Market shows mixed reactions to Central Bank’s policy decision

Short-term interest rates dip amid balanced communication; long-term rates rise on external pressures and risk premium demands

02/08/2024

Denis Ferrari — Foto: Rogerio Vieira/Valor

Denis Ferrari — Foto: Rogerio Vieira/Valor

The reception of local agents to the Central Bank’s Monetary Policy Committee (COPOM) decision was mixed. While some of the market bet on and chose to see a harsher tone in the monetary authority’s communication given the recent depreciation of the Brazilian real and the de-anchoring of inflation expectations, another part of the investors assessed the decision as balanced. In this context, short-term interest rates closed the day with a slight drop, as bets decreased that the Central Bank would resume monetary tightening in the coming months, while long-term rates rose, with market agents demanding higher risk premiums to hold Brazilian assets.

The local market was also pressured by fears of a recession in the U.S. economy, which ended up heavily affecting the real and emerging market currencies.

At the end of the session, the Interbank Deposit (DI) contract rate for January 2026 fell to 11.565% from 11.625%, while the DI rate for January 2029 rose to 12.025% from 11.99%. The exchange rate advanced 1.43%, with the exchange rate at R$5.7349 per dollar.

According to Denis Ferrari, fixed income manager at Kinea Investimentos, the COPOM statement was good, and the authority made a correct diagnosis of the scenario. The market’s reaction was quite coherent until the external scenario showed a strong deterioration, ultimately contaminating local assets.

“The statement showed concern, but without a certain exaggeration that part of the market would like. I think the Central Bank’s diagnosis is very fair. It shows that they may, at some point, have to discuss raising interest rates, and if necessary, it will be discussed. They might even raise them, but such a move is not imminent,” he said.

Mr. Ferrari also believes that monetary policy shouldn’t try to address the problem of currency depreciation. “The exchange rate responds much more to external factors and should not be the focus of monetary policy,” he said.

The manager said he maintains positions that benefit from the local market’s decline in short-term interest rates. “I think the bar for a rate hike in September is still high. It could happen, but the Focus survey would need to keep worsening, and the real would have to fall beyond R$5.80 per dollar. Even in this scenario, I think the Central Bank could say that the risk balance has become asymmetric and raise rates in November.”

On the other hand, Sergio Silva, partner and macro co-manager at Tenax Capital, said that there has been a rapid deterioration in local assets recently, which has consumed a certain “cushion” that the COPOM kept in its strategy of keeping inflation on target with the Selic rate paused at 10.5% per year.

In this context, the manager believes that the COPOM could have issued a slightly tougher warning, making the minutes’ reading very important to understand the discussions within the committee. “We are seeing the currency at R$5.70. It is a much higher level than we saw six months ago. There is still a need for fiscal implementation and commitment to medium-term targets, which could lead to a reduction in the risk premium that the market demands. There is nothing that indicates, for now, that the scenario is improving, and things are converging to a lower level. If this is the case, the faster you act, the less you would have to react,” said Mr. Silva.

Even after the COPOM avoided signaling that it intends to raise rates in the short term, the scenario gained traction among market participants. Although it maintains the expectation that the Selic rate should start falling again in December in its baseline scenario, UBS BB sees “growing risks” of rate hikes still this year and considers a 30% chance that the Central Bank will be forced to increase the policy rate in September.

“The expected response of monetary policy and a subsequent softer fiscal policy leave us with an alternative scenario of three 50-basis-point increases in September, November, and December,” which would bring the Selic rate to 12% at the end of this year, with a resumption of monetary easing at the beginning of 2025.

In the current context of elevated uncertainties, Tenax maintains only tactical positions on the yield curve at this moment and has been making bets with a shorter investment horizon. “It seems that we have a challenging future concerning fiscal commitment. This has partly explained the underperformance of Brazilian assets we have been observing,” said Mr. Silva.

Daniel Cunha, the chief strategist at BGC Liquidez, also said that the market’s reception to the Central Bank’s statement ended up being contaminated by external factors. “We saw a risk-averse session, particularly with strong movement in the currency market, making it difficult to isolate the ‘post-COPOM factor’ in the assets. In any case, I dare say that the decision was well received, as much as possible, judging by the modest steepening of the curve, even amid the strong currency deterioration,” he said.

In his view, the narrative of a recession in the U.S. still does not seem to be supported by the data. “I do not see today’s session [Thursday] as a narrative shift or initiation of a new regime of American recession. I understand it more as a one-off adjustment, with agents wishing to lighten their positions to get through this less liquid window that occurs during the period of vacations in the Northern Hemisphere,” he said.

*Por Gabriel Roca, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Supreme Court to decide on tax cases impacting public finances by R$712bn

Key case this month addresses the exclusion of ISS from PIS/Cofins calculations

02/08/2024

Saul Tourinho — Foto: Divulgação

Saul Tourinho — Foto: Divulgação

At least 32 critical tax cases against the federal government, states, and municipalities, with a combined estimated impact of R$712 billion on public finances, are currently pending before Brazil’s Supreme Court. Three of these cases are scheduled for this month, including one highly anticipated by taxpayers, known as the “thesis of the century.” It concerns the exclusion of the Services Tax (ISS) from the social taxes PIS and Cofins tax base.

The analysis was conducted by Machado Associados law firm and includes cases mentioned in the Fiscal Risks Annex of the 2025 Budgetary Guidelines Bill (LDO). Although the potential financial impact remains substantial, experts note that the most significant cases have already been adjudicated by the higher courts in recent years. For instance, at the Superior Court of Justice, all items listed in the LDO have been reviewed on their merits, leading to an estimated R$80.4 billion being reclassified as having a “remote risk” of impact.

One of the most eagerly anticipated tax rulings, set for August 28th, involves an appeal concerning the exclusion of ISS from the PIS and Cofins tax base at Brazil’s Federal Supreme Court. Should the appeal fail, it could result in a fiscal impact of approximately R$35.4 billion on the federal government.

