MURRAY ADVOGADOS
Spanish owners allocate funds to clean balance sheet; group filed for reorganization
06/03/2024
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DIA’s local operation has been in court-supervised reorganization since March — Foto: Claudio Belli/Valor
The sale of the supermarket chain DIA’s operations in Brazil to Lyra II Fundo de Investimento em Participações (FIP) accelerated a month ago as the Spanish owners needed to clean the balance sheet and reduce the Brazil risk in its financial statements. Banco Master’s MAM Asset structured the fund but is not involved in the deal. Valor found that a group of former executives of Alvarez & Marsal are leading the fund.
DIA’s local operation has been in court-supervised reorganization since March and is expected to be acquired by the fund for a symbolic amount (€100). In practice, the group paid to operate in Brazil in recent years and divest the country’s chain.
Valor found that, despite the progress of the company’s operational recovery plan, the more financial approach by Chairman Benjamin Babcock gained strength over the last few weeks. Mr. Babcock leads the investment firm LetterOne, with 77% of the group’s shares.
According to this approach, the chain requires a faster solution in Brazil, involving negotiation with foreign banks to refinance the retailer’s debt in Spain.
The completion of the sale hinges on DIA obtaining the banks’ approval of the terms of the agreement, which includes a final capital injection into the local operation. “LetterOne was unwilling to inject capital and needed to reduce leverage. Therefore, divesting of the Brazilian operation became the top priority,” a person familiar with the matter said. Two proposals were at the table, one by Lyra II FIP and another by DIA Brasil managers. The first was the winner.
A statement by the headquarters informs that under the agreement with the fund, DIA will allocate €39 million (R$222 million) to the company in Brazil and will pay €30 million in guaranteed debt (R$171 million) with Santander. It should spend €5 million (R$28.5 million) on transaction expenses, for a total allocation of R$422 million.
As an accounting effect, with no cash disbursement, there are €27 million (R$154 million) in exchange rate adjustments. In total, considering cash and accounting effects, the impact is R$575 million.
Over the last decade, between €500 million and €1 billion have likely been injected into the subsidiary, according to another person, including the period when an accounting fraud was unveiled, in 2019.
The announcement of the deal with the fund, on Friday (31), occurred hours before the company’s reorganization plan was filed in court, with legal debts of R$1.1 billion, as revealed by Valor.
The fund’s investors, through the management, are expected to open negotiations with creditors based on the filed plan, according to two industry creditors’ lawyers interviewed by Valor.
“There is a plan to resume DIA’s operations, that’s what we’ve heard, and we think it’s still in effect. This is the signal we want to see from the new owners,” says one of the lawyers, who criticized the headquarters’ lack of transparency in disclosing information about the fund. Information regarding the Lyra II FIP appears only in a statement to the Spanish market regulatory body.
The fund, structured by MAM Asset, was registered with the Board of Trade on May 17, specifically for the deal. In recent days, there were rumors in the market that Brazilian investor Nelson Tanure could be leading the agreement, given his operations through MAM. Valor found that Mr. Tanure was not involved in the deal.
Santander is the main creditor bank, with two loan facilities (R$85 million and R$90.9 million). Banco do Brasil has loans amounting to R$27.3 million and Daycoval, has R$16.5 million. Most of the debt is with suppliers.
By exiting Brazil, the controlling shareholders of the DIA group will have operations only in Spain (90% of revenue) and Argentina. The decision surprised the market and the group’s leadership in Brazil, which was leading the retailer’s turnaround, and had closed a restructuring project with the headquarters in March.
Led by Sébastien Durchon, the chain has improved its performance—cash consumption decreased and losses were reduced by almost two-thirds, Valor found. Of the total stores, 343 closed between March and April. The group currently has 244 stores (121 owned and 123 franchises) in addition to the distribution center located in Osasco, in São Paulo.
According to the plan filed on Friday (31), which may change after negotiations, creditors that accept to cooperate will not have any discount on their debt but cannot litigate against the company. They also should maintain supply according to the best commercial conditions in effect over the 150 days before the filing of the reorganization plan.
In the first two years after approval, the payment period to cooperating creditors will be at least 30 days or whatever was in effect before the filing (whichever is longer). DIA commits to pay cooperating creditors in 96 monthly installments, following the end of a two-year grace period.
There are also payment conditions for creditors with unsecured debt, labor creditors, and small and micro companies. Under the plan, DIA commits to maintaining its activities and could divest from assets to pay debts amounting to R$1.1 billion.
Considering its facilities, machines, furniture, and utensils, the group’s residual balance is R$88.1 million, according to the feasibility study report attached to the plan. The residual balance of all fixed assets amounts to R$413 million.
