected by the fires.”
In the countryside of São Paulo, the scene is one of chaos. With more than 2,300 fire incidents reported in two days, the state is at the top of fire occurrences in the country. The flames continue to advance in areas of vegetation and crops, especially in the Ribeirão Preto region.
The state government announced an increase in the operation to combat the fire in the countryside with the establishment of an advanced post in Ribeirão Preto. According to monitoring by the Emergency Management Center (CGE) of the Civil Defense, 21 cities are facing active fire fronts.
According to Governor Freitas, the unit will operate in an integrated manner with the crisis cabinet set up at the CGE for monitoring and controlling the situation. “Our task force consists of more than 7,000 professionals and volunteers, in addition to helicopters, drones, and vehicles to act in combating the fire and guiding the population,” he said on social media.
In a statement, the São Paulo government reported that two employees of a plant in Urupês died on Friday while trying to combat a fire. “Forest fires can reach large areas of natural vegetation. With gusts of wind, the fire can spread rapidly. The fires emit dense and toxic smoke that harms the environment and human health, causing respiratory problems and cardiovascular disorders,” the text said.
According to government alerts, the highways are experiencing closures, ranging from total to partial, impacting traffic in several regions. The guidance is “for drivers to avoid these routes until normalization and to seek safe alternatives for their journeys. Furthermore, everyone must remain attentive to constant updates on traffic conditions monitored in real-time by emergency teams and responsible concessionaires.”
Wilson Sons, CLI, Porto Sudeste, Santos Brasil among possible assets for sale
26/08/2024
Ports in Brazil, such as Santos, have a strong correlation with agribusiness and the oil and gas sector — Foto: Divulgação
The Brazilian port sector is heading towards a new wave of mergers and acquisitions (M&A), as the interest of foreign investors in the assets grows, amid accelerated activity in the segment. Current negotiations total at least R$7 billion, considering only the controlling shareholders’ stake in the publicly traded companies for sale. Sources involved in the deals say the interest can be explained by the link of ports, agribusiness, and the oil and gas sector, as well as large global operators seeking consolidation.
At the moment, at least four assets are for sale, according to sources: Wilson Sons, CLI (Corredor Logística e Infraestrutura), Porto Sudeste, and Santos Brasil. “We see a movement from global operators,” said a source who spoke on condition of anonymity. According to the source, shipowners are positioned to face market consolidation. In Brazil, the focus is on the Southeast region. According to the source, these large operators are leading the current trend, as they direct global product flows.
The sale of Wilson Sons’s control to the U.S. infrastructure fund I Squared is expected to be the first deal in the sector, according to people familiar with the matter. The sale of Ocean Wilsons’ stake in Wilson Sons is an old process in the market, but only recently it has accelerated. The company boasts a market capitalization of R$7.3 billion on the stock exchange, according to Valor Data, based on the closing of August 22. The parent company holds a 56.5% stake.
The asset was put on the block in 2011 but the operation did not take off. The main challenge at that time was pricing, combined with the difficulty of finding a group with interest in all of the company’s assets. The company operates successful but relatively small container terminals, in addition to tugboat services, offshore assets, and logistics centers. BTG Pactual is advising the sellers in the process. Bank of America and Santander work for I Squared, according to sources.
The asset manager, which has around $40 billion in infrastructure assets under management worldwide, opened an office in Brazil in mid-2023 and has since announced the acquisition of 49% of the distributed generation company Órigo Energia.
The process for the sale of CLI is also being discussed, Valor found. The current owners—Australia-based Macquarie Asset Management and asset manager IG4 Capital—engaged Citi in the process, according to sources speaking on condition of anonymity.
A person familiar with the matter said the process is undergoing initial studies and potential interested parties have not yet been identified. IG4’s exit is seen as natural, as the private equity manager entered the business at the end of 2020. Macquarie, which bought a stake in the company in 2022 and has a longer-term vision, would not necessarily exit the business, sources say. CLI operates grain terminals in the ports of Itaqui (Maranhão) and Santos (São Paulo)—the latter, in partnership with Rumo, which has 20%.
Mubadala is also seeking a buyer for Porto Sudeste, according to sources. UBS BB and Goldman Sachs were hired to advise on the deal, people familiar with the matter say.
“This type of activity in Brazil will continue to be active and most ports have exposure to commodities—grain or liquids (oil)—which remains accelerated,” one source told Valor. According to this person, the sector will require massive investment, leading to more growth, which has attracted global interest. In addition to large infrastructure funds, the sector has also been closely watched by trading companies. The fact that port revenues are pegged to the dollar—even if indirectly—has also helped increase foreign investors’ interest in the assets.
A source says Chinese interest has attracted attention, including the giant China Merchants Port.
Another port asset that could be a target for acquisition is Santos Brasil, which operates container terminals and, more recently, liquid bulk as well. The company is a mature investment by Opportunity, its main controlling shareholder. In recent years, Maersk and MSC, shipping groups operating container terminals in Santos with plans to expand operations in the port, have been identified as the main interested parties. However, sources say there are no conversations at the moment.