This case is underscored by the landmark decision made in 2017, often referred to as the “thesis of the century,” which involved the removal of the ICMS (a state tax on goods and services) from the PIS and Cofins tax base. The current case could set a precedent affecting related secondary legal arguments and interpretations, known in Brazil as “teses filhotes.” Taxpayers argue that the reasons for excluding ICMS should similarly apply to ISS. However, the Attorney General’s Office of the National Treasury (PGFN) holds a contrary position.

The issue had initially split the justices, resulting in a tie after eight votes when it was first addressed in an online session in August 2020 (RE 592616). With the case now moved to the physical courtroom, the trial will restart, though the opinions of retired justices will remain influential.

“There is great anticipation among service providers who have awaited a resolution for many years,” states Maria Andréia dos Santos, a partner at Machado Associados. She believes the prospects are promising, likening the case to the influential “thesis of the century.” However, she cautions that outcomes may vary in other related teses filhotes, such as the one involving PIS and Cofins within the tax base itself (RE 1233096), which has a projected impact of R$65.7 billion, where taxpayers might face challenges.

This expectation reflects the Supreme Court’s previous rulings, like the decision that upheld the inclusion of ICMS in the calculation basis of the Social Security Contribution on Gross Revenue (CPRB)—RE 1187264—as constitutional. “We anticipate decisions that will delve into the specifics of each case, aligning with the court’s established jurisprudence. However, the general outlook for teses filhotes is not favorable,” she notes.

Additionally, on the same day as the review of the ISS exclusion from the PIS and Cofins tax base, the justices may also finalize their analysis of the collection of the Rural Workers Assistance Fund (Funrural) from individuals—this sector’s social security contribution (direct action for the declaration of unconstitutionality – ADI 4395), with a potential financial impact of R$20.9 billion. This charge has already been deemed constitutional, and the current discussion centers on the concept of subrogation, which involves early collection or a form of tax substitution.

The August agenda also includes a case of significant interest to states and municipalities. The justices are set to determine whether ICMS or ISS should be levied on industrialization operations to order when such operations serve as an intermediate stage in the production cycle of goods (RE 882461).

According to the LDO, however, the cases with potentially the most substantial impact have not yet been scheduled. These include a dispute over the limits on deducting education expenses from income tax, estimated to impact R$115 billion (ADI 4927), and a case addressing the requirement for a complementary law to levy PIS/Cofins on imports, which could affect up to R$325 billion (RE 565886).

Tiago Sbardelotto, an economist at XP Investimentos, notes that the lawsuits listed in the Fiscal Risks Annex are unlikely to impact public accounts in 2024. Even if the scheduled items are adjudicated, their effects will only materialize once the decisions are final and unappealable, a scenario not expected to occur in the latter half of the year.

Mr. Sbardelotto outlines three phases of consequences stemming from tax judgments. The most immediate involves offsetting, where companies can claim credits they would have received and use them to offset the taxes they owe. However, Law 14873 of 2024 has introduced limits on the use of these credits, aiming to enhance predictability in tax revenue.

Tax decisions significantly influence tax computations, according to the economist. For example, if the Supreme Court determines that ISS should not be included in the PIS and Cofins tax base, Brazil’s Federal Revenue Service will be required to cease its collection, markedly affecting future tax revenues. However, he notes that with tax reform, although historical amounts would be maintained, the impact of such a decision would not be felt in the future.

The third phase, as outlined by Mr. Sbardelotto, involves the reimbursement of overpaid amounts through court-ordered refunds, which has been a significant concern in recent years. “While it takes time to materialize, it has a considerable impact on the budget,” he explains.

Saul Tourinho Leal, a partner at Tourinho Leal Drummond de Andrade Advocacia, observes that there is considerable pressure from the federal government on judicial outcomes that favor public finances. Despite this, he anticipates that with ongoing tax reform and potential new government budget measures, the Judiciary may face less pressure to resolve public account issues in the second half of the year as it has in the past.

Felipe Salto, chief economist at Warren Investimentos and former director of the Senate’s Independent Fiscal Institution (IFI), adds, “The Fiscal Risks Annex outlines, among other elements, factors that could incur costs for the federal government, such as judicial rulings, especially those involving tax matters. These represent potential expenses that must be monitored closely, one by one.”

According to Mr. Salto, there have been instances where the National Treasury has successfully contested disputes that could have led to significant costs or revenue losses for the federal government, which is commendable. He points to the social security debate around the “lifetime review” and references the legislative response to the decision that excluded ICMS from the PIS and Cofins base, culminating in Law 14592 of 2023. This law mandates the exclusion of ICMS in the calculation of social contribution credits.

At the Superior Court of Justice, though not accompanied by an impact estimate or mentioned in the LDO, tax attorney Maria Andréia dos Santos is closely watching the debate concerning the nature of stock option plans to determine the applicable income tax rate and the timing of its imposition—special appeal (Resp) 2069644.

Ariane Guimarães, a partner at Mattos Filho, draws attention to other significant issues pending before the Superior Court of Justice in repetitive appeals. One involves the potential refund of overpaid amounts as ICMS-ST—special appeals (REsps) 2034975, 2034977, and 2035550. Another pending decision will clarify whether providing a surety or bank guarantee can suspend the enforceability of a non-tax credit (REsps 2007865, 2037317, 2037787, and 2050751).

The PGFN declined to comment on the matter.

*Por Beatriz Olivon — Brasília

Source: Vaslor International

https://valorinternational.globo.com/
/by

With new owner, GSI aims to double in size in 5 years in South America

Company was part of AGCO’s grains and proteins division, sold to American Industrial Partners for $700m

07/31/2024

Ricardo Marozzin — Foto: Divulgação

Ricardo Marozzin — Foto: Divulgação

With a new owner, GSI is set to make waves in the storage and post-harvest systems market in Brazil and other South American countries. The goal is to double in size within five years, based on the 2023 revenue in the region of nearly $200 million.