*Por Adriana Mattos — São Paulo
Source: Valor International
Costs reflect increased processing and storage capacity, monetary authority says
06/03/2024
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Leandro Vilain — Foto: Leonardo Rodrigues/Valor
As the user base expands and new functionalities are incorporated, Pix— the Central Bank’s instant-payment system—represents increasing costs for the monetary authority, in terms of both maintenance and investment. While the instant payment system has significantly boosted financial inclusion and transaction efficiency, the associated expenses for its implementation and operation have grown.
The implementation costs for Pix up to 2021 amounted to R$13.6 million. For 2024, the forecasted costs are R$25.3 million for maintenance and R$43.1 million for investment. These figures are approximations, as maintenance and investment are generally spread across the entire computing infrastructure of the Central Bank. The data were obtained through the Freedom of Information Act.
According to the Central Bank, the rise in costs is due to the need for continuous expansion of the system’s processing and storage capacities, as well as the addition of new features and security improvements.
Despite the increase, these amounts represent a small percentage of the Central Bank’s allocated budget, which was R$3.9 billion in 2023. Of this total, 92.7% was spent on personnel, social charges, and benefits; another 5.6%, or R$222.6 million, went to maintenance; and 1.7%, or R$69.9 million, to investment.
The Central Bank said that it has prioritized the technology budget, “especially necessary for Pix,” at the expense of other projects. Even so, it described the budgetary scenario for 2023 as “quite challenging” and noted that the investment amount for this year depends on a budgetary reorganization currently being negotiated with the government.
The Federal Budget Department declined to comment, stating it only addresses budget credits whose proposals have been formalized and their effects made public.
With the investments made so far, Pix has reached 149.1 million individuals and 14.2 million businesses since its launch in November 2020. The Central Bank estimates that the system has brought 71.5 million users into the financial system by December 2022, the most recent data available.
Leandro Vilain, a partner at Oliver Wyman specializing in financial services, said that Pix has “cannibalized” cash transactions, which he views as “extremely favorable for the low-income population.” He cited examples of service providers who previously only accepted cash and now accept Pix, broadening their potential clientele and opening up new possibilities.
“You have a portion of the population, like self-employed individuals and taxi drivers who used to receive a lot of cash transactions, small self-employed agents, or day laborers. These people have started to receive money directly into their bank accounts, giving banks the necessary information to provide credit if needed,” he said.
Pix does not charge fees for individual users and has increased the volume of transactions in the financial system. In the third quarter of 2020, 10.8 billion transactions were recorded. By the fourth quarter of last year, that number had risen to 30.8 billion.
Before Pix, the easiest options for transfers were TED and DOC, both of which incurred fees. TED has now largely fallen out of daily use, accounting for just 1% of transactions, while Pix handles 43%. DOC was discontinued by banks this year.
The Central Bank has continuously added features to Pix since its launch. Pix Saque (for drawing cash) and Pix Troco (for change), which allow for cash withdrawals at stores and lottery outlets, are already operational. To enhance security, the system includes precautionary blocking for suspected fraud and a “Special Refund Mechanism” to facilitate reimbursements in fraud cases.
Amid these developments, Central Bank President Roberto Campos Neto has publicly discussed the institution’s budgetary challenges, including reduced funding for certain projects.
At an event in late April, Mr. Campos Neto was asked about potential risks to Pix’s operation. He said that there is currently no significant risk but noted that he had allocated many staff to system security, which has hindered the development of new functionalities.
The launch of Pix Automático (for scheduled payments) was postponed from April to October this year. At the time, amid a working-to-rule movement by Central Bank servants, the delay was attributed to the time required for development and organizational issues. The service will function similarly to direct debit, facilitating the payment of recurring bills such as water and internet.
The Central Bank’s centralized system for Pix has faced criticism from the private sector. While banks and payment institutions acknowledge Pix’s success, they see limitations in an operation run by a public entity with a restricted budget.
In last year’s integrated report, in which the Central Bank outlines its operations, the monetary authority highlighted that the biggest challenge was “maintaining the level of results observed in previous years, especially incorporating technological innovations in the Central Bank’s business areas to support the future financial system, such as Pix, Drex [digital currency], and open finance.”
- Por Gabriel Shinohara — Brasília
- Source: Valor International
Tragedy highlights need for climate-conscious rebuilding efforts, according to company’s shareholder
06/03/2024
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André Bier Gerdau Johannpeter — Foto: Silvia Zamboni/Valor
Businessman André Bier Gerdau Johannpeter, continuously monitoring the recovery efforts in Rio Grande do Sul—recently devastated by the most significant flood in its history—is deeply involved in the post-disaster scenario in the birthplace of the steel group founded by his great-great-grandfather. From his apartment in Porto Alegre, the former CEO of Gerdau and now vice-chairman of the board watches as dark clouds gather, signaling yet another heavy rainfall. “We are still in the midst of the catastrophe,” he told Valor last week.