People familiar with the matter say the company’s price was too high for negotiation in recent months, amidst accelerated activity and queues in Santos. However, the scenario could change if the project for a new container terminal in Santos, called STS10, advances. After a statement by Minister of Ports and Airports Silvio Costa Filho that the bidding could be carried out in 2025, Santos Brasil shares plummeted 8.9% on Thursday (22) and closed the trading session at R$12.62.
In any case, sources say the process has cooled down. Furthermore, the discussion about STS10 hinges on a series of decisions, and there may be positive factors for the company, including a possible terminal expansion, which is also on the government’s agenda.
The port of Itapoá is also expected to undergo a future M&A deal, sources say. It’s controlled by Portinvest, a vehicle formed by the Battistella group and asset manager BRZ. Maersk is a minority shareholder with 30% of the company. People close to the group, however, deny interest in selling the asset. One of them argues that the company is undergoing an expansion phase and it would not be the time for the current partners to exit.
Rafael Schwind, from law firm Justen Pereira, points out that the interest of foreigners in the port sector in Brazil is nothing new and has been noticed over the last decade. “Today we see this interest once again, whether in auctions or in acquiring control,” he said. Mr. Schwind also emphasizes that foreign investors have little presence in this sector and that, as a result, there is room for increasing participation.
Casemiro Tercio, a port sector specialist at 4 Infra, points out that foreign investor interest also occurs among agribusiness groups, for example, seeking verticalization. “The verticalization of agribusiness would eliminate transaction costs,” he points out. On the side of financial investors, such as funds, the focus is on mature assets, the expert says. In the container segment, he explains, protection is behind companies’ interests. “These companies seek assets to protect their business, which is shipment,” he says.
Marcos Pinto, managing partner at A&M Infra, agrees that shipping groups should increasingly seek investment in ports, especially with the arrival of large ships in the country.
Wilson Sons, I Squared, IG4, Macquarie, Mubadala, Opportunity, BRZ, and China Merchants declined to comment.
Announcement of X’s exit is reviving discussion on regulation in Brazil’s top court
08/21/2024
The announcement of platform X’s exit from Brazil is expected to bring the Internet Civil Framework back to debate in the Federal Supreme Court, Valor has learned. There was already an expectation among the court’s judges to address the matter this semester, but the situation created by the owner of X, Elon Musk, has reignited the discussion about the need for some form of regulation and accountability for digital platforms regarding content.
Experts consulted by Valor believe that the ruling on the Civil Framework is an opportunity to reaffirm that companies cannot operate in Brazil without legal representation. As of Monday evening, neither the Supreme Court nor the Superior Electoral Court had received formal communication regarding X’s exit from Brazil.
Therefore, for now, there is still no precise movement on what actions the judges will take in light of the potential non-compliance with the decisions of the two courts.
X is expected to end the year with 335.7 million users worldwide, 32.7 million fewer users than in 2022.
The agreements signed by X with the Electoral Court regarding misinformation programs remain in effect. The most recent was signed on August 7 and commits the platforms to adopt swift measures to combat fake news and cooperate with the Court in the Integrated Center for Combating Misinformation and Defending Democracy (CIEDDE).
The law firm Pinheiro Neto, which represents X in Brazil, said that it will not comment on the matter and did not even inform whether it will continue to represent the company legally in Brazil.
While the impacts of X’s departure from Brazil are still unclear, experts emphasize the need for the Supreme Court to define pending issues in the Court, such as the accountability of platforms and the discussion of the constitutionality of Article 19 of the Internet Civil Framework, which states that providers are not responsible for content generated by third parties.
Experts interviewed by Valor assert that it will not be easy for X to disregard Brazilian court orders, but they understand that the company’s withdrawal from the country could complicate compliance with the determinations.
In the case of electoral matters, the main concern regarding non-compliance with a court order will be related to irregular content posted by third parties. Fernando Neisser, a professor of electoral law at Getulio Vargas Foundation (FGV) and a member of the Brazilian Academy of Electoral and Political Law (Abradep), noted that if the content is posted by candidates, the notification of the irregularity will go to the candidate, and if they do not remove it, they will be subject to fines, charges of disobedience, and even the revocation of their registration.
“The biggest problem arises with posts from third parties, from individuals who are not candidates, who make illegal posts, some of which are anonymous. There’s no way to notify them, so the platform has the task of removing it. If it doesn’t remove it, the solution will be to take down the entire platform,” he noted.
In Brazil, if a platform does not follow court orders, it can be taken down by internet service providers. Experts consulted by Valor believe this is possible and has been done in the past, such as in the temporary blocking of YouTube by a first-degree judge’s injunction in 2007 involving model Daniela Cicarelli, or the temporary blocking of WhatsApp that occurred in 2015; however, in both cases, the measures were quickly reversed.
Lucas Maldonado, an attorney specializing in digital law from FGV and a partner at the Maldonado Latini law firm, said removing the platform is not straightforward. According to attorney Alexandre Atheniense, the removal of the platform “would be a disproportionate decision.”