Last Thursday, AGCO announced the sale of its Grains and Proteins division to the private equity firm American Industrial Partners (AIP) for $700 million. This division, which generated $1 billion in revenue globally last year, includes GSI and the brands AP, Cimbra and Tecno (automation systems), Cumberland, C-Lines, and Agromarau (dedicated to poultry and swine solutions).

Ricardo Marozzin, who recently completed 25 years at AGCO, will continue to lead GSI, tasked with growing the company and generating returns for shareholders. “Since 2003, AIP has been interested in GSI because of its desire to enter agribusiness. It’s a fund with extensive experience in the industrial sector, managing $16 billion in assets,” the executive told Valor.

AIP is a partner in 45 companies across various sectors, primarily in the U.S. and Canada. Among its partners are major pension funds and institutional investors.

“In preliminary meetings, we noticed that AIP wants to optimize the positive agricultural cycle in South America and plans to use its experience to assist GSI,” Mr. Marozzin stated. However, an investment plan has not yet been developed.

The company’s growth in the region is expected to be supported by the continuous development of automation solutions for silos and post-harvest systems, as well as comprehensive infrastructure for swine and poultry farming.

AGCO’s former division offers everything from the construction of animal housing to autonomous systems for distributing birds and feed, electronic controls, and remote operation supervision. “In serving poultry and swine farmers, we are leaders and will continue to invest in technology,” he said.

In the silo area for grain storage, GSI has not been able to replicate its international dominance in Brazil and is losing ground to Kepler Weber. “We are catching up and getting close to Kepler, which is a century-old company and a leader in the national market. A few years ago, we were the fifth player in the storage sector in the country, and now we are the second,” he stated.

Like the segment leader, GSI is betting on artificial intelligence to automate silos and processes for producers. “We can, for example, export technology for the company’s operations in Africa because the region has many similarities with South America,” he said. In the region, besides Brazil, he sees promising markets in Colombia, Peru, and Paraguay.

The deal between AGCO and AIP involves 14 factories worldwide, including two in Rio Grande do Sul. AGCO retained a storage division in China.

The transaction value implied a multiple of 8.3 times the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of AGCO’s storage business for the 12 months ending March 31. This sale is part of AGCO’s strategic shift to focus on its core business. GSI was acquired by AGCO in 2011 for $940 million.

In a statement, AGCO CEO Eric Hansotia said, “The sale of this business allows us to optimize and enhance our focus on our premium portfolio of agricultural machinery and precision farming technology products, sustaining a long-term focus on high-growth, high-margin, and free cash flow-generating businesses.”

*Por Fernanda Pressinott — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Budget freeze hits R$4.5bn in infrastructure program

Ministry of Health also faced cut of R$4.4bn

07/31/2024

The federal government released the Budget and Financial Programming Decree on Tuesday night (30), detailing a freeze of R$15 billion in expenditures. The document outlines a cut of R$4.5 billion from the new Growth Acceleration Program (PAC), and a limitation of over R$1 billion on parliamentary budget amendments.

Among federal agencies, the Ministry of Health was the most affected, facing a freeze of R$4.419 billion. Following were the Ministries of Cities (R$2.133 billion); Transportation (R$1.512 billion); Education (R$1.284 billion); and Social Development, Family, and Hunger Combat (R$924 million).

In a statement, the Ministry of Planning and Budget (MPO) emphasized that the freeze distribution followed “guidelines to preserve the allocation of resources in health and education (constitutional minimums), ensure the continuity of public policies for the population, and maintain the federal government’s commitment to the fiscal result target set for 2024.”

From now, ministries and agencies “have until August 6 to adopt adjustment measures and carry out the procedure for indicating the programs and actions to be blocked.”

The freeze was announced by Finance Minister Fernando Haddad in mid-July. The measure aims to meet both the federal government’s primary result target and the spending limit imposed by the fiscal framework.

By type of expenditure, the freeze was mainly concentrated on the discretionary spending of the Executive Branch—in other words, funds indicated by the agencies themselves over which the government has control. This spending category faced a containment of R$9.256 billion.

Limitations on Novo PAC expenditures, also executed by ministries but with a specific budget marker, totaled R$4.5 billion, concentrated mainly in the ministries of Health, Cities, and Transportation. Earlier this month, Planning Minister Simone Tebet stated that the freeze would only affect uninitiated construction works.

Regarding Congress-indicated spending, the containment focused on committee amendments (R$1.095 billion), which are not mandatory. Mandatory block amendments faced a limitation of R$153 million, while individual mandatory amendments were spared.

The primary result target for this year is a zero deficit, with a tolerance range of 0.25 percentage points of GDP, up or down. This range is approximately equivalent to R$28.8 billion. The ministries of Finance and Planning and Budget currently project a negative result of R$28.8 billion, at the lower limit of the range, for 2024. The fiscal framework limit is R$2.116 trillion.

The MPO noted that the containments might be revised throughout the execution.

*Por Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/
/by

Court-supervised reorganization volume rises, set to hit record in 2024

Second-quarter growth reaches 10.5% over last year, reports RGF Monitor

07/31/2024

Roberta Gonzaga — Foto: Divulgação

Roberta Gonzaga — Foto: Divulgação

The number of companies undergoing court-supervised reorganization in Brazil is on the rise, with a record volume anticipated for this year. The increase was 10.5% in the second quarter compared to the same period in 2023, according to the RGF Judicial Recovery Monitor by consultancy firm RGF & Associados, which shared the data exclusively with Valor. At the end of June, 4,223 companies were negotiating debts in court, compared to 3,823 last year. This is the highest number of companies in reorganization since RGF began keeping records a year ago.

Rio Grande do Sul, which experienced the most significant environmental tragedy in its history at the end of April and beginning of May, is now the state with the second highest number of companies in this situation: 361 small, medium and large companies, second only to São Paulo, with 1,279. In the same period last year, the state was in fifth place.