While immediate emergency responses and substantial investments are crucial to restore the basic infrastructure, Mr. Johannpeter is also casting an eye towards the future, considering the broader implications of the devastation. He sees an opportunity for Rio Grande do Sul to become a beacon of sustainable reconstruction and a case study in minimizing climate impacts.
“We need to rethink Rio Grande do Sul. Perhaps the state can serve as a case study for how to rebuild in a way that acknowledges and addresses the realities of climate change,” he suggested. With 50% to 60% of its GDP impacted by the disaster, the state’s immediate needs are dire, but Mr. Johannpeter emphasizes that planning for sustainable rebuilding should begin now, recognizing that it will be a prolonged endeavor.
The businessman is championing an efficient and sustainable approach to reconstruction in response to the increasing frequency of extreme weather events. “If we simply rebuild in the same locations and in the same manner, we are setting ourselves up for future catastrophes,” he warns.
Mr. Johannpeter points to successful international models that could inspire Rio Grande do Sul’s rebuilding efforts. For instance, the Netherlands’ “Room for the River” program was initiated after the 1995 floods of the Rhine and Meuse rivers, which displaced over 200,000 people. “This program does not merely attempt to contain water; instead, it involves sophisticated engineering of dykes, elevation of riverbanks, and channel modifications to allow the river more room to flow safely,” he recalls.
Another example is New Orleans in the United States; following the devastation of Hurricane Katrina in 2005, over $14 billion was invested in enhancing its hurricane and flood defenses. The city’s measures included constructing new dyke systems, installing water pumps, and developing an extensive contingency plan to better manage future disasters.
Despite significant efforts and investments, the aftermath of Hurricane Katrina saw New Orleans’ population decline by 20% as 100,000 residents were forced to leave, having no viable options for resettlement. Mr. Johannpeter expresses a concern that Rio Grande do Sul might face a similar fate. “Without a compelling program that offers residents hope and support to rebuild, we risk a mass exodus,” he cautions.
Mr. Johannpeter also highlights innovative solutions like “sponge cities,” a concept applied in China, the United States, Denmark, and Germany. This approach involves adapting urban environments to absorb, cleanse, and repurpose rainwater. While acknowledging the high costs associated with such technologies, he emphasizes their long-term benefits: “We must envision a grand project that’s sustainable over time, rethinking our approach to reconstruction to ensure it is robust and effective.”
Furthermore, Mr. Johannpeter sees an opportunity to raise global awareness about climate change through Rio Grande do Sul’s reconstruction. He points out that while developed nations are progressing toward decarbonization, similar impactful measures can be implemented elsewhere. He envisions two major goals for the state in the wake of its recent devastation: to become a model for effective and sustainable rebuilding and to enhance global engagement with environmental stewardship, thereby contributing to broader efforts to mitigate climate change.
Internally, various proposals and actions are gaining momentum. Mr. Johannpeter, a prominent member of the Rio Grande do Sul State Federation of Industries (FIERGS), highlights the ongoing campaign to boost local product consumption. Dubbed “Buy RS,” this initiative is designed as an emergency measure to bolster the state’s economy in the wake of recent hardships.
FIERGS has presented over 40 distinct requests for federal support to aid in the state’s recovery, which are already yielding tangible results. According to Agência Brasil, a month following the intervention by the federal government’s task force, an emergency allocation of R$62.5 billion has been directed towards Rio Grande do Sul to assist the flood-impacted populace. Additionally, the government has expedited the distribution of benefits and extended the deadline for tax payments.
Mr. Johannpeter, alongside other leading southern businesspersons and executives such as Daniel Randon, Bruno Zaffari, José Galló, and Gabriela Schwan, is actively involved with Transforma RS, an initiative aimed at mobilizing local and international companies. The organization, which already collaborates with public authorities to enhance management practices, now faces the critical challenge of efficiently managing significant financial inflows and coordinating diverse recovery efforts in the aftermath of the disaster.
“We closely examined what was done during the pandemic to reinvigorate companies. However, there is a heightened challenge now: the economy must be stimulated to generate revenue. It is crucial to infuse new capital into businesses, as this catalyzes both the regional and state economies,” he said.
Gerdau, significantly impacted, saw two of its major plants in Charqueadas and Sapucaia halted by the floods. Though the rains did not directly damage the facilities themselves, operations were suspended to ensure the safety of the workforce, many of whom suffered considerable personal losses due to the flooding.
“There was no damage to the property itself, but we halted operations as a precautionary measure,” explained Paulo Boneff, head of organizational development and social responsibility at Gerdau and general manager of Instituto Gerdau. He noted that approximately 180 families of employees either lost their homes or require extensive repairs before they can return. Gerdau is actively working to support these families in making their homes livable again.
In addition to monitoring the well-being of at least 350 families significantly affected by the tragedy, Gerdau faces the challenge of addressing its employees’ mental health. Mr. Boneff highlighted a dedicated company program that maintains daily contact with affected employees, ensuring that no one is required to return to work until they are ready, including from a psychological standpoint.
