Tire imports surge, straining Brazil’s natural rubber producers

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.”

*Por Rafael Walendorff, Globo Rural — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Marina Silva: Decision on Equatorial Margin exploration will be technical

Ibama estimates Petrobras drilling permit decision by year-end

08/21/2024

Marina Silva — Foto: Brenno Carvalho/Agência O Globo

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.

*Por Fábio Couto, Paula Martini — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Sale of legal claims becomes fundraising alternative for companies

Legal disputes become a profitable asset for companies, attracting specializing firms

08/15/2024

João Mendes — Foto: Rogerio Vieira/Valor

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.”

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil’s top court halts amendments pending greater transparency

Justice Flávio Dino freezes payments until lawmakers create rules for traceability, efficiency

08/15/2024

Flávio Dino — Foto: Antonio Augusto/STF

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

Source: Valor International

https://valorinternational.globo.com/
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CSN to sell shares in competitor, but does not set deadline

Company seeks partner for energy business, plans to divest assets to reduce leverage ratio

08/14/2024

Benjamin Steinbruch — Foto: Rogerio Vieira/Valor

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.

*Por Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Investment banking earnings decline amid IPO dearth

Despite three years without IPOs in Brazil, fixed-income securities sustain market activity

08/14/2024

Cristiano Guimarães — Foto: Gabriel Reis/Valor

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.

In the M&A arena, despite challenges in finalizing transactions due to the fluctuating share prices of listed companies, which complicate establishing a price benchmark, significant deals were completed. These include the mergers of Soma with Arezzo, Petz with Cobasi, and 3R Petroleum with Enauta, as well as the sale of AES to Auren and of Eletrobras’s thermal plants to Ambar.

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.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Lower House passes urgency for vote on regulation of tax reform

Motion received 308 favorable votes; final decision expected this Tuesday

08/13/2024

Alexandre Padilha — Foto: Cristiano Mariz/Agência O Globo

Alexandre Padilha — Foto: Cristiano Mariz/Agência O Globo

Brazil’s Lower House of Congress approved on Monday the urgency motion with 308 votes in favor and 142 against to expedite the processing of the bill that establishes the rules for the operation of the management committee of the future Goods and Services Tax (IBS), according to the text of the tax reform regulation sent by the government to the Legislature. The merits are expected to be considered this Tuesday.

The vote was part of the Lower House’s so-called “concentrated effort” to advance strategic agendas amid the tight schedule imposed by the municipal elections.

Earlier, before the vote, the minister of Institutional Relations, Alexandre Padilha, said that the government wants to convince parliamentarians to treat the regulation of tax reform as the “central issue” of this concentrated effort. According to him, the current administration will “do everything” to complete the discussion of this topic by the end of 2024.

“We hope to vote on the second bill regulating tax reform this week. The government will do everything to complete the regulation of tax reform. I trust the willingness of the Lower House speaker and Senate president to leave this as a legacy. We will work to make this a central issue in the concentrated effort,” he said.

The second regulation project for the reform defines the rules for the body that will be responsible for managing and overseeing the consumption tax for states and municipalities. The first text, which addresses the general rules of the new consumption tax system, was passed by the Lower House in July and is now under review by the Senate.

According to the text being analyzed by the Lower House, this committee will consist of a Superior Council, subordinate bodies such as the General Secretariat and the Internal Affairs Office, as well as an Executive Board—comprising nine directorates.

Additionally, the body will have 27 members, representing each state and the Federal District, appointed by the head of the state and district Executive branch. There will also be another 27 members, representing the municipalities and the Federal District, appointed by the heads of the municipal and district Executive branches. These members will serve a four-year term.

The text also stipulates that the management committee will hold mandatory meetings every three months, with the possibility of convening extraordinary sessions when necessary.

The proposal also establishes that there will be no charge for the Transfer and Donation of Any Type of Property or Rights Tax (ITCMD) in cases where the assets are inherited by public, religious, political, union entities, and non-profit institutions with a public and social relevance purpose.

The maximum tax rate to be charged will be set by the Senate and established by the states and the Federal District, being progressive according to the value, legacy, or donation.

Furthermore, the proposal says that large estates will be taxed at the maximum rate, but leaves it up to the states to regulate what is considered a “large estate.”

During the vote, Congressman Reginaldo Lopes praised the work of the rapporteur Mauro Benevides Filho and said that the measure “has been a societal desire for more than 40 years.” “Society can be sure that the best project for the IBS management committee is being voted on,” he said.

On the other hand, Congresswoman Coronel Fernanda argued against the urgency and emphasized that the voted reform “will destroy our country.” “At this moment, a bill with over 150 pages has just been introduced. There’s no way to vote on urgency if even we parliamentarians cannot fully understand the text. Simplifying cannot be synonymous with increasing taxes. Therefore, the Liberal Party opposes it,” said the government opponent.