Experts say the high Selic, Brazil’s benchmark interest rate, now at 10.5% per year, coupled with entrepreneurs’ greater knowledge of the institute, are some of the reasons for the growth. Debts rolled over at the time of the COVID-19 pandemic in 2020 began to fall due at the end of last year, another factor that explains the figures. In addition, loans and credit lines created for that period are no longer able to stem the damage.

Odebrecht Engenharia e Construção (OEC), with a debt of $4.6 billion (R$25.3 billion), and Polishop, with liabilities of R$395.6 million, were some of the main companies that sought a solution in the courts. In the case of OEC, the debt was renegotiated in 2020 with a grace period of four and a half years. Negotiations with creditors began at the end of 2023, and the reorganization process was filed at the end of June.

Polishop filed for reorganization in early April after closing nearly 200 physical stores since 2021. The company attributed its difficulties to disruptions in the production chain of its imported product lines from China and a decline in sales. Both Polishop and other companies have cited the pandemic and the high Selic interest rate as contributing factors to their challenges.

Roberta Gonzaga, a consultant at RGF, notes that while the number of companies undergoing restructuring continues to rise, the pace has slowed significantly. “The slowdown has been quite notable. In previous quarters, we saw over 200 companies in reorganization; this quarter, the number was 141,” she states.

Ms. Gonzaga also observes that, relative to the total number of companies in the country, the impact of the crisis appears less severe according to the RGF Monitor’s Court-Supervised Reorganization Index (IRJ). The index shows that 1.84 out of every thousand corporations were in reorganization during the period, from a pool of 2.3 million. This ratio is slightly lower than in the first three months of this year, when it stood at 1.87, and also less than the last quarter of 2023, which recorded 1.85 companies in reorganization per thousand.

The states with the highest recovery indices remain unchanged, with Goiás (4.77), Alagoas (4.44), Pernambuco (4.29), and Sergipe (3.6) leading. The sectors facing the most significant difficulties also remain consistent with the previous quarter. Sugarcane cultivation continues to lead, with over 24 companies per thousand in recovery, followed by dairy manufacturing (16.45), municipal public road transportation (14.96), highway and railroad construction (14.22), and soybean cultivation (12.09).

According to Ms. Gonzaga, changes in the performance of regions or sectors are not typically swift, nor do they necessarily indicate a crisis within a state. “Given the vast base of companies, shifts in the indicators require analysis over an extended historical period to be meaningful,” she explains.

For instance, Ms. Gonzaga notes that Goiás, with its significant agricultural base, is naturally prone to certain challenges. “The situation in the state isn’t inherently poor; it’s merely that its economic characteristics differ. Similarly, the Northern region, which is less developed, often appears more favorable in the indicator, yet it has fewer companies in the key sectors driving the market,” she adds.

Ms. Gonzaga also points to an encouraging trend in the reorganization rate of companies post-restructuring. In the second quarter, 74% of the 123 companies that exited court oversight resumed operations successfully. However, 28 companies declared bankruptcy, and five either relocated, closed down, or suspended operations.

Rodrigo Gallegos, a partner at RGF & Associados, highlights a common pattern in the type of debt that leads companies to seek court intervention: a significant portion typically stems from obligations to financial institutions. This situation creates a cyclical problem for debtors who are forced to extend their debt and inject more capital, which often must also be sourced from banks. If a company only addresses its financial issues without tackling the underlying problems that led to the crisis, it still faces a serious challenge,” he cautions.

To avoid court-supervised reorganization or to emerge from it successfully, the key is to first “do some internal homework” by identifying the most profitable areas. “The company must address the root cause, engage in strategic planning, and enhance operations, selling or eliminating all non-essential elements,” advises the expert.

He also emphasizes the importance of maintaining a “minimum amount of cash” before filing for court-supervised reorganization and suggests that companies should only file after thoroughly assessing their structures. He predicts that an improvement in national figures could begin to materialize by the end of this year or early next year if the Selic rate decreases. “If the Selic continues to fall and drops below double digits, we should expect to see a decrease in the number of companies entering court-supervised reorganization rather than an increase,” Mr. Gallegos states.

Gabriela Martines, a partner in TozziniFreire’s restructuring and corporate reorganization area, expects this year to set a record. Beyond economic factors, she notes that the amendments to Law 11101/2005 made in 2020 are starting to take effect. “The negative stigma associated with reorganization has diminished, and there is greater awareness now,” she observes.

The most commonly employed amendments include the preliminary injunction, which accelerates the effects of the recovery, Debtor-in-Possession (DIP) financing, and the mandate to conclude the case within two years. “These changes make it more appealing to investors outside the traditional financial sector,” she adds.

The surge to a record number of filings is underscored by the latest data from Serasa Experian. In June 2024, a total of 1,014 companies initiated judicial reorganization proceedings, marking a 71% increase from the same month in the previous year, when 593 companies did so. This number represents the highest volume recorded for this period in the historical series, exceeding the previous high in 2016 when 923 companies were in reorganization.

*Por Marcela Villar — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Mover’s heirs resume agreement with CSN to sell InterCement

Third generation of founders of former Camargo Corrêa wants to keep part of CCR shares given as collateral; negotiation depends on Benjamin Steinbruch

07/30/2024

The sale of InterCement is considered crucial for the group to focus on less problematic businesses — Foto: Divulgação

The sale of InterCement is considered crucial for the group to focus on less problematic businesses — Foto: Divulgação

The controlling shareholders of Mover, the company formerly known as Camargo Corrêa, are seeking a quick solution for the sale of InterCement, the last major business that remained with the third generation of the group founded by Sebastião Camargo.

Last week, the company announced that it had re-opened talks within the exclusive dealing agreement with CSN—which had expired on July 12—for the sale of the family’s cement division. The new deadline is Wednesday (31) but if negotiations gain ground the agreement will be valid until August 12th. Until then, the group is rushing to sell all its operations in Brazil and Argentina to businessman Benjamin Steinbruch, an old rival.