Furthermore, Gerdau is actively involved in several other initiatives. In collaboration with Gerando Falcões, a non-profit organization focused on social impact, Gerdau has established a fund to aid housing efforts, kick-started with an initial company donation of R$5 million. This fund, open to contributions from other corporations, aims to finance the construction of temporary or permanent residences for families who have lost their homes. Additionally, the steelmaker is contributing to the rebuilding of small bridges in the hilly areas of Rio Grande do Sul, which is critical for the region’s logistics and accessibility.
The controlling family of Gerdau has actively participated in various efforts to aid the reconstruction of the state. In collaboration with Din4mo Lab, a consultancy specializing in social impact businesses, they established the Regenera RS emergency philanthropic fund. Initiated with a substantial contribution of R$30 million from Instituto Helda Gerdau and the steel company itself, the fund aims to amass a total of R$100 million. Managed by Din4mo, the funds will support projects across education, housing, urban solutions, and business development.
“It is a collective endeavor involving both the public and private sectors and drawing support from within and beyond Brazil. Every bit of help counts. The emotional impact is profound, and while the full scope of the challenge is still unfolding, it is clear that it will be substantial,” expressed Mr. Johannpeter.
*Por Stella Fontes, Helena Benfica — São Paulo
Source: Valor International
Kopi Kita considers buying 100,000 coffee bags from Brazil due to robusta shortage in Southeast Asia
05/31/2024
Kopi Kita, the largest coffee roaster in Indonesia, will purchase Brazilian conilon coffee for the first time, introducing the Brazilian variety to the Asian market.
Indonesia, the fourth largest coffee producer, primarily grows robusta and exports to countries like Vietnam. However, due to severe drought starting last year, the country is turning to Brazilian production to meet its needs.
Kopi Kita plans to buy 100,000 bags of coffee from Brazil this year, including both arabica and conilon varieties, Moelyono Soesilo, the company’s director, told Valor. The final decision on the volume will depend on weather developments in Brazil.
“I will wait a few more weeks to finalize the negotiations, observing the progress of Brazil’s harvest. I’ve heard from many producers and traders that the drought in Espírito Santo is affecting the quality of the conilon being harvested, and I don’t want to risk securing lower-quality beans,” Mr. Soesilo explained. He is willing to pay more for Brazilian coffee by delaying the purchase decision.
Kopi Kita is also strengthening its ties with Brazilian traders and exporters to negotiate Brazilian coffee with smaller roasters in Southeast Asia, Mr. Soesilo added. The Indonesian industry is expected to increase Brazilian coffee acquisitions this year due to low domestic stocks. Coffee shipments from Brazil to Southeast Asia are anticipated to gain momentum starting in June.
Kopi Kita began sourcing Brazilian coffee in 2023, initially focusing on arabica beans to blend for the Indonesian market, which predominantly uses robusta. However, the drought worsened between January and March this year, leading to projections of a 6 million bag harvest in Indonesia, matching 2023’s output and insufficient to meet local and Asian demand. Indonesia’s harvest peaked at 12 million bags in 2021.
According to Mr. Soesilo, Brazilian conilon’s flavor and aroma characteristics don’t fully align with Indonesian preferences. Nevertheless, due to the robusta shortage in Southeast Asia, the company had no choice but to turn to Brazilian coffee.
Adverse climate conditions in Asia have been driving Indonesia’s demand for Brazilian coffee since last year. In 2023, Indonesia’s coffee imports from Brazil grew by 19% to 415,900 bags, according to the Brazilian Coffee Exporters Council (CECAFÉ). This increase was driven by Brazilian conilon purchases, which were zero in 2022 but reached 103,300 bags in 2023, surpassing Brazilian arabica imports that year.
The trade between the two countries continues to accelerate in 2024. From January to April, Indonesia increased its purchase of Brazilian coffee by 119.1%, from 23,700 bags in the same period last year to 52,000 bags.
*Por Isadora Camargo — Santos
Source: Valor International
Technical team of CADE discusses flight-sharing agreement with airlines
05/31/2024
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Azul and Gol recently announced a flight-sharing agreement — Foto: Leo Pinheiro/Valor
The technical team of the Administrative Council for Economic Defense (CADE) has been in contact with Azul and Gol, seeking information regarding the recently announced flight-sharing agreement, sources say. While the companies are not mandated to submit the agreement to CADE, the antitrust authority can review potential competitive issues, as it has done with similar agreements in the past.
According to a source, before making the announcement, the companies had already approached CADE to present the agreement. Being a “traditional” model without overlapping routes, it is likely that there will be no hurdles from the agency. However, if a merger is proposed, it will require submission to CADE.