The platform X, owned by billionaire Elon Musk, announced on Saturday that it would cease operations in Brazil. In a post published on its own social media, the company said that the measure is due to a ruling by Justice Alexandre de Moraes. According to X, Mr. Moraes threatened to fine and imprison the head of the company’s office in Brazil, Rachel de Oliveira Villa Nova Conceição, for non-compliance with court orders. However, the company claims that the service will remain available to users in the country. When contacted, the Supreme Court did not comment on the matter.
On Thursday, Justice Alexandre de Moraes decided to increase the daily fine imposed on this social media to R$200,000 from R$50,000 per profile that failed to comply with the order to block seven profiles accused of spreading misinformation. Among them is the profile of Senator Marcos do Val, which is subject to a provisional remedy determined by Justice Moraes in investigations regarding the coup-mongering acts of January 8.
By announcing the closure of its social media X operations, Mr. Musk also reduced a space that was already not significant in advertising investment budgets in Brazil, marketing professionals told Valor.
On Friday, about 40 employees of the subsidiary, including commercial area professionals, were laid off via email and had their access blocked, leaving agencies and advertisers without local contacts.
“The closure of the office in Brazil puts a nail in the coffin of an operation that has lost relevance in recent years and has entered a death spiral since Elon Musk took over the company,” an advertising market executive spoke on condition of anonymity. Other professionals in the sector reported that the budget currently allocated to X in advertising campaigns is quite insignificant.
“The X service remains available to the Brazilian population,” the company said in a post on Saturday.
On Monday, no employees were present at the office that the company occupies on one of the ten floors of rental spaces at WeWork in the Itaim Bibi neighborhood of São Paulo. Valor was informed that only one security professional was answering calls and receiving documents, but he could not be found on-site.
X’s team in Brazil had already been reduced in November 2022, following a cut of at least half of the employees of the then Twitter worldwide. The cut was made shortly after Mr. Musk purchased the platform for $44 billion in October 2022.
The social media founded in 2006 in California and which began operations in Brazil in 2012 sent an email to agencies and advertisers in the country on Saturday, saying that it is “committed to ensuring that its business with X continues uninterrupted.”
X is expected to end the year with 335.7 million users worldwide, 32.7 million fewer users than in 2022, according to data from German consultancy Statista. In Brazil, X had 22.1 million users according to the “Digital Brazil 2024” report from the DataReportal platform. The survey cites data published in X’s own advertising planning tools showing that the potential reach of ads in Brazil decreased by 2.2 million people (an 8.9% drop) between the beginning of 2023 and the beginning of 2024.
*Por Flávia Maia, Daniela Braun — Brasília, São Paulo
Low prices drive growers to abandon rubber; in São Paulo, the leading producer, sugar cane encroaches on rubber lands
08/21/2024
Imports of cargo and passenger tires in Brazil surged by 117%, from 16.9 million to 36.8 million units between 2017 and 2023. This steep increase has sparked a crisis in the domestic tire industry, exerting immense pressure on the natural rubber production chain. Historically, Brazil was a leader in natural rubber and was once the world’s top producer and exporter.
As a result of the crisis, producers have been abandoning their rubber plantations; some have even uprooted trees to switch to more lucrative crops like sugar cane, particularly in São Paulo, which is the leading state for natural rubber production. Industry estimates predict a decline of 15% to 20% in the national rubber crop for the 2023/24 season.
Data from the Institute of Agricultural Economics of the State Department of Agriculture (IEA-SP) indicates a reduction in the cultivated area from 115,200 hectares in 2022/23 to 113,300 hectares in 2023/24 in São Paulo, which represents over 60% of the country’s output. This marks a significant downturn, with production in the state dropping from 282,100 tonnes to 273,500 tonnes over the same period.
“This is unprecedented since the crop was introduced in the state,” notes Marli Mascarenhas, a researcher at IEA-SP. “The combination of low prices and producers’ lack of capital for reinvestment has significantly impacted the rubber sector,” she explains.
Ms. Mascarenhas adds that the surge in tire imports in recent years has led to overflowing stocks at mills, causing industries to halt purchases of approximately 120,000 tonnes of rubber directly from the fields, which has further driven down prices.
For the first time ever, growers found themselves unable to sell their crops at viable prices, necessitating government intervention to alleviate some of the financial strain.
José Fernando Canuto Benesi, head of the Brazilian Association of Natural Rubber Producers (ABRADOR), expresses his concern: “Some producers are resorting to cutting down their rubber plantations to eradicate the plants and exit the industry. It’s a chaotic situation for the entire chain, and it desperately needs governmental intervention to be salvaged.”
Currently, rubber plantations cover 257,000 hectares across Brazil, with 163,000 hectares actively in production. While official harvest data for the last two seasons remains unavailable, in 2022, Brazil produced 416,900 tonnes of natural rubber, valued at R$1.8 billion, as reported by the Brazilian Institute of Geography and Statistics (IBGE).
August marks the off-season for rubber production. The tapping, performed by workers known as “bleeders,” commences in September, signaling the start of the harvest season. By October, the harvested rubber begins to reach the processing plants.