In a note to the market last week, CSN confirmed its interest in InterCement Brasil’s assets but pointed out that no binding documents have been signed to date that create an obligation or commitment to carry out the deal.

A person close to Mover’s controlling shareholder told Valor that the divestment is crucial for the family’s heirs—the group’s third generation—to focus on less problematic businesses.

The current generation is made up of grandchildren and husbands of the founder’s three heirs—Regina, Renata, and Rosana, the daughters of Sebastião Camargo—who took over the business in 2015. Important companies in the conglomerate—from Alpargatas to a stake in electric utility CPFL Energia—were sold to raise cash, and business areas were redesigned after the anti-corruption task force Car Wash. The breakdown of the conglomerate has not yet been completed.

InterCement was regarded as a promising asset despite its high debt. Mover, Brazil’s second-largest cement producer, intended to carry out an initial public offering (IPO), but the plans were halted in 2021 due to an adverse capital market scenario.

Since then, the financial situation has worsened and pressure from creditors increased. With debt approaching R$12 billion, the company went to court this month to avoid the forced collection of R$3 billion that was due in July.

According to the source, the best scenario for the family would be selling the entire operation in Brazil and Argentina to CSN. A sale of separate stakes would take longer and would be not as profitable, although there are local interested parties for Loma Negra, listed on the Argentina stock exchange, according to this source.

However, it depends on reaching an agreement with the creditor banks—a process that is underway. At the same time, it remains unknown how Mr. Steinbruch will manage the refinancing of the heavy debts. The deadlines are also tight. Furthermore, the family offered part of its shares on highway concessionaire CCR as collateral to Bradesco but now is refusing to give them up.

Mover has 14.86% of the company, currently seen as the best asset in the group. CCR’s market capitalization is around R$25 billion.

Another person familiar with the conversations said negotiations involving the shares are “complex.”

According to this source, there is a favorable agreement being discussed and no definition so far.

If the heirs manage to resolve the issue, they will remain as CCR’s main shareholders and continue leading the company’s key real estate portfolio. Construction company HM, with a focus on the affordable housing segment, is part of the group, in addition to other key real-estate enterprising.

The heirs gave control of their companies and preferred to own a holding company that manages assets, which have been decreasing year after year.

This year, the holding company sold finance outsourcing firm Vexia to Francisco Ricardo Blagevitch, the founder of Asyst—later sold to the Algar Tech group—and Sami Arap, a lawyer specializing in M&A and compliance.

Mover declined to comment on the matter.

*Por Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Listed company M&A activity accelerates

Attractive bargains and restructuring opportunities fuel interest

07/30/2024

Felipe Thut — Foto: Celso Doni/Valor

Felipe Thut — Foto: Celso Doni/Valor

The lackluster performance of the Brazilian stock market, which has significantly reduced the market value of many companies, is expected to spur mergers and acquisitions (M&As) involving listed companies. In search of bargains, firms in need of capital restructuring are becoming prime targets. Consequently, there is increased interest in companies with surplus cash.

Valor has discovered that private equity funds are particularly drawn to those that have experienced substantial devaluation in the stock market. These funds have shown a preference for companies without a defined controlling shareholder, known as “corporations.” According to a source, many acquisitions involve purchasing small stakes in the stock market, allowing funds the flexibility to sell when advantageous.

While takeovers are not off the table, they present additional challenges, especially if the goal is to privatize the company. A notable instance is Mubadala’s purchase of Zamp, which manages Burger King in Brazil. Following the acquisition, Mubadala temporarily paused its strategy of forming a franchise group in the country.

Moreover, the pursuit of financial restructuring is a key motive behind the interest of furniture and decor company Tok&Stok in Mobly, which still retains cash from its 2021 initial public offering (IPO). Tok&Stok did not respond to a request for comment from Valor.

M&As are driven by various motives, one of which is providing a quicker route for privately held companies to list on the stock market, especially when the prospects for new IPOs are unclear. By merging with a publicly traded company, a privately held entity can become publicly listed through an exchange of shares, which finalizes the merger. GetNinjas, significantly undervalued since its IPO, is cited by sources consulted by Valor as a potential target for such an M&A strategy. When approached for comment, the company stated that it does not discuss “market speculation” and remains focused on executing its “business plans.”

Diogo Aragão, head of mergers and acquisitions at Bank of America (BofA) in Brazil, acknowledges that there are potential deals under consideration, with many aimed at capitalizing companies. “We’re observing more structured transactions currently,” he noted.

The search for reinforcement in the balance sheet should drive other transactions throughout the year. Felipe Thut, head of the investment bank at Bradesco BBI, also points out that strengthening balance sheets is a major driver for current M&A activities involving listed companies. These transactions transform private companies into publicly traded entities. “There’s significant discussion and ongoing conversations, fueled by the anticipation of ‘higher for longer’ interest rates,” he explains.

According to the BBI executive, these transactions are beneficial in multiple ways. They not only adjust the balance sheet and reduce leverage for one of the companies involved but also create synergies. “Merging the companies leads to both a reduction in leverage and a gain in synergies,” he adds.

Leonardo Cabral, head of Santander’s investment bank in Brazil, acknowledges that various mergers and acquisitions involving listed companies are currently under consideration and make economic sense. However, he points out that the risk of not being able to privatize the target company necessitates more structured solutions, adding complexity and prolonging negotiations. “Economically, this type of transaction makes perfect sense,” he asserts.

This complexity is why such operations still require a maturation phase within the country. According to Mr. Aragão from BofA, for these transactions to become more commonplace in Brazil—as they are internationally—it will be necessary to educate the market and closely monitor the evolving discussions around takeover bids (OPAs), which are key instruments for going public or effectuating a change of control.

In response to persistent market demand for clarity, the Securities and Exchange Commission of Brazil (CVM) is reviewing this matter and is expected to issue new regulations on takeover bids later this year.