Currently, the technical team within CADE’s General Superintendence (SG) is conducting a confidential review to determine if the companies need to formally submit the agreement for analysis. Based on this review, SG may either initiate a formal analysis and request further information from the companies or close the case.
Following SG’s decision, any CADE councilor could request an investigation, which would require agreement from the Tribunal and the technical team.
Within CADE, opinions are divided; some see the agreement as unproblematic due to the lack of overlapping routes, while others believe certain clauses, like the merging of loyalty programs, may require further clarification.
Eric Hadmann Jasper, an expert in economic law and partner at HD Advogados, noted that it is natural for CADE to seek clarifications from the companies given the operation’s significance in a strategic market.
Until mid-2017, such agreements had to be notified to CADE. The policy changed following the analysis of an agreement between Qatar Airways and Latam, where CADE concluded that typical flight-sharing agreements did not require notification.
Mr. Jasper explained that in the Qatar Airways-Latam case, the exemption was granted because the agreement did not involve payment, asset transfers, or changes in corporate structure, and the companies had the freedom to start or stop routes, set prices, and did not exchange sensitive commercial information.
In a recent case involving Latam’s purchase of VoePass (Passaredo) shares, the technical team noted that such agreements can benefit consumers and airlines, particularly when connecting companies operating complementary routes. However, they can also reduce competition, as airlines might lose interest in exploring new or low-demand market niches.
The SG pointed out that CADE’s primary concern in reviewing domestic airline cooperation is the potential for coordinated actions, such as setting flight frequencies and fares together.
CADE councilor Gustavo Augusto emphasized that there is no precedent for absolute exemption of flight-sharing agreements. He stressed the need to assess whether the agreement involves shared risk and suggested that it would be prudent for the companies to notify the operation. “If we determine that the operation should have been notified, the companies could face penalties.”
Gol stated that the sharing agreement is a standard commercial deal within the “normal course of business,” involving only non-overlapping domestic routes, and affirmed their readiness to respond to any inquiries. Azul also expressed willingness to provide any necessary clarifications to CADE.
The National Civil Aviation Agency (ANAC) commented that commercial cooperation agreements do not require its prior analysis and approval. However, as the sector’s regulator, ANAC will monitor the implementation to ensure passenger rights are protected and operations adhere to safety standards.
*Por Beatriz Olivon — Brasília
Source: Valor International
Lack of consensus at Monetary Policy Committee, fiscal concerns, change in Petrobras increase risk perception
05/31/2024
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André Leite — Foto: Divulgação
Investments linked to the Selic policy interest rate and CDI (the interbank deposit rate, used as an investment benchmark in Brazil) remain the main highlights in 2024. A month before the end of the year’s first half, assets regarded as risky, such as the stock market, multimarket and real-estate funds in Brazil had little chance among investors, with the Selic paying comfortable double-digit yields, at 10.5% per year. The depreciation of the real also provided a good return for those investing in the dollar or holding international assets with no currency hedge.
With further interest rate cuts by the U.S. Federal Reserve seen as less likely to occur and the slowdown in the pace of monetary easing in Brazil, the benchmark stock index Ibovespa posted losses of 2.55% in May, until the 29th, and 8.55% in the year. In the first five months of 2024, the index that tracks shares in the real estate segment showed the worst performance (-16.81%), followed by small caps traded on the stock exchange (-13.89%).
The exchange rate was 0.30% up in May and 7.33% in the year.
In fixed income, the IMA-B 5 index, comprised of inflation-indexed bonds adjusted by the Extended Consumer Price Index (IPCA) maturing in up to five years, were 0.94% up in the month and 2.81% in the year. They were still below the 4.39% CDI return since January. Debentures linked to the CDI were showing better performance, with 5.72% in the year, according to the Brazilian Financial and Capital Markets Association (ANBIMA) index.
In the international market, the S&P 500 was 9.8% up, while the Nasdaq rose 10.9% until Thursday (30) when markets in Brazil were closed due to a national holiday.
The United States has been the world’s main capital attractor, via direct and financial investment. At the same time, Brazil has disappointed investors since the government reduced its fiscal surplus target, as proposed in the 2025 budget.
“The market realized what was happening from the second half of April onwards. On the international front, there is no clear horizon for the Fed to cut interest rates, with an impact not only in the Brazilian monetary policy but for emerging markets in general,” said André Leite, chief investment officer at TAG Investimentos. “And we can’t say the government has surprised [the market] with a worse fiscal situation. It was already bad, with little [adjustments] on spending and a very high tax burden.”
Amid concerns about public accounts, Brazilian assets missed the favorable wave seen in some emerging markets in May—and even in developed economies—with a weak performance by the real and Brazilian shares, plus an increase in interest rates. The consequences of the floods in Rio Grande do Sul added uncertainty both on the fiscal side, due to the funds needed to rebuild the state, and on the monetary side, due to expected impacts on inflation.