The local industry and producers have raised concerns about the influx of imported tires, particularly from Asia, labeling it as “unfair competition.” Stakeholders within the sector argue that these imports are priced below both the cost of local production and international market rates. This pricing strategy has led to decreased sales for domestic companies, resulting in overstocked factories and approximately 2,500 workers currently on leave due to reduced operational demands.
The tire industry, which accounts for 80% of Brazil’s rubber consumption, has sought governmental intervention. The sector is advocating for an increase in the import tax on tires from 16% to 35% for a period of 24 months, a proposal set for deliberation next week by the Foreign Trade Chamber (Camex).
Additionally, manufacturers are urging the government to reinforce current anti-dumping measures and to take action on three specific fronts: countering subsidies provided by exporting countries, preventing the falsification of origin and product triangulation, and restricting the entry of tires priced below production costs by scrutinizing the reference price upon import.
From 2017 to 2023, a period during which imports surged by 117%, domestic tire sales saw an 18% decline. Concurrently, the volume of natural rubber in imported products more than doubled, rising from 55,900 tonnes to 125,100 tonnes. This increase represents the volume of foreign raw material that has directly competed with Brazilian rubber.
In the first half of this year, imported tires held a more significant market share (54%) than local production (46%) despite no decrease in the production of load and passenger tires in Brazil. This is because the costs associated with idling the industry are prohibitively high.
A study conducted by LCA Consultoria Econômica, commissioned by Brazil’s National Association of the Tire Industry (ANIP), revealed that in 2023, imported cargo tires were brought into Brazil at an average cost of $2.9 per kilo, significantly below the international average of $4.2. In Brazil, the prices were 69% lower than the global average.
Klaus Curt Müller, executive director of ANIP, criticized this disparity, stating, “This absurd variation shows that Asian countries are exploiting Brazil’s lack of tariff protection to dump their products at unfair prices. The world market has grown while domestic companies have contracted.”
In contrast, countries like the United States and Mexico have substantially increased tax rates in recent years to shield their domestic industries. In Brazil, however, the rate was initially set at zero and was only raised to 16% in 2023, which proved ineffective. Fernando do Val Guerra, executive director of ABRABOR, expressed concern about the future of the industry, remarking, “If this industry dies, we will die together.”
Ibama estimates Petrobras drilling permit decision by year-end
08/21/2024
Marina Silva — Foto: Brenno Carvalho/Agência O Globo
Brazil’s environmental protection agency IBAMA anticipates a decision on the environmental permit for Petrobras to drill an oil well in the basin at the mouth of the Amazonas River in Amapá by the end of the year. The well is located in Block FZA-M-59, 160 kilometers from Oiapoque, in the Equatorial Margin, one of Brazil’s emerging oil frontiers.
At the same time, Environment and Climate Change Minister Marina Silva said the decision regarding exploration in the Equatorial Margin will be technical and free from political interference.
According to IBAMA’s licensing director, Claudia Barros, the agency is analyzing additional information provided by Petrobras to supplement a wildlife management plan the oil company submitted last year. This review will determine if the plan meets the agency’s requirements before moving forward with the decision-making process for the permit.
The wildlife management plan was one of the main reasons for IBAMA’s denial of the environmental permit in May 2023. Petrobras declined to comment on the matter.
Ms. Barros, who participated on Tuesday (20) in the 1st Environmental Licensing Seminar for Transmission Lines, held by FGV Energia, emphasized that the analysis of the appeal presented by the oil company after IBAMA’s denial was impacted by the strike of the agency’s employees, which ended this month.
She told reporters that if the strike had not occurred, the decision would “probably” have been made. “Without a doubt. There is a backlog of projects; the impact is significant.”
After the analyses, the process will go through the agency’s decision-making instances until it reaches the president of IBAMA, Rodrigo Agostinho. “A position will be released still this year,” Ms. Barros said.
While in Rio de Janeiro to participate in the preparatory meeting for the G20 Social Summit, Minister Marina Silva addressed the comments made by IBAMA’s licensing director.
“The decision on the Equatorial Margin will be a technical one. If the answer is yes, it will be technical. If it’s no, that decision will also be technical. In a republican government, there is no interference like what was attempted in the previous administration in the decisions of IBAMA, ANVISA, and other technical agencies,” said Ms. Silva, citing Brazil’s health regulatory agency.
The start of activities in the region, considered ecologically sensitive by environmentalists, is controversial and pits the environmental and energy wings of the federal government against each other.
When asked if the start of exploration in the Equatorial Margin could harm the image of environmental leadership that President Lula’s government seeks to project at the G20, a group of the world’s largest economies, and at COP 30, set to take place next year in Belém, the minister responded cautiously.
“The debate that is being put forth for global economies is the transition to the end of fossil fuel use. This was a decision made at COP 28, and President Lula delivered the most compelling speech on this issue,” she argued.
Ms. Silva highlighted Brazil’s competitive advantages in solar, wind, biomass, and green hydrogen energy. However, in her view, the decision regarding the strategies for Brazil’s energy transition strategies lies with the National Energy Policy Council (CNPE), which includes representatives from various ministries such as Mines and Energy and the Environment.