Henrique Lang, a partner in capital markets at Pinheiro Neto, emphasizes the intent behind the new regulations: “The aim is to have rules that are simpler to implement and generate less controversy.” He clarifies, however, that the current scarcity of transactions is more a reflection of the macroeconomic environment than of the existing rules regarding takeover bids.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Thefts surge in retail sector affecting supermarkets, pharmacies

Internal and external thefts of all kinds have reached highest level since 2019, causing R$11bn in losses

07/30/2024

Estimates show that in 2023, internal and external thefts accounted for 31.7% of losses, the highest level since 2019 — Foto: Hermes de Paula/Agência O Globo

Estimates show that in 2023, internal and external thefts accounted for 31.7% of losses, the highest level since 2019 — Foto: Hermes de Paula/Agência O Globo

In mid-March, the manager of a neighborhood market in Piraí do Sul, a town with 25,000 inhabitants in Paraná, noticed discrepancies between the value and quantity of products processed by one of the cashiers and the total collected at the end of the day. Uncertain, he checked the surveillance videos and discovered that the cashier on several occasions entered a password (which belonged to a supervisor, as investigations revealed later) to cancel sales.

Discreetly, she would then take the money from the register and stash it in her pants while the store was still open. The employee was dismissed for cause and criminal charges were filed.

This is not an isolated incident, nor confined to small towns. In Campinas, São Paulo, a cashier at a medium-sized supermarket, with 20 checkout points, owed her landlord R$300 in rent. They agreed she would repay it by simulating purchases of products worth that amount at her workplace.

“She pretended to scan the merchandise but didn’t do it. The issue was that they made a much larger purchase, of R$3,000, which caused a discrepancy in the register and triggered an alert within the company,” said Juliano Camargo, CEO of Nextop, whose client was the victim of the scam. Mr. Camargo has been working in retail theft prevention since 1996.

Simulating purchases to keep the product or settle debts, and even using supervisors’ passwords to cancel sales and keep the money, are common practices among thefts in the sector. Supermarkets and pharmacies are particularly prone to this type of crime. However, new methods are emerging, involving the instant-payment system Pix and other payment channels, such as ATMs, which have created opportunities for increased fraud.

Estimates by the Brazilian Association of Loss Prevention (ABRAPPE), supported by KPMG, show that in 2023, internal and external thefts (by customers, employees, suppliers, and promoters) together accounted for an average of 31.7% of losses, the highest level since 2019.

The total loss index for retail (including errors, thefts, and fraud) also accelerated, reaching the highest level since the survey began in 2016. The rate averaged 1.57% of sales in 2023, a 0.9% increase over 2022.

It may seem small, but Brazilian retail generated R$2.23 trillion in 2023, according to IBGE, which translates to an estimated loss of around R$35 billion. Considering only the projected share of thefts (31.7%) within the total, they accounted for just over R$11 billion.

This is more than half of the revenue generated by GPA, the owner of Pão de Açúcar, last year (R$20.6 billion) and nearly matches Renner’s entire gross sales in 2023.

“We have noticed an impressive increase in thefts. It is quite troubling,” said Carlos Eduardo Santos, president of ABRAPPE. By estimation, employee crimes rose to 9.8% in 2023 from about 6.8% of total losses in 2022, and thefts by outsiders increased to 22% from 16.6%.

“This has required much greater attention from stores on the subject in recent years, as there are social, racial, and economic issues involved, and retail is at the center of this complex and difficult debate,” he states.

To calculate these numbers, based on information provided by members, the networks rely on data such as video surveillance of customers and employees, and evidence like tampered packaging shortly after being handled by employees. The entity considers these estimates, as the cases do not always generate statistics through police investigations or lawsuits. In certain situations, chains avoid prosecuting customers and employees.

This occurs partly due to the risks involved. “There are certain thefts that create avoidable strain, such as cases of vulnerable customers. And the company does not want to risk exposure with all the visibility on discrimination and racial issues today,” said a union director in the sector.

According to the data, theft was second only to estimated losses from “damaged” products last year, which accounted for 43% of the total, leading the general ranking for years. This includes damaged and expired items, two of the sector’s main vulnerabilities.

It is also necessary to consider the need for chains to review internal loss control projects, including thefts after the pandemic. There were deep expense cuts that affected the control department, which may help explain today’s high rate.

As the volume sold in general retail took a hit after the pandemic, and interest rates rose after 2021, operations had to adjust to a different level of expenses and debts, and the loss prevention area felt the cuts. “It’s the same old story: when cuts are necessary, this department is one of the first to feel it, and then the bill comes due,” said Mr. Camargo.

Another industry data set confirms this scenario. According to a survey by Nextop, there were 41,000 cases of theft and fraud in food retail from January to June, 55% higher than in 2023, and the highest rate since at least 2019, the initial year of the survey requested by Valor.

This is more than double the number observed, for example, in 2021, the pandemic year when the unemployment rate was the second-highest since official records by the statistics agency IBGE began. The analysis includes 3,500 supermarket stores, partners of Nextop.

Another aspect affecting the numbers is the industry’s releases, and this year, there is already an expectation that thefts and robberies in pharmacies will increase compared to last year, due to the sale of Ozempic, used to treat diabetes. The medication, sold for R$1,100 per box, has become a craze among those willing to lose weight quickly. In this case, the product has been more targeted for robbery than employee theft, due to the security measures around Ozempic.

According to experts, the rise of self-checkout in supermarkets and fashion retailers, which are still operating with precarious controls in some cases, has pressured retailers’ losses.

“Companies say everything is going well, that theft is low, but that’s not quite the case,” said Mr. Camargo. “I have worked in large chains with losses of 15% at the quick checkout, while the normal would be 2%, 3%.”

According to him, some chains, like Pão de Açúcar, use tray reading systems. In these, the customer places all items on one side of the checkout, passes them all through the reader, and deposits everything on the other tray. Only after that, the customer can pay and pack.