Mr. Leite points out that Brazil is not a “guy with savings.” He said the country is more like “a guy who owes money and now has a disaster bill to pay, which explains its detachment from the rest of the world.”
The executive says that, in the composition of portfolios, both for individual and institutional investors, the year started with part of the assets allocated in dollars, with no hedge—with direct exposure to the U.S. currency. He sought a return of the exchange rate variation plus 4% in the long term, similar to that of the CDI, but with no relation to Brazilian assets. “In a bad moment, it helps part of the portfolio, reduces volatility, and is paying part of the [performance] bill.”
With artificial intelligence and incentive policies for the construction of microprocessor plants in the U.S., there is a reallocation of capital to the country, both via direct investments and financial assets, through the stock exchange or fixed income. The weak dollar thesis was not confirmed, the executive said. The spread between local and international interest rates, which was once 6 to 8 percentage points, is now close to 4, which is considered insufficient to encourage arbitrage operations.
In the speculative flow towards emerging markets, Mexico has stood out, while the Chilean currency has excelled thanks to the high demand for copper, a raw material with limited supply, Mr. Leite points out. The thesis can be seen in TAG’s portfolio.
The executive said that as rates paid by Tesouro IPCA+, an inflation-indexed National Treasury note (NTN-B) rose, TAG increased its exposure, favoring tax-exempt securities in the conservative portion of the portfolio. The asset manager has taken advantage of opportunities in structured credit, with a good level of guarantees, with interest rates between 3% and 5% above the CDI. The stock market, in turn, lacks the strength to gain traction. With high interest rates, local or international flows with a speculative profile are not expected to come.
At Portofino Multifamily Office, the bias is towards bonds and corporate debt, according to CIO Eduardo Castro. That applies both to Brazil and international assets.
“Interest rates are being kept high [in the U.S.] because activity is strong, which benefits companies’ results,” Mr. Castro points out. With surprises in the top and bottom lines, high-yield companies’ spread (to sovereign rates) is close to the lowest levels in 10 years. However, “the quality of companies, in general, was not affected by the recession, a prevailing narrative 12 months ago.”
According to the executive, the Brazilian stock exchange needs a trigger to adjust prices, no matter how cheap the assets may be. Considering price, macro scenario, and flow, the last two aspects do not allow a reaction. “With the real interest rate of NTN-B above 6%, pension funds are unlikely to increase allocation,” Mr. Castro adds. “For individuals, the same applies, as, in recent years, investors have been hurt by the stock market’s performance.”
In the international market, with interest rates around 5% per year and the U.S. stock market posting good returns, foreign investors are not willing to change geography. Mr. Castro points out that indices in the U.S. are no longer driven by the so-called magnificent seven—Alphabet (owner of Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. According to the executive, there is dispersion to other names outside the tech industry.
“It has really appreciated, it may seem expensive if we compare the valuation with the 10-year history, but there were important changes in the sector, including technology and investment theses. Some cases could demand higher multiples, such as Nvidia,” Mr. Castro said. “Given the differences in risk, allocation, geography, and concentration between the Brazilian and U.S. stock exchanges, we prefer the U.S.”
In the Brazilian market, the preference is for floating-rate bonds as a way to benefit from the double-digit annualized carry, with an additional over the CDI. The executive favors structured credit rather than triple-A, liquid one in large issues.
“The premium for this type of company is relatively low, there is an imbalance among market agents, the originating bank, the borrowing company, and investors, which is the weakest side,” Mr. Castro points out. “Tax-exempt debentures are a good example. Some securities are paying [the yield] of the NTN-B with no additional interest rates, just because of tax exemption. In a normal market, there is a risk of increasing such spread [with the assets’ devaluation].”
However, there is no rush to invest in inflation-indexed government bonds. Although the NTN-B at 6% may be a promising starting point as, in two or three years it will likely outperform the CDI, amid the current concerns about the monetary cycle and inflation, investors would rather postpone taking that risk. “The market is pricing in inflation unanchoring, whether due to discussions about the change in leadership at the Central Bank, the division of votes [in the Monetary Policy Committee], or a slightly worse inflation combined with rising commodities.”
The lack of consensus at the last COPOM meeting, with 5 versus 4 votes for reducing the Selic by 25 basis points and 50 basis points, brought forward the debate on who will replace Roberto Campos Neto as the Central Bank president, said Evandro Buccini, partner and director of credit and multimarket management at Rio Bravo Investimentos. “It has coincided with a turbulent moment also in the U.S. monetary policy, and with the change of command at Petrobras. So, for yet another month, the Brazilian stock market was outperformed by the U.S., with the S&P 500 rising sharply.”
Mr. Buccini points out that, given the negative reactions, the COPOM will seek greater consensus at the next meeting. “It will be interesting to follow the topic and see if it [a consensus] is credible or if it will just convey the idea of a temporary truce.” In any case, he sees a troubled succession as it will be hard to find an independent name appointed by President Lula as it was in the Bolsonaro administration. “There is almost consensus that it will be someone more dovish. This matter will remain around and will only be resolved at the end of the year.”