“The Ministry of the Environment does not make strategic decisions about whether to explore or not explore oil. The debate that has been taking place is that oil companies should transform into energy companies. And in Brazil’s case, it is no different.”
Claudia Barros from Ibama emphasized that if Petrobras needs to drill new wells in the block, it will have to open new licensing processes. The ongoing licensing process only pertains to the drilling of one well.
At the event, the licensing director described the strike period and negotiations with the government as “difficult” and said she sees the licensing of transmission projects as a result of the agency and the sector maturing through dialogue and “construction,” despite still needing improvements.
“Environmental licensing is a product of the sector; we respond and react to what the sector produces. I do not believe in shortcuts or quick fixes,” Ms. Barros stated.
Legal disputes become a profitable asset for companies, attracting specializing firms
08/15/2024
João Mendes — Foto: Rogerio Vieira/Valor
Brazilian companies are now exploring their legal contingent assets in search of alternatives to raise funds at a time of restricted access to capital, high interest rates, and more selective investors. By carefully examining their numbers in search of “assets hidden in their balance sheet”—without financial visibility—, companies are eying not only IOUs issued by the judiciary branch, which are court-ordered payments of federal debts, but also other legal disputes.
As a result, the market for legal claims in Brazil is increasingly gaining ground, with a growing number of asset managers operating in this niche. Although this type of asset was not seen as “monetizable,” now companies’ legal departments have started to actively work to help the financial areas.
As this segment matures, a new spree of deals that were already usual in developed markets such as the U.S. is now arriving in Brazil.
Large-sized companies have started to transfer a portfolio of lawsuits to a fund of investment in receivables (known in the Brazilian market by its acronym FDIC), structured by a specialized asset manager. New transactions should be announced soon.
From the get-go, a company receives capital through this portfolio, which can help reduce its leverage, for example. In the end, it gets to keep a large part of the gains from the causes. Firms specializing in alternative assets, including Prisma, have been operating in this new niche in Brazil. Banks are also starting to seek opportunities in this market.
Companies that have recently resorted to the sale of legal claims include retailer Marisa—which sold tax credits to raise cash—and food processing company BRF. When contacted, Marisa and BRF declined to comment.
This market has also been boosted by cases from philanthropic hospitals (Santas Casas) selling lawsuits against the federal government and asking for payment for a bed in the public healthcare system (SUS). The so-called “thesis of the century,” which excludes the Tax on Circulation of Goods and Services (ICMS) from the social taxes PIS and Cofins base, has also been driving this market in recent years.
Companies also sold these litigation assets to raise cash amid court-supervised reorganization processes.
Vessel company Oceanpact, which does not face an emergency cash problem, announced a partial assignment of collection suits against Petrobras for charging daily contract fees. In a notice of material fact, the company informed the market that it received R$100 million and would take part, in the majority, of future amounts to be received in the lawsuit. Oceanpact also declined to comment on the matter.
Some companies have seen the possibility of selling legal claims as a way of “unlocking value,” as the disputes could generate billions of reais on their balance sheets. This market’s demand also receives a boost from companies interested in using certain types of tax credits to reduce taxation.
“The legal claim market emerged with the sale of single-name claims [with just one claim holder]. The sale of a portfolio came later. Now, as the market matures, there is a group of companies that do not necessarily need to raise capital, but they sell this package in search of efficiency of funds,” said Guilherme Setoguti, a lawyer ahead of the Brazilian Association of Special Situations and Litigation Finance. The association was created last year to meet the demands of this industry. The increase in the number of asset managers specializing in “special sits” has fueled this market in recent years.
Gustavo Junqueiro, a partner at Dias Carneiro Advogados, points out that the understanding that these assets are “totally unrelated” to companies’ businesses was a key driver for this market growth. It represents a good choice for companies seeking liquidity.
“Companies are exploring their numbers to find possible illiquid funds,” said Francisco Clemente, a partner at KPMG. According to him, the new legislation on court-supervised reorganization is among the reasons for this market growth. Research on alternative assets recently launched by KPMG revealed that having cash on hand is the main driver for selling these assets. Many companies also sell defaulted loans for this purpose, in a fast-growing market in Brazil.
At Latache Capital, an asset manager specializing in special situation assets, the approach by companies considering entering the segment of legal claims has grown, as companies realize these assets’ value. “Companies have been going through a process of internal transformation and realize that legal assets have value and they can take advantage of these opportunities for extraordinary monetization,” he points out.
According to him, extensive due diligence is required before the acquisition of these assets to understand the counterparty’s payment capacity, with a direct impact on risk and pricing. A common clause in the acquisition of legal claims, he says, is the earn-out. If payment is made within a shorter time than estimated at the time of purchase, the company receives an additional pre-agreed amount. At Latache, to be eligible for purchase, a lawsuit must have passed the final ruling, when there is an unappealable decision on the matter.
Felipe Ciciarelli, the head of the legal claims area at Makalu Partners, argues that this market is not new in Brazil, as IOUs have always attracted investors. However, more recently, this went through a dearth when a proposal to amend the Constitution [“Precatórios PEC”] affected the payment of IOUs by the federal government, reducing investor appetite. As this topic is now more structured, Mr. Ciciarelli expects a new boost, as it is also expected that more assets will be sold by companies.