On Monday, in addition to addressing the priority of tax reform, Mr. Padilha also commented on the discussion in the Supreme Federal Court about the rules for congressional earmarks to the budget. In a conversation with journalists, he denied that the Planalto Palace had influenced Justice Flávio Dino of Brazil’s Supreme Court to suspend the payment of individual congressional earmarks alleging a lack of transparency. These are funds transferred directly to states, the Federal District, and municipalities without a specific indication of destination.

Mr. Padilha spoke on the matter when asked about possible retaliation by Congress members, who see the “fingerprint” of the current administration in this decision.

“There’s no government fingerprint on a Supreme Court decision. Whatever new decision comes, the government will comply. It is not the government’s role to influence Supreme Court decisions,” said the minister.

The issue is sensitive because this week, Congress will undertake a concentrated effort when several proposals are voted on more quickly. This means that legislators might defeat the government as a message to the Lula administration. The parliamentarians’ distrust stems from the closeness between President Lula and Justice Dino, who was minister of Justice in the beginning of the Lula administratio

*Por Marcelo Ribeiro, Raphael Di Cunto, Renan Truffi — Brasíl

Source: Valor International

https://valorinternational.globo.com/
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Avon subsidiary files for Chapter 11 bankruptcy in the U.S

Restructuring process involving assets in Europe, Asia, and Africa was halted

08/13/2024

Avon’s innovation center in Cajamar, São Paulo: Natura plans to lend $43 million to this subsidiary during the reorganization process — Foto: Daniela Braun/Valor

Avon’s innovation center in Cajamar, São Paulo: Natura plans to lend $43 million to this subsidiary during the reorganization process — Foto: Daniela Braun/Valor

Avon Products Inc. (API), a non-operating subsidiary of Natura and the Brazilian beauty brand’s holding company in the U.S., filed for protection from creditors under Chapter 11 in a Delaware court on Monday (12). The Brazilian group plans to make an offer for the brand’s operational assets, valued at $125 million, in the court-supervised reorganization process.

The company’s operational assets are under the umbrella of Avon, present in 37 countries in Europe, Asia, and Africa.

Natura plans to lend $43 million to this subsidiary during the reorganization process and use the claim to acquire the assets in the bidding process. Natura is API’s biggest creditor.

Natura announced plans to separate Avon International’s assets from its Latin American businesses earlier this year.

With the request for protection from creditors in the U.S. courts, strategic studies involving a possible separation of the assets from the international company and Natura will be halted until the company’s restructuring process is completed.

The idea was to list the company’s assets outside Latin America on the stock exchange and sell a stake or assets separately.

The acquisition of Avon by Natura, announced in May 2022, when assets were valued at around $2 billion, was another important step in the Brazilian group’s internationalization process. The deal was approved the following year.

In the acquisition process, carried out through the exchange of shares, Avon shareholders received 24% of the business—the remaining stake remained with the Brazilian group. API was de-listed and became a Natura&Co wholly owned subsidiary.

However, since the pandemic, Natura’s acquisitions abroad weighed on the company’s debt. Since then, the group has sold two important symbols of the company’s internationalization process—luxury brand Aesop was sold for $2.6 billion to French L’Oréal and The Body Shop was sold for £207 million to asset manager Aurelius—the amount is a fifth of the £1 billion paid for the asset.

The challenge was restructuring Avon International, present in 37 countries in Europe, Asia, and Africa.

With the sale of the two important assets outside Brazil, Natura plans to focus its efforts on operations in Latin America. The company sees synergy between Natura and Avon’s operations in the region.

Of Avon International’s group of 37 countries, only a few markets are relevant to this business division, including Eastern Europe, Africa, the Middle East, and Asia. Russia has become a sensitive point, especially with the war in Ukraine. In some regions, Avon will likely limit its presence to product distribution.

The sale of Aesop was key to reducing leverage, while with the divestment of The Body Shop, the goal was to streamline the group’s strategy—the brand had a small presence in Brazil but was very strong, especially in England, the U.S., and Australia—and was severely impacted by the COVID-19 pandemic, like retail operations in general.

Natura&Co’s restructuring process has been led by Fabio Barbosa, a former board member, who was invited by Natura’s three founders— Antônio Seabra, Guilherme Leal, and Pedro Passos—to restructure the company, heavily indebted in 2022 and facing poor results.

In the Brazilian market, Natura wants to boost Avon sales also in physical retail. The beauty company announced a partnership with retailer of beauty products Soneda to sell Avon items in the chain’s stores in the São Paulo state.