Rio Bravo’s projection for the Selic was revised to 10% per year from 9.75% by December, with great debate and a lot of noise about fiscal policy expected along the way. The executive mentions that the launch of development bills could indicate a more active Brazilian Development Bank (BNDES) in the coming years, allowing operations below the cost of capital and bringing distortions to private funding.
The firm’s funds have more cash available, including loans and equity. “With 10% [of the CDI], we are happy to carry it and there is no rush to allocate the money.” For individual investors, Mr. Buccini points out that strategies linked to real interest rates may be a good choice. “It could increase further if everything goes wrong and it becomes 7%, but ensuring the IPCA plus 6% in the medium and long terms is very good, especially for investors with access to tax-exempt debentures.”
*Por Adriana Cotias — São Paulo
Source: Valor International
If the operation proves viable, the fund’s investments in the country could reach R$1.5bn
05/29/2024
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Paulo Castellari — Foto: Gabriel Reis/Valor
Appian Capital, a British investment fund focused on mining projects, is investing an additional R$350 million in Brazil to enable graphite exploration. Considered a critical mineral, graphite is essential for battery production, with 70% of the global supply currently sourced from China. If the initial operation confirms its viability, the fund’s investments in the country could reach R$1.5 billion over the next five to eight years.
With these resources, Appian will establish a demonstration unit—a pilot mineral beneficiation operation—with a production capacity of 5,500 tonnes of graphite per year at the Boa Sorte mine in Itagimirim, Bahia. Additionally, it will develop two technical studies in areas controlled by Graphcoa, a joint venture managed by the fund, which has nine mining projects spanning southern Bahia and northern Minas Gerais.
According to Paulo Castellari, CEO of Appian Capital Brazil, two of the fund’s nine global mining projects are located in Brazil. “Brazil has been an area of significant interest since 2019,” he said. At that time, Appian invested in Atlantic Nickel, which produces nickel in Bahia, and Mineração Vale Verde, a copper operation in Alagoas.
The fund is focused on materials that can aid in the energy transition, such as copper, nickel, and lithium, which are used in the positive pole (cathode) of batteries. However, they also see potential in graphite, as there is currently no economically viable substitute for this mineral used in the negative pole (anode) of batteries. “What lies ahead for graphite is fascinating,” he said.
Mr. Castellari anticipates being able to decide on the next phases of the project in Brazil, aiming for 25,500 tonnes annually, by the first half of next year after conducting tests and certifications with potential clients.
In the future, the installed capacity in the Brazilian operation could increase to 40,000 tonnes, potentially reaching 65,000 tonnes by exploring two of Graphcoa’s nine areas. “It could be the largest graphite project in the country,” said Mr. Castellari.
Currently, Brazil’s graphite production represents less than 2% of the global volume, even though the country holds deposits equivalent to a quarter of the world’s reserves. The global supply of graphite is around 1 million tonnes per year and is expected to reach 3.7 million tonnes by 2030. China’s share, which currently accounts for more than half of the production, is projected to decrease to 30%, Mr. Castellari notes.
On the demand side, a deficit is anticipated. Today, 2 million tonnes are consumed annually, with 1.4 million tonnes used for batteries. By 2030, consumption is expected to rise to 4.6 million tonnes, exceeding the projected supply.
With potential clients both domestically and internationally, the strategy is to assess the feasibility of verticalizing operations, possibly extending to battery production in the future. “The investment is not only in the use of batteries for vehicle electrification but also in general,” he said.
*Por Stella Fontes — São Paulo
Source: Valor International
Neobank reached market cap of R$297bn on Tuesday, surpassing Itaú’s R$288.5bn
05/29/2024
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Nubank is now the second-largest company in Brazil regarding market cap, behind Petrobras — Foto: Divulgação
Nubank has surpassed Itaú in market capitalization on the New York Stock Exchange (NYSE), claiming the title of the most valuable bank in Latin America. On the previous Friday, the digital bank had come close but did not surpass its rival. It took a 3.84% rise in Nubank’s share price on Tuesday, closing the regular session at $12.18, along with a 0.54% decline for Itaú, to make the shift official.
Nubank ended the day with a market cap of R$297 billion, according to Einar Rivero of Elos Ayta Consultoria, compared to Itaú’s R$288.5 billion. The movement makes the digital bank the second-largest company in Brazil regarding market cap, behind Petrobras.
This is not the first time Nubank has overtaken Itaú in market cap. Between January and February 2022, the two banks alternated as the most valuable. Being traded in dollars gives Nubank an edge over banks on the Brazilian stock exchange, such as Itaú, whose shares are traded in reais.
