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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Recession fears spark risk aversion

While services data offers relief, concerns about the U.S. economy persist

08/06/2024

Ruy Alves — Foto: Leo Pinheiro/Valor

Ruy Alves — Foto: Leo Pinheiro/Valor

Global markets plunged into panic amid mounting fears of a U.S. recession in Monday’s trading session. Risk aversion gripped investors from the early hours, starting with Japan’s stock market experiencing its second-worst day ever and continuing across global stock markets throughout the day. In Brazil, concerns pushed the exchange rate to its highest close since March 2021, while Brazil’s benchmark stock index (Ibovespa) also fell, though local asset losses were less severe compared to their international counterparts.

The day’s trading commenced with high tension as Asian stock markets recorded substantial losses driven by fears of a U.S. economic slowdown and concerns over a tech stock bubble. Japan’s primary market index, the Nikkei, plummeted 12.4%, marking its steepest decline since 1987, and South Korea’s Kospi index closed down 8.7%.

U.S. markets mirrored this downward trend, with significant indices suffering heavy losses. The Dow Jones Industrial Average dropped 2.60%, the S&P 500 declined by 3.00%, and the Nasdaq Composite fell 3.43%, dipping over 6% at one point during the session. The S&P 500 experienced its worst day since September 2022. Furthermore, the VIX index, often referred to as Wall Street’s “fear gauge,” surged by 65%, ending the day at 38.57 points.

In a communication to clients, strategists at Citi noted that the investment strategies widely adopted by the market are now showing their limitations. “Positioning metrics shed light on some of the recent movements in asset classes, providing insights into vulnerabilities during periods of high volatility. Japanese stocks were widely favored […], and equities in Europe, the U.S., and emerging markets (excluding China) remain overweight,” they commented.

Citi highlighted that “carry trade” positions—where investors borrow at low interest rates in one country to invest in higher interest options elsewhere—are particularly vulnerable, impacting currencies such as the Brazilian real, the Turkish lira, and the British pound.

Amid these global tensions, local markets displayed a stark aversion to risk. At one point during the day, the exchange rate surged by 2.71% in Brazil, reaching R$5.8641 per dollar. Simultaneously, the Ibovespa plummeted to a low of 123,073 points, a drop of 2.20%.

Nevertheless, unexpectedly positive data from the U.S. services sector tempered fears of an imminent recession in the world’s largest economy, leading to a partial recovery in market sentiment. Consequently, local assets rebounded from their lowest points of the day. By the close of trading, the exchange rate had risen by 0.56%, settling at R$5.7412 per dollar, marking a year-to-date gain of 18.31%. Meanwhile, the Ibovespa closed down slightly by 0.46%, at 125,270 points.

Ruy Alves, global macro manager at Kinea, expressed confidence that there is no imminent recession on the horizon for the U.S., nor is there a likelihood of a sharp economic downturn. According to him, the recent monetary policy meetings of the U.S. Federal Reserve and the Bank of Japan have led to a recalibration in risk perception among highly leveraged trades, contributing to the recent market corrections. “It’s a misconception to think that the market consistently aligns with economic fundamentals. In reality, the market is shaped by supply and demand dynamics, which only sometimes coincide with the fundamentals,” he explained.”

The executive is optimistic about the potential for the Brazilian real to recover from its recent excessive fluctuations compared to its counterparts. “The real has room to correct some of the unusual movements it has experienced in recent months,” observes Mr. Alves. He notes that despite the market turbulence, the currency has shown considerable resilience relative to its peers.

Echoing this sentiment is Sérgio Goldenstein, chief strategist at Warren Investimentos. He suggests that the anticipated Federal Reserve rate cut of 0.5 percentage points should, in theory, benefit emerging market assets, particularly currencies. However, he points out that there is volatility stemming from the unwinding of carry trade operations.

“The yen has risen about 10% in a month. Fortunately, this appears to be a cyclical trend. Notably, on Monday (5), the real managed to outperform other emerging market currencies. If this unwinding of positions has concluded, it suggests that the real is poised to adjust to a more favorable rate. Currently, the currency stands well above its equilibrium rate,” Mr. Goldenstein explains.

He believes that an improvement in the exchange rate could significantly alleviate the Central Bank’s inflation concerns. “Should the Fed initiate rate cuts in September, combined with the cessation of ‘carry trade’ unwinding, there could be an opportunity for the real to appreciate, potentially reducing inflation projections. This scenario would enable the Central Bank to maintain the Selic [Brazil’s benchmark interest rate] at a stable level over an extended period,” he adds.

*Por Gabriel Roca, Gabriel Caldeira, Maria Fernanda Salinet — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Highway auctions to generate investments of R$32bn

Market expects the five scheduled auctions to attract at least one offer each

08/06/2024

Viviane Esse — Foto: Gesival Nogueira Kebec/Valor

Viviane Esse — Foto: Gesival Nogueira Kebec/Valor

The highway concessions segment will see a series of large auctions in the second half of the year. At least five tenders by the São Paulo state and the federal government are planned and could total R$32.3 billion in investments. In addition to these, eight other projects could be launched in 2024, apart from the renegotiation of concessions, according to the Ministry of Transportation.