In 2023, Natura posted net earnings of R$2.9 billion, reversing a loss of R$2.8 billion in 2022, and ended the year with net cash of R$1.7 billion. The fourth quarter, however, saw R$2.7 billion loss. With the sale of Aesop, R$7.6 billion was allocated to paying debts, which were R$7.4 billion, in 2022. The company announced the payment of dividends of nearly R$1 billion.

*Por Ana Luiza de Carvalho, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Companies in crisis lure buyers offering symbolic payments, debt relief

Specialist managers increase transactions involving problematic assets

08/07/2024

Renato Azevedo — Foto: Gabriel Reis/Valor

Renato Azevedo — Foto: Gabriel Reis/Valor

Companies facing financial distress and undergoing restructuring are increasingly being sold for nominal amounts, with buyers assuming the existing debts. A notable instance is the sale of the retailer DIA for €100 during its court-supervised reorganization process. Initially, the Spanish group attempted to divest the asset before it sought court protection for its creditors.

In the biotechnology sector, Superbac, which received investments from XP’s private equity fund, transitioned to a firm specializing in restructuring, Valor found. Similarly, the footwear retailer Mr. Cat, which received investments from the HIG fund, followed this trend. Both XP and HIG declined to comment when approached.

Another example includes Rodovias do Tietê, which was sold for R$1 after restructuring firm Starboard brokered the deal. A representative from the managing firm explained that the bondholders organized into a temporary holding structure, assumed the company’s debts, and established interim governance pending approval from the granting authority.

Renato Azevedo, a partner at Latache, notes the increasing prevalence of such transactions in Brazil. “This growth is driven by a more sophisticated market and evolved legislation, along with a greater understanding from both shareholders and creditors that, in some cases, this might be a more viable option than simple debt renegotiation,” he explains.

Market insiders reveal that some investment firms employ a strategy of divesting problematic assets to facilitate exits from challenging investments, typically demanding extensive restructuring efforts. These transactions are often “closed-door” sales, which entail the transfer of both assets and associated liabilities.

Daniel Vorcaro, president of Master, elaborates on the economic volatility, pandemic impacts, and institutional crises that have compelled numerous companies to undergo restructuring. The bank has engaged in acquiring companies for nominal sums while taking on their debts, either directly or through financial vehicles associated with the institution.

Mr. Vorcaro highlights several notable acquisitions in this framework. Beyond the retailer DIA, Master’s MAM fund—operating independently from the bank—acquired Veste (previously known as Restoque), which manages several prominent fashion brands, and Metalfrio, an industrial concern. “These companies are well-regarded but required substantial restructuring,” he notes.

According to Mr. Vorcaro, these symbolic purchases are integral to a broader strategy of sophisticated capital restructuring. This approach is designed to recalibrate the company’s debt load, setting the stage for future growth and stability.

In certain situations, stressed assets represent the final divestment within a portfolio, according to industry insiders. Notably, last year, Pátria Private Equity offloaded Tenco, a company that owns shopping centers in Brazil’s countryside regions, as the last of its troubled investments.

Sources reveal that asset management firms like Vega, Starboard, and Evix have engaged in similar transactions. Additionally, special situations asset restructuring companies such as Makalu and Prisma are known to have contemplated these types of deals, Valor found.

Gilberto Zamcopé, a trailblazer in this sector and founder of the OrderVC fund, has a track record of turning around distressed companies. Eighteen years ago, he purchased Wap, a manufacturer of high-pressure washers, for R$10 million when it was mired in debt. After comprehensive restructuring, the company is now valued at R$3.5 billion. “It was a failed company; carrying debt in Brazil is very challenging,” Mr. Zamcopé remarks. The turnaround strategy included overhauling the administrative processes and outsourcing production to China to revitalize the business.

Mr. Zamcopé has coined the “theory of order” over his career, which has proven effective in his ventures. This year, he acquired another struggling business, Acquion, a collagen manufacturer. “I’ve bought several companies in disarray; it’s not necessarily better than buying a stable company, but a stable one is more expensive,” he explains. With high interest rates currently pressuring many firms, Mr. Zamcopé notes an increase in available opportunities. “High interest rates often precipitate crises, leading companies into disarray. Other contributing factors include toxic leadership, succession issues, market dynamics, competitive pressures, and technological challenges,” he elaborates.

Demand for restructuring expertise is surging, prompting firms like Evix to establish specialized teams to manage these situations internally. André Berenguer, a partner at Evix, explains that the rise in restructuring cases typically aligns with economic downturns and follows periods of aggressive corporate expansion, such as those witnessed during the pandemic fueled by high global liquidity and low interest rates.