In practice, market cap is a way to measure how stock investors assess a company, including a “premium” that represents the potential for future gains and competitive presence in its market. This metric disregards aspects such as the balance of assets, cash, and liabilities.
From the perspective of the stock price relative to the bank’s book value, for instance, Nubank is being traded at a multiple of about 8.7 times. Meanwhile, Itaú is traded at around 1.7 times its book value. “The difference is that Itaú has decades of accumulated profits in its equity, whereas Nubank only started making a profit last year, in 2023; hence the difference in price to book value,” said Larissa Quaresma, an analyst at Empiricus Research.
*Por Beatriz Pacheco — São Paulo
Source: Valor International
For Magda Chambriard, “dialogue” is key to reconciling different perspectives
05/28/2024
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Magda Chambriard — Foto: Leo Pinheiro/Valor
Petrobras must be a profitable company that simultaneously serves the interests of both private and governmental shareholders, said the new CEO of the state-run company, Magda Chambriard, on Monday. In her first press conference after taking over the company, the executive noted that the plan is to align the company’s operations with shareholders’ interests while adhering to business logic. She added that “dialogue” is the key to balancing the different interests of investors.
Ms. Chambriard took office on Friday after being elected by the company’s board, replacing Jean Paul Prates, who was dismissed on May 14 by President Lula following months of public criticism and clashes with factions within the government.
The new CEO mentioned that when Mr. Lula invited her, he requested that she manage the company with respect for society. She said the company is committed to fulfilling promises with agility and accelerating efforts, can ensure returns for all shareholders, and must meet societal expectations, “understanding that we have to deliver returns.”
“If we make a profit and meet the interests of public and private shareholders, we will pay dividends,” said Ms. Chambriard, adding that changes in the company’s board, if they happen, will be driven by the need to adjust profiles. She noted that she is still getting to know the current board members.
When asked about the second half of the extraordinary dividends for 2023, which the company is expected to allocate by the end of this year, Ms. Chambriard said she still needs to study the matter: “I took over on Friday, so I need to look into this more carefully.”
Another crucial point for her is the exploration of new oil and gas frontiers, such as the Equatorial Margin and the Pelotas Basin. Ms. Chambriard stressed the importance of maintaining the company’s reserves, noting that the production peak of the pre-salt is imminent. The current challenge, she added, is ensuring energy security while managing the transition in the sector. “The company’s efforts must be accelerated,” she said.
Ms. Chambriard believes that the Ministry of the Environment (MMA) needs to understand better the country’s and the company’s need to drill wells in the Equatorial Margin. Brazil’s environmental protection agency IBAMA, linked to the MMA, denied an environmental permit for drilling a well in the Foz do Amazonas basin, and the company has appealed the decision, which is still pending.
“We need to discuss with the MMA and show that the company exceeds the legal requirements for environmental care,” she said. She added that issues like the exploration of the Equatorial Margin should be discussed in the National Energy Policy Council (CNPE), which she considers the most appropriate forum, with final arbitration by President Lula. The internationalization of the company, seeking areas in other countries for oil exploration and production, is on the table, but she said that the “priority is the Brazilian territory.”
According to Ms. Chambriard, the company’s experts will assess whether the repurchase of the Mataripe refinery is a good deal for the state-run company. “Refining interests us as a value aggregator.” The company is negotiating with Mubadala Capital to re-enter the refinery, which was sold in 2021.
Ms. Chambriard said that the oil company needs to increase the “availability” of its products in the market. “We must guarantee that the company is sustainable and continues with high production levels,” she added. She defended the current fuel pricing policy and said the company will continue with the goal of “Brazilianizing” prices. “It is undesirable to bring daily instability to fuel prices.”
Regarding the contract between Petrobras and the petrochemical company Unigel, Ms. Chambriard noted that the case is under review and that the company will address any concerns raised by the public spending watchdog TCU. “I will not override a respected institution like the TCU,” she said, adding that “no one here wants to waste money, and the company will continue with the contract with Unigel if it proves profitable.”
“We need to explain to regulatory bodies that fertilizers are a good business,” Ms. Chambriard said, adding that the company cannot have “excessive compliance” that leads to inertia and that Petrobras will discuss projects and their timeliness.
Unigel leased two fertilizer factories from Petrobras in late 2019, in Camaçari (Bahia state) and Laranjeiras (Sergipe state), which had been mothballed due to unprofitable operations. The petrochemical company resumed production at the two units but suspended activities again last year, citing a drop in international urea prices not matched by natural gas costs, making operations unviable.
In December, the companies signed a “tolling” agreement—an industrial processing contract on demand—worth R$759.2 million for Unigel to provide industrialization, storage, shipping, and post-sale services for urea, ammonia, and Arla (used to reduce emissions from diesel vehicles).
*Por Kariny Leal, Fábio Couto — Rio de Janeiro
Source: Valor International