According to the executive, Makalu is currently dealing with around R$1.1 billion in these assets, considering face value. They involve different cases, not only the public sector but also large-sized companies. There, according to Mr. Ciciarelli, the focus has also turned to private disputes, which can include the sale of hereditary or commercial claims or even collection suits for charging fees.
Prisma Capital has been in talks with large companies to back their litigation. “The company prioritizes the allocation of its capital in core business, not in litigation,” said João Mendes, a partner at the asset manager. In this type of business, there is a partial assignment of the legal claim, which means that the asset manager backs the case—from lawyers to other costs involved—and the company can have a leaner legal department, participating in the gains obtained from the success of the action. “The company also has a committed partner, who would invest capital to generate results. Someone to share the risk,” he adds.
Companies have recently started to use these lawsuits as a way of obtaining cheaper capital, aiming to reduce leverage, for example. “These assets [legal claims] are very financially useful. The general counsel of a company ends up sharing a role that previously was only of the CFO. The legal department becomes more efficient, serving as a source of funds for the company,” said Mr. Mendes, from Prisma. By packaging these lawsuits into a FIDC, a company receives the agreed-upon money. Later on, as the processes are successful, it would keep a large part of the gains.
“The beauty of this type of FIDC is that it is made up of diverse cases, with various legal risks. Diversification reduces risk and allows for more attractive rates,” the Prisma partner points out.
Mateus Tessler, a partner at Jive, points out that companies are showing an increasing interest in using these claims as collateral for loans. As they are carried out through a fiduciary assignment, in addition to obtaining competitive rates, a company could keep the amount of the debt off its balance sheet, Mr. Tessler explains. “We prefer to do that. The disbursement is lower and we avoid the risk of delay [in payment],” he said. “Usually, large companies do that. The legal advisor, not the CFO, is the one who suggests it.”
Justice Flávio Dino freezes payments until lawmakers create rules for traceability, efficiency
08/15/2024
Flávio Dino — Foto: Antonio Augusto/STF
Justice Flávio Dino of Brazil’s Supreme Court ordered the suspension of all mandatory parliamentary budget allocations until Congress establishes new guidelines to ensure transparency, traceability, and efficiency in the disbursement of these funds. Exceptions are made only for ongoing infrastructure projects and emergency disaster relief efforts.
These mandatory budget allocations, which the federal government is required to execute, are divided into two types: individual allocations (which include so-called “direct transfers,” where funds are sent directly to state and municipal governments) and group allocations. Together, these allocations amount to approximately R$40 billion.
Justice Dino’s ruling caught members of Congress off guard. Lower House Speaker Arthur Lira convened a meeting with party leaders from the governing coalition and opposition to discuss a response, but no consensus had been reached by the end of the night. Mr. Lira also planned to consult with Senate President Rodrigo Pacheco. One idea under consideration is to request that Chief Justice Luís Roberto Barroso reassign the case to another justice.
In a related move, the chairman of the Congressional Joint Budget Committee, Congressman Júlio Arcoverde, hastily called a session on Wednesday night to vote down a provisional executive order that would allocate R$1.3 billion in credit to the Judiciary. This action was taken in retaliation for what lawmakers perceived as an infringement on their legislative authority. However, by the time of publication, there was still no quorum to vote on the measure, and the Lula administration was hesitant to support the initiative pushed by the center-right bloc and opposition.
Mr. Arcoverde’s session was convened just minutes after Justice Dino’s decision. Earlier in the day, Mr. Arcoverde had scheduled a session to address Justice Dino’s concerns by approving a bill that would amend the 2024 Budget Guidelines Act to specify the use of “direct transfers.” However, this plan was abandoned following Justice Dino’s latest decision to suspend all budget allocations.
In his decision, Justice Dino said that the execution of budget allocations must comply with standards of efficiency, transparency, and traceability. He argued that mandatory parliamentary allocations should comply with constitutional requirements and should not be subject to the “absolute discretion of the lawmaker proposing the allocation.”
“It is important to clarify: ‘Mandatory Budgeting’ should not be confused with ‘Arbitrary Budgeting.’ While public administration allows for discretion in various aspects, it must not lead to arbitrariness that disregards constitutional and legal norms,” the justice wrote.
Justice Dino also expressed concern that the current process for distributing these funds limits the Executive Branch’s ability to implement public policies and effectively turns members of Parliament into “expense coordinators.” He further noted that it is “incompatible with the constitutional order” to execute the public budget privately and secretly.
“As it stands, the detailed execution of the budget no longer depends on administrative decisions within the Executive Branch, but merely on rubber-stamping decisions made by another branch of government,” Justice Dino wrote.
According to the rapporteur, amendments to the federal constitution cannot violate fundamental clauses such as the principle of separation of powers. He also pointed out that the Executive Branch must check whether the funds are fit for implementation per the Constitution.
The preliminary injunction was issued in response to a Direct Action of Unconstitutionality (ADI 7697) filed by the Socialism and Freedom Party (PSOL), which challenges constitutional amendments passed between 2015 and 2022 that mandate the execution of individual and group parliamentary budget allocations.