In the market, the main doubt regards the possibility of attracting investors in a scenario of high interest rates and with concessionaires already committed to investments in ongoing contracts. However, according to governments and analysts interviewed by Valor, at least the auctions that have already been scheduled are expected to attract proposals.

Even the concession of BR-381 in Minas Gerais, known as the “Road of Death,” is expected to attract interest. Following changes in the project, which mitigated geological and expropriation risks and increased the rate of return, the expectation is that the auction will attract at least one group.

“There have been four attempts to bid. Now it’s for real,” said Viviane Esse, national secretary of Road Transportation. According to her, there are a host of companies analyzing the project, at least three with a background in the construction sector, in addition to traditional highway concessionaires. One is J. Malucelli, according to a source. When contacted, the company said it uses its “structure and experience” in the construction and highway segment “to study the programs announced by the government.”

For Ms. Esse, the broad market interest has grown. “I see increased participation. That became clear in the BR-040 auction, which attracted four bidders. We have seen many groups studying it.”

For Rafael Benini, São Paulo’s secretary of investment partnerships, the size of the contracts helps attract interested parties. “I understand there is concern [about a lack of proponents] but the size of projects was reduced. Two years ago, there were auctions worth R$15 billion, like the Dutra highway. Now we have [projects of] R$7 billion, R$8 billion,” he points out.

The two São Paulo state auctions scheduled for this year—the Sorocabana and Nova Raposo lots—are seen as highlights. The bids will take place as a result of the approaching expiration of the ViaOeste concession, by CCR. They are considered attractive because traffic on the roads is known and tolls are already in operation.

According to Mr. Benini, Sorocabana is a traditional lot, which tends to attract well-known concessionaires. Nova Raposo, on the other hand, includes urban construction work, which will require complex expropriations, and therefore tends to attract groups in the construction segment.

Sorocabana has been studied by CCR, Pátria, Ecorodovias, EPR, and Via Appia (by Starboard). Nova Raposo has been evaluated by groups such as Acciona, CDL (Consladel), Via Appia, and a consortium comprising CCR and construction companies.

Via Appia says it is studying the projects but has not yet made a decision, according to CEO Brendon Ramos. The two blocks have their challenges but also synergies with concessions that the company already operates, he points out. When contacted, CCR said, “The auction pipeline is extensive and the company has carried out in-depth assessments.” EPR says it “has a habit of evaluating opportunities.” Ecorodovias said it continues to analyze projects “selectively, looking for opportunities with an attractive rate of return.” Pátria and CDL declined to comment.

The São Paulo state government has other projects underway, which will likely be scheduled for 2025. In the first half of the year, a concession for the Paranapanema lot (Raposo Tavares highway between Itapetininga and Ourinhos) should be tendered, with investments of R$2.5 billion to R$4 billion. In the second half of the year, the Mogiana and Circuito das Águas blocks should be tendered, as a result of the expiration of the Renovias concession. As with ViaOeste, the state will likely split the concession in two and incorporate new road stretches into each lot.

Other federal government auctions are scheduled for this year, including the Rota dos Cristais (BR-040 between Minas Gerais and Goiás) and the BR-262 in Minas Gerais. They are regarded as challenging projects but there is interest.

“The best stretch of BR-040 has been tendered and was taken by EPR. The other two lots are considered complex projects. However, EPR tends to be a proponent,” said Massami Uyeda Junior, a partner at Arap, Nishi & Uyeda.

Marco Aurélio de Barcelos, president of ABCR (Brazilian Association of Highway Concessionaires), said there has been progress in federal projects, with an increase in return rates and greater risk sharing in challenging projects. “The government did its job to increase attractiveness. The IRR [internal rate of return] became more attractive as the final model has resolved risks.”

As projects progress, the general perception in the market is that new players are increasingly entering the sector. “We have been approached by companies from abroad which are interested in learning about the concession environment. We have seen moves,” said Mr. Barcelos.

Rodrigo Campos, a partner at the Vernalha Pereira law firm, expects to see offers for all scheduled auctions. “We won’t see many bidders as the projects are many and with different profiles. However, I believe all projects will attract interest, including the BR-381.”

Letícia Queiroz, a partner at Queiroz Maluf Advogados, also sees interest in the sector but points out that there are challenges, mostly related to funding and hiring engineering work. Furthermore, she points out that auctions will likely occur simultaneously with the renegotiation of troubled concessions. “The pipeline will coincide with the number of contracts being renegotiated which are also expected to generate new investments. It’s a challenging calendar, with a lot of auctions, but I see moves in the market.”