Other chains, like Renner and Zara, perform an immediate reading of the entire purchase after it is placed on the tray. “The more difficult it is to shop, the less friendly the process, the higher the theft risk for the network. The store does this to protect itself,” said the CEO of Nextop, a company that keeps over 400,000 client videos related to theft.

The data also shows how theft has spread across the sector, beyond supermarkets, historically the most affected.

In 2021, in fashion chains, unidentified losses, which include thefts and frauds, were estimated at 1.1% of total losses, according to ABRAPPE, rising to 1.54% in 2023. In construction retail, it went to 0.93% from 0.66%, and in cash and carry stores, to 0.54% from 0.47%.

The rise of Pix operations has forced stores to improve their controls. Purchases through apps, with remote payment, have led to a sharp increase in falsified receipts among small grocery stores, experts say.

One of these scams involves payment using the cashier operator’s account when making a Pix. At that moment, the employee provides their bank key instead of the store’s. Therefore, companies have widely kept their Pix key at payment counters.

One such case became known in the countryside of São Paulo, due to the buyer’s abuse. In April, a customer of a butcher shop in São Carlos bought R$7,100 in meat and beer using the store’s WhatsApp to make the order. He sent a fake bank receipt as payment. Since he had pulled off the scam six times at the same place without any consequences, he took a chance and went to pick up the order. An employee became suspicious, checked the transaction, and discovered the fraud. The customer, who resold the products, was caught in the act while picking up the order, according to the São Carlos regional police.

The proliferation of new types of these crimes has weighed on retail balances—and ultimately, the consumer pays the price. In an environment of fierce competition and high money costs, companies end up passing the blow to the buyer, or, alternatively, cutting from their own margin. Retail profitability is already low, making some cost transfer to the consumer inevitable.

about:blank

This increase involves a broader scenario of general merchandise losses. The number has grown. Losses include, for instance, damages, frauds, administrative and inventory errors, in addition to thefts.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Coca-Cola Femsa “maxes out” factories, will need new plant in Brazil

Company is adding two new bottling lines in the country to start operating in the second half of the year

07/25/2024

Coca-Cola Femsa, the world’s largest bottler by sales volume, told analysts it must open new factories in Brazil and Mexico to meet increasing demand. Currently, the company has “maxed out” its existing factory capacity to handle orders.

In this scenario, focusing on maximizing its installed capacity, the company is adding two new bottling lines in Brazil, set to begin operations in the second half of the year. “As long as we can add lines, that’s the way to go,” said CEO Ian Craig García.

The company did not immediately respond to Valor’s request for comment.

In a conversation with analysts, the company revealed details about the impact of the floods in Rio Grande do Sul, which had a non-recurring effect on the balance sheet, costing nearly R$40 million. The tragedy led to lower margins in Latin America.

In addition to Coca-Cola, the group’s portfolio includes brands like Fanta, Sprite, Schweppes, Leão, Sucos Del Valle, Ades, beers such as Therezópolis, Eisenbahn, Sol, and Kaiser, and Crystal mineral water.

During the second-quarter earnings conference call on Friday (19), the management team was asked about investments in Brazil and Mexico, in light of the addition of seven new bottling lines in Latin America this year. Mr. García said the company is trying to “max out” current facilities before making new investments.

Regarding the lines, CFO Gerardo Cruz Celaya explained that of the seven planned, two will be in Mexico, two in Guatemala, two in Brazil, and one in Colombia.

Despite this expansion, the CEO admitted that a new plant would eventually be needed in southeastern Mexico and, at some point, a “completely new greenfield project” for Brazil and Mexico, though he did not specify timelines or product focuses for this investment.

According to him, the bottler is executing a production capacity expansion plan initiated last year, which aims to add 15% production from 2023 to 2025. However, in the distribution area, he said they are “a bit behind” and need to increase capacity by 30% over the same period.

Earlier this month, Valor reported that Uberlândia Refrescos, a Coca-Cola System franchisee and distributor in the Triângulo Mineiro, Alto Paranaíba, and northwestern Minas Gerais regions, will invest R$1.5 billion in the region from 2024 to 2030, with R$860 million allocated for a new factory in Uberlândia.

The CEO also noted that the operating profit margin in Latin America reached 14% from April to June, and would have been 14.2% excluding the negative impacts of the floods in Rio Grande do Sul.

According to Mr. García, operating profit rose 13.8% to 9.7 billion Mexican pesos ($540 million) in the quarter, with a profitability rate of 14%—compared to 13.9% a year earlier. Coca-Cola Femsa managed to partially shield itself from the impacts in Brazil and global cost increases, avoiding a downturn compared to last year. Excluding the extraordinary effects related to the floods in Brazil, the margin would have been 14.2%.

The CFO added that in the South American division, operating profit grew 19.6% in the quarter, with a margin of 10.1%. However, gains in the region were impacted by pressures in Argentina and costs from the tragedy in Brazil.

Mr. García mentioned that the supply chain team in Brazil had to adapt the sales and distribution network in Rio Grande do Sul, setting up two distribution centers around Porto Alegre. Finished products were sent from Uruguay, Argentina, and other bottlers in the system to mitigate production losses while working to reopen the Porto Alegre base.

Due to the tragedy, over 5,000 tonnes of debris and lost products had to be cleaned and removed from the facilities. “We are working with our equipment manufacturing partners for a gradual reopening in the fourth quarter of the year,” said the CEO.

Despite the challenges, Mr. García noted that sales volume in Brazil increased by 12.1% from April to June, reaching 269 million units, but did not specify what the increase would have been without the tragedy. From January to June, the growth was 11.2%.

Itaú analyst Alejandro Fuchs asked the company about non-recurring effects in Brazil, estimating a negative impact of 200 million pesos on the balance sheet due to the floods in Rio Grande do Sul. The effect, absorbed in the second-quarter balance sheet, amounted to 130 million pesos (R$39 million, according to June’s exchange rate), Mr. Celaya calculated.