Justice Dino’s move is the latest in a series of actions aimed at curbing the practice of so-called “secret budgeting.” He is also overseeing a case that questions whether non-mandatory budget allocations, which were significantly increased in this year’s budget, are being used to maintain non-transparent funding practices similar to those previously associated with the so-called “rapporteur amendments,” banned by the Supreme Court in 2022.
These “rapporteur amendments,” identified by the RP9 marker, were officially attributed to the budget rapporteur but were, in practice, a tool for executing spending recommendations made informally by other lawmakers through backroom political deals.
In addition to overseeing the case on non-mandatory allocations, Justice Dino is also responsible for reviewing the “direct transfers,” created in 2019 and currently under scrutiny by the Supreme Court. Initially challenged by the Brazilian Association of Investigative Journalism (Abraji) and more recently by the Prosecutor-General’s Office, these direct transfers are a form of individual budget allocation that sends funds directly to states and municipalities without requiring them to be tied to a specific project or activity.
The mechanism was introduced to reduce bureaucratic hurdles in implementing projects, but experts have raised concerns about transparency, as it is possible to identify who requested the funds, but not how they will be spent, unlike other types of budget allocations.
*Por Flávia Maia, Raphael Di Cunto, Marcelo Ribeiro, Valor — Brasília
Company seeks partner for energy business, plans to divest assets to reduce leverage ratio
08/14/2024
Benjamin Steinbruch — Foto: Rogerio Vieira/Valor
CSN, the Brazilian steelmaker that holds a 12.9% stake in Usiminas, reiterated on Tuesday (13) that it will comply with the determination of the Administrative Council for Economic Defense (CADE), and more recently from the courts, to reduce its position in the competitor. However, the company still does not indicate a timeline for this move, which is defined in a process that is under confidentiality.
“The sale of the shares is still within the deadline set by the courts. CSN is observing the ideal moment to make this monetization and discussing, internally and with the authorities, the best way to do this,” the company’s chief financial and investor relations officer, Marco Rabello, told analysts.
The CADE determined in 2014 that CSN reduce its stake in Usiminas to less than 5%. Since then, the deadline for the operation has been reviewed twice, the last time in 2022. Less than a month ago, the courts ordered the sale of the shares again, and Usiminas indicated that CSN had failed to meet the legal deadline.
The timing is not ideal for this type of operation, as Usiminas shares have dropped more than 30% this year. However, divestment would help CSN reduce financial leverage at a time of high investments. Interest in acquiring assets from InterCement has been hindered precisely by this point, while CSN seeks alternatives to reduce its indebtedness.
In negotiations to bring a partner into the energy segment, Benjamin Steinbruch’s company is also negotiating the sale of a minority stake in mining. The floods in Rio Grande do Sul—CSN owns power generation company CEEE-G in the state—and the volatility of iron ore prices have prolonged the discussions, but the ambition is to close the deal by 2024.
In addition to the commitment to deleverage, another major challenge is the internationalization of the business, according to Mr. Steinbruch. “Internationalization is our biggest challenge, buying assets outside of Brazil. We are working hard on this,” said the CEO and chairman. CSN is particularly interested in steel assets in the United States and Europe.
According to the businessman, specifically in the steel business, there will still be a few quarters of efforts to reduce costs and modernization, although results have already begun to appear. “This was the first quarter after many where we showed a reaction [in steelmaking],” said Mr. Steinbruch.
In mining, the advances are more noticeable. “We are working with good future prospects. We are on the rise and will continue this way,” he said. In cement, production has already approached nominal capacity, with cost reductions, and the challenge is to “produce at full capacity.” Mr. Steinbruch also highlighted the growing contribution that the logistics business has brought to the results. “We are certain that infrastructure and logistics will be very valuable in Brazil soon.”
CSN’s results in the second quarter came in above expectations, particularly in mining. Net revenue rose 12% compared to the first quarter, reaching R$10.9 billion, while adjusted EBITDA jumped 35% to R$2.6 billion. On the bottom line, the company incurred a loss of R$222.6 million, reflecting the negative impact of the weakened real on foreign currency debt.
Despite three years without IPOs in Brazil, fixed-income securities sustain market activity
08/14/2024
Cristiano Guimarães — Foto: Gabriel Reis/Valor
With the equities market stalling and many mergers and acquisitions (M&As) operations on pause, the revenue of investment banks operating in Brazil has dipped to the lowest level in at least seven years. So far this year, revenues from typical capital market operations have totaled approximately R$2 billion ($361 million), marking a 12% decrease from the same period in 2023, when the start of the year was impacted by market paralysis due to the crisis at Americanas.
This decline also marks the third consecutive year of revenue reduction, primarily driven by the most significant dearth of initial public offerings (IPOs) in over three decades on the Brazilian stock exchange. This situation reflects the ongoing global volatility and high interest rates that have dampened enthusiasm for equities. Conversely, fixed-income operations continue to drive activity, buoyed by robust investor demand and significant capital flows into fixed-income funds.