*Por Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Flying car gains traction with 830 orders

Regulatory certification pending, vertical and take-off landing vehicle eVTOL promises lower emissions and reduced costs, eyeing competition with helicopters

08/06/2024

Vertical take-off and landing vehicles—eVTOLs, also known as flying cars—attracted 830 orders — Foto: Divulgação

Vertical take-off and landing vehicles—eVTOLs, also known as flying cars—attracted 830 orders — Foto: Divulgação

Currently undergoing certification with regulatory agencies, the future vertical take-off and landing vehicles—eVTOLs, also known as flying cars—attracted 830 orders from eight commercial aviation and air taxi companies in Brazil. Executives in this emerging sector are preparing to compete with helicopter transportation, promising reduced pollutant emissions, safety, and lower costs. However, specialists are monitoring several factors that could influence the development of this new market: how the National Agency of Civil Aviation (ANAC) will regulate the segment, for instance, regarding the construction of landing and take-off sites, known as vertiports, and the potential delay in consumer adoption of this new type of vehicle.

In a statement, ANAC highlights the importance of fundamental safety, design, technology, and accessibility requirements for users and aircraft, considering the need for integration into city structures and urban mobility, connecting eVTOLs with other modes of transportation, services, and public facilities. All of this generates social, economic, and environmental benefits, the agency said. “This necessity directed the agency to implement the regulatory sandbox currently underway.”

This process has not deterred interested parties. Of the total 830 orders reported in Brazil, 57% were placed by airlines Gol and Azul. There are also startups created specifically to explore this potential market.

One of them is VertiMob Infrastructure, which anticipates significant interest from high-income individuals who use air taxi services. According to data from the Brazilian Association of General Aviation (ABAG), São Paulo has the largest helicopter fleet in the world, with 420 aircraft in operation, followed by New York and Tokyo. Brazil has about 2,000 helicopters.

On another front, based on forecasts from international consulting firms, the company also projects that the cost of travel with flying cars will gradually decrease, potentially generating demand among higher-income individuals within the upper middle class. For example, VertiMob CEO Bruno Limoeiro noted that the 15-minute flight from São Paulo’s financial center, known as Faria Lima, to Guarulhos Airport can cost R$2,500 per seat for an executive in a helicopter. In an eVTOL, he said, the cost should range from R$500 to R$1,000 per seat on this route.

“If this trip costs R$1,000 at the start, that’s very good, with a 60% reduction,” Mr. Limoeiro said, acknowledging that the flying car will not be part of most people’s daily lives. The target audience will likely use the service in exceptional situations, such as risking missing an international flight, traveling to nearby cities in an emergency, or sightseeing with panoramic flights.

Marcus Quintella, head of the FGV transportation study center, believes the future mode will have to undergo stricter demand tests, which may yield different results than the company expects, depending on how the service is regulated and the level of acceptance. There may be consumer distrust related to safety, at least initially. “Even with helicopters, many people who have money decide not to fly,” he said, referring to the fear of accidents.

Alessandra Abrão, CEO and partner of Voar Aviação, which has already ordered 70 eVTOL units, argues that they are being developed to the highest safety certification standards by manufacturers and international regulatory agencies. “These vehicles are designed with advanced technologies that include multiple redundant systems, such as batteries and engines, to ensure safety in case of failures,” she said.

For Mr. Quintella, with FGV Transportes, if there are too many restrictions on coexisting with other aircraft, the supply of flights may not be as large. He draws attention to the licensing criteria for the vertiports themselves. “The travel time to the take-off area should be short, and these points should be distributed throughout the city. This broad base is essential for it to be competitive,” the expert said.

VertiMob, created in the first semester, plans to install and operate the first “vertiport” in Latin America. The initiative is conducted in partnership with São José dos Campos Airport, whose technical proposal will be analyzed by ANAC. The agency is seeking interested parties to implement a vertiport, within the “regulatory sandbox” model whose registrations are open until October.

According to ANAC, this sandbox model allows for the development of new technologies in an evaluation environment by the regulatory authority. “Thus, it is a preliminary stage for future normative production and, consequently, the inclusion of the topic in the regulatory agenda. Meanwhile, ANAC can monitor the evolution and assess the effectiveness and safety level guaranteed by the innovative technique proposed by eVTOL technology.”

Contacted, Gol reported that it has partnered with the Irish leasing company Avolon and the British eVTOL manufacturer Vertical Aerospace to “study the ecosystem that will enable this new mode,” which is “promising.” It said that the prototype of Vertical’s VX4 is “in the test flight phase on its certification journey,” with the “highest safety criteria,” which will extend until 2026. “In the meantime, all other participants in this ecosystem—infrastructure, airspace control, energy providers, regulatory agencies, and companies—must work collaboratively for the success of eVTOLs,” which are important for the “potential expansion of the air network.”

Azul reported that the partnership with the German company Lilium, involved in eVTOL research, will help achieve the carbon neutrality goal by 2045. Emphasizing that it is one of the first companies to support the new aircraft project, it reported that it is “awaiting the regulatory part, which still needs to be defined, in addition to working on planning, support, and studies of bases and infrastructure to determine how the operation will be.” It added that eVTOLs are for “short and medium-distance routes, which would help complement the air network, operating in places where conventional aircraft cannot.”

Asked about its strategy, Latam declined to comment.

*Por Rafael Bitencourt — Brasília

Source: Valor International

https://valorinternational.globo.com/
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