Regarding Femsa’s operations, the Oxxo supermarket chain, created in a joint venture with Raízen, saw an 89% increase in net sales in Brazil from April to June, driven by new store openings that boosted total sales. There were 179 net openings (balance between openings and closings) in 12 months until June. From April to June, 14 new stores were added, bringing the total to 525 stores in the country. Same-store sales increased by 22%, well above the market average, which has been in single digits during this period.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Brazil mulls changes to social benefits in cost-cutting effort

New measures for unemployment insurance and pensions for poor elders and disabled people wil be analyzed by lawmakers amid fiscal adjustments

25/07/2024

Marcos Mendes — Foto: Gesival Nogueira/Valor

Marcos Mendes — Foto: Gesival Nogueira/Valor

The Lula administration is considering changes to the criteria for granting the Continuous Cash Benefit (BPC, a pension for impoverished elders and disabled people) and altering unemployment insurance rules as part of another effort to reduce mandatory expenses and ensure they fit within the limits of the new fiscal framework.

These would be additional measures in the cost-cutting agenda, not included in the R$25.9 billion already announced for 2025 by Finance Minister Fernando Haddad. Both measures would require changes in the law but are being considered for submission to Congress by the end of this year.

According to two sources, the studies have already been requested and are underway. However, the proposals still need to be drafted and will undergo political scrutiny by President Lula at the “appropriate time.” A source from the economic team assured that the topic is not taboo within the government and will be addressed.

BPC is a social benefit amounting to one minimum wage paid monthly to people with disabilities and impoverished elderly individuals. To qualify, a person must have a per capita household income equal to or less than a quarter of the minimum wage. However, a 2021 law eased this criterion, allowing deductions for health-related expenses and granting the benefit to families with incomes up to half the minimum wage in specific cases.

Additionally, a 2021 ordinance changed the procedure for granting BPC to people with disabilities. The so-called “medium standard for social evaluation” was adopted, replacing the individual social evaluation in cases where the medical examination had already been performed and long-term impediment was confirmed. The measure was intended at the time to reduce the waiting delays.

The government assesses that these measures, even with subsequent changes, have helped expedite granting benefits in recent years, especially those granted judicially, due to ambiguous interpretations of the law.

As of June this year, 6 million people were receiving BPC. Ten years ago, in the same month, that number was 4 million. In 2021, it was 4.7 million. Data also shows that until 2022, the growth in the number of beneficiaries ranged between 1% and 5%. Now, it is in double digits, driven by the increase in BPC for people with disabilities and elderly individuals over 65 years old.

In the case of unemployment insurance, the economic team believes the program, as currently designed, is procyclical and needs changes. Currently, to receive the money, a worker must have been employed for at least 12 months in the 18 months prior to dismissal for the first application. The period drops to 9 from 12 months for the second application and then to 6 months.

The economic team advocates for standardizing these rules and making the program less procyclical. According to a source, “this is a good time” to make the changes, as the country is experiencing a “good employment situation.”

Bruno Ottoni, a labor market specialist at the Getulio Vargas Foundation (FGV), agrees that the current unemployment insurance format is procyclical. According to him, in most other countries, insurance is counter-cyclical, meaning that when the economy worsens and unemployment rises, spending on unemployment insurance increases.

In January and February this year, the government spent 29.75% more than in the same period last year on unemployment insurance, despite a heated labor market. A projection made on May 13 by the Ministry of Labor and Employment shows that spending on the policy would continue to rise in the coming years, costing R$51.6 billion in 2024 and reaching R$64.6 billion in 2027. Therefore, according to Mr. Ottoni, it makes sense for the government to seek to stabilize this expense over a ten-year period, for example, to fit within the new fiscal rules.

Changes to BPC and unemployment insurance are also being studied as an alternative to disconnecting these expenses from the minimum wage appreciation policy, a proposal raised by Planning and Budget Minister Simone Tebet but publicly dismissed by President Lula. “To maintain the link to the minimum wage, I need to improve social policies,” said a source.

Changes in the association of health and education floors to revenue growth would also not be adopted until 2026, as there is an assessment that the political cost of altering the growth rate is high. The economic team’s focus is on a thorough review of pension and social benefits and changes to the benefit for fishermen and agricultural insurance programs, measures included in the R$25.9 billion savings announced by Mr. Haddad for 2025.

In the case of the salary bonus, another policy contested by experts and attached to minimum wage growth, sources said that it would require a Constitution amendment, which tends to be difficult to pass by Congress.

Marcos Mendes, a doctor in economics and an associate researcher at business school Insper, believes there is room to change both the BPC and unemployment insurance. However, the researcher advocates for stricter changes than those being considered by the government and argues that it doesn’t make sense to equate the BPC amount to the minimum wage.

“The BPC is a benefit that a person receives without having contributed before. Therefore, it cannot be equated to another benefit paid to those who have contributed,” said Mr. Mendes. “Today this happens because the social security contributor retires at 65, and the BPC beneficiary also receives as of 65. It would be correct to return the BPC age to 70, as it was initially,” the economist said. He also argues for more selective criteria in defining disability and a “significant effort” to prevent fraud.

In the case of unemployment insurance, the economist said that it is necessary to redesign the three instruments to protect the worker who loses their job: unemployment insurance, the Workers’ Severance Fund (FGTS), and the contract termination fine paid to the employee fired without cause. “It would be necessary to redesign this protection to reduce costs for the government, employers, and employees, as there are negative fiscal and incentive effects for formalizing the workforce and job retention,” he said.

If confirmed, the change in unemployment insurance would not be the first time a government has altered the rules to restrict access and thus reduce expenses. At the end of 2014, then-president Dilma Rousseff issued a provisional presidential decree, signed into law in 2015, adjusting the criteria for granting unemployment insurance.

*Por Jéssica Sant’Ana, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
/by