From January through the end of July—a timeframe traditionally viewed as the first half of the year for the capital market—revenues stood at $412 million in 2023 and $666 million the preceding year. In 2021, which was a record-setting year fueled by extraordinary global liquidity during the pandemic, revenues from January to the end of July reached $1.04 billion, according to data from Dealogic, the consultancy firm compiling this information for Valor.
Regarding follow-on offerings, the Brazilian stock exchange hosted eight transactions in 2024, the largest of which was the privatization of Sabesp, which garnered R$14.8 billion. Despite being the largest public offering in the sanitation sector globally, the fees collected by the coordinating banks were modest, amounting to R$14.8 million. “Low commissions are typical in offerings of state-owned companies, and this particular offering is both a decoy and a market milestone,” noted a banker involved in the operation.
Expectations for the revival of Brazilian companies’ equity activities on the stock exchange are pinned on 2025, anticipated to coincide with lower interest rates in the United States, which could redirect investor funds back towards equities and attract foreign investors to the Brazilian market. Despite a current stagnation in equity market activities in Brazil, local and international fixed-income operations have bolstered the revenues of investment banks.
Cristiano Guimarães, Itaú BBA’s global director of large companies and investment banking, notes the ongoing challenges in the equities segment, driven by market volatility and the withdrawal of funds from multi-market and equity funds. However, he suggests that some follow-on offerings may still occur during the latter half of the year. Conversely, he highlights that the fixed-income market remains robust, significantly contributing to the activity within investment banking. “The market has seen considerable growth this year compared to last, primarily because last year started slowly due to the Americanas event and also due to the substantial volumes entering fixed-income funds,” he remarks.
Mr. Guimarães adds that most companies looking to manage liabilities through fixed-income issues, benefitting from spread compression, have already executed their plans. Furthermore, considering the macroeconomic backdrop, companies delaying investments might also influence the operation’s tempo in the upcoming months.
Regarding M&A, the executive from Itaú BBA highlighted that due to its less volatile nature, revenues have remained stable compared to the previous year, thus bolstering overall activity. “At Itaú BBA, the investment bank has continued to strengthen its market leadership year on year by leveraging its capabilities across fixed income, equities, and M&A, recognizing that each market behaves differently in certain periods. This year has particularly favored fixed income, where we’ve even increased our market share. While all segments are vital, the balance among products shifts annually,” he explained.
Bruno Amaral, a partner at BTG Pactual, observed that despite ongoing volatility in the variable income market and interest rates dampening investor enthusiasm, the bank’s activity this year has outperformed last year’s. “We are witnessing a skewed balance between products, with fixed income and M&A experiencing substantial activity,” he noted. Mr. Amaral anticipates the latter half of the year “might be busier.”
He suggested that one catalyst for foreign investment could be the anticipated U.S. interest rate cuts starting in September, though he cautioned that the U.S. elections might make investors wary. “M&A activity continues unabated; only the execution pipeline shifts,” Mr. Amaral added, mentioning that as one market sector gains momentum, it often stimulates others. Consequently, a revival in equity offerings could reinvigorate M&A activity. With interest rates potentially declining and capital flowing back to funds, he expects a positive cycle to emerge.
The banks are actively working to retain revenue internally. To maintain revenue streams, financial institutions are strategizing to increase their market share, as articulated by Eduardo Miras, the head of Citi’s investment bank in Brazil. He acknowledged that while the stock market remains tepid and M&A activities are delayed, the debt market has bolstered revenue levels. Mr. Miras revealed that in response to increased market volatility, Citi has shifted focus towards in-demand products like derivatives and other instruments not tracked by Dealogic. “We’re combating a challenging market with the resources available to us,” he stated.
For the executive at Citi, the latter half of the year appears to be as challenging as the first, with U.S. elections looming as a significant uncertainty. He notes that the current stock prices on the exchange have led to mismatches in valuations between buyers and sellers in M&As, thereby increasing deal failures. Mr. Miras also mentions that limited foreign interest in Brazil has been a factor, though he suggests that this could rapidly change with improved confidence in the country.
Fábio Medeiros, head of Morgan Stanley’s investment banking in Brazil, acknowledges that while the mergers and acquisitions market hasn’t been as robust as hoped, it has nonetheless bolstered the revenues of investment banks. He highlights that one of the main activities this year has been consolidation deals within the local market. Additionally, U.S. banks have been leveraging the active dollar-denominated fixed-income market, encompassing both bond issuances and structured debt operations.
With the equities team at Morgan Stanley’s Brazilian office focusing on Latin America, efforts have been particularly directed at other active markets, like Mexico. Mr. Medeiros expects that the anticipated commencement of interest rate cuts in the United States will facilitate the redirection of investment flows to Brazil.
Mr. Medeiros also points out that current expectations in equity operations are centered on share sales by private equity funds, as many are approaching the time to return capital to investors. “These disposals are likely to be driven primarily by sponsors. Firms that needed to offload shares to reduce debt have mostly completed those transactions,” he explains.
Given the ongoing market volatility, he expects these exits to occur through “block trades,” which are quick transactions involving the sale of large blocks of shares at an auction on the stock exchange.
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