Mr. Berenguer identifies three main groups seeking Evix’s restructuring services. The first includes private equity funds at the end of their investment cycle needing to divest problematic assets to return capital to investors.

The second group also consists of private equity funds, but these are seeking assistance with portfolio companies requiring restructuring before they reach the divestment phase. The third group involves financial institutions that have acquired stakes in struggling companies through debt-to-equity conversions and now require specialized turnaround expertise.

Luiz Prazo, a partner at Makalu, notes an uptick in such cases at his firm. He emphasizes the importance of thorough due diligence to avoid unforeseen risks. “We focus on sectors we are familiar with to fully understand the risks involved,” he states. Mr. Prazo points out that acquisitions in this segment often involve taking on substantial liabilities, as purchases made for symbolic amounts like R$1 typically imply the assumption of existing debts.

Sources interviewed by Valor indicate that international conglomerates planning to exit the Brazilian market have increasingly turned to asset divestment as a viable option, as seen with companies like DIA. Often, these negotiations are conducted solely with a local representative, as the primary management may no longer be operating within the country. “There are opportunities to secure favorable deals currently,” one source noted, preferring to remain anonymous.

This strategy falls under what is globally known as dealing with “corporate orphans.” This term refers to companies looking to offload a business division that no longer aligns with their core objectives or to withdraw from a specific geographical market.

*Por Fernanda Guimarães, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Central Bank indicates that rate hike is on the table

Meeting minutes reveal a more conservative stance than initial analyst interpretation

08/07/2024

Minutes from last week’s meeting state that Central Bank’s decision in September will depend on the economic developments until then — Foto: Divulgação/BCB

Minutes from last week’s meeting state that Central Bank’s decision in September will depend on the economic developments until then — Foto: Divulgação/BCB

The Central Bank of Brazil’s Monetary Policy Committee (COPOM) has indicated the possibility of a rate hike at its next meeting in September, while simultaneously avoiding any premature decisions.

The minutes from last week’s meeting, released on Tuesday, state that the decision in September will depend on the economic developments until then, without committing to any future strategies.

This conditional approach suits the committee well given the unfavorable inflationary scenario observed at the meeting last Wednesday and is appropriate for handling the new situation that emerged the following day, when fears of a recession in the United States intensified.

It is unlikely that the COPOM updated its minutes to reflect recent events. The governance of drafting this document means the committee confines itself to what was discussed at the COPOM meeting. Any deviations should have been explicitly mentioned in the text.

Therefore, it is crucial to consider how the COPOM viewed the situation in the United States during its meeting. From this initial benchmark, one can follow the thread to anticipate how new developments might affect the September decision. “A scenario of gradual reduction in inflation and activity and a cautious start to monetary easing is envisaged,” the minutes state, referring to the United States.

In other words, a more substantial economic downturn in the U.S. was not anticipated by the Central Bank, nor was a more aggressive cycle of monetary easing by the Federal Reserve (Fed).

It is also essential to understand how the COPOM will digest the new developments: lower interest rates in the United States do not mechanically translate to lower rates in Brazil, nor does a weaker dollar. It will depend on how these factors affect inflation, which also depends on other variables, such as the level of economic activity and fiscal policy developments.

Overall, the minutes are more conservative than the initial interpretation of the statement made by economic analysts last week. The scenarios under consideration are clear—either maintaining or increasing interest rates from the current 10.5% per annum, depending on the situation the committee encounters in September.

The market misinterpreted the COPOM’s view on its inflation projection. It assumed that the 3.2% inflation rate for the 12 months ending March 2026 was close enough to the target to be indistinguishable. The COPOM’s minutes clearly state that the rate “is above the inflation target of 3%.” In other words, the current 10.5% interest rate no longer seems sufficient.

The market also downplayed the COPOM’s expressed concerns regarding its inflation risk balance. All members acknowledged that there are more items listed indicating the risk of inflation exceeding the target. “Several members” emphasized the asymmetry of the inflation risk balance, pointing out that upward factors outweigh downward ones.

Had nothing new occurred since last Thursday, the market’s re-pricing—assuming a more “dovish” COPOM—would have been premature. The minutes do not appear to differentiate between the chances of maintaining rates and additional tightening.

Within this more conservative message, there are some inconsistencies between the minutes and the decision to maintain rates last week. If the COPOM believes the projected inflation is above the target, why not raise rates already? There were reasons for at least a split vote, considering that “several members” view this projection with greater skepticism, noting that the chances of inflation exceeding the target are higher than those of it falling below.

The decision to maintain rates, postponing the decision on a hike until September, could reflect a committee seeking consensus in its decisions, following the scars left by its divided decision in May. Ultimately, a slower approach provides the COPOM more time to analyze a more uncertain situation with greater calm and more information.

*Por Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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