New investment boosts Pirelli’s prominence in Brazil

R$200m plan for laboratory and logistics center adds to purchase of natural rubber producer

18/03/2024

Cesar Alarcon — Foto: Gabriel Reis/Valor

Cesar Alarcon — Foto: Gabriel Reis/Valor

Carmakers have been in the news in recent weeks after announcing local investments, but they are not the only ones interested in Brazil: Pirelli also announced a R$200 million program on Wednesday. The acquisition adds to the recent purchase of a Brazilian company, which means a combined disbursement of R$350 million in three months. The plans take the local operation to a new level within the Italian tire manufacturer.

While investment announcements in the automotive industry tend to focus on plans, Pirelli’s were made when the project was almost half complete. Part of the money has been used to build a modern laboratory, which was inaugurated on Wednesday. The rest will be used to build a logistics center in 14 months.

Both buildings will be located on the same site as the factory in Campinas, which Pirelli bought 54 years ago. This plant and another one in Feira de Santana, Bahia, produce the tires sold on the national and international markets.

One third of the country’s production is exported, including tires for electric cars produced in the United States. “We even make snow tires in Bahia,” said Cesar Alarcon, the 45-year-old Argentinean executive who has led Latin American operations for five years after an already long international journey within Pirelli.

Considering the Argentinean plant, the group has 8,000 employees in the region, which accounts for 20% of the company’s global production.

With the new lab, the company now has an important research and development center in Campinas, “comparable to those in Germany or Italy,” according to the executive.

The quality tests conducted by the team of engineers trained for the new center, he added, will be able to meet the group’s needs in other countries. The project will also allow the group to forge closer links with the academic and scientific community in the region.

One advantage of the second part of the new investment is the proximity of the storage area, both for raw materials and tires, to the production line. As well as reducing costs, Mr. Alarcon said this proximity will bring environmental benefits by saving 5,000 freight journeys a year.

The group’s strategy to develop the region was completed with the recent acquisition of Hevea-Tec, a 25-year-old family business in Jaci, São Paulo, that produces natural rubber from latex lumps.

The agreement for the R$150 million acquisition was signed in the second half of 2023 and approved by Brazil’s antitrust watchdog CADE earlier this year.

By increasing Pirelli’s natural rubber share in Latin America, Mr. Alarcon said, the Latin American business will become more relevant to the group’s global sustainability agenda, which has set a target of reducing carbon emissions to zero by 2040. “We’ll be able to process and export this product, or we’ll be able to export the tires made of natural rubber,” he said.

“Brazil is strategically important for Pirelli,” said Mr. Alarcon. According to him, the group’s investments in Brazil amount to R$2 billion over 10 years.

“We have to invest before carmakers do,” he said. Mr. Alarcon said the company is in a comfortable position to cater for the future production of electric cars in the country, for example, because it already produces tires for this type of vehicle for export.

He added that the tire for a fully electric model is different because it needs to be made of lighter materials—these vehicles weigh more because of their big batteries—to reduce energy consumption and help with autonomy. “The car is silent, which requires materials with less noise; these are unique characteristics,” he said.

At the same time, Mr. Alarcon praises the carmakers’ plan to produce hybrid models in Brazil that can run on ethanol. “It was the right decision for the transition to fully electric cars.”

With his extensive international experience at Pirelli since 2007, including five years in China, Mr. Alarcon has an optimistic view regarding the potential for China’s BYD to become a future customer. Notably, BYD’s plant is close Pirelli’s Bahia unit. “Pirelli already supplies BYD in China; it’s reasonable to expect that the Camaçari plant will also opt for our tires,” he said.

The executive is excited about the expansion of sales of high-end cars in Brazil, which consequently require tires with wider rims. This means more sales for the company. “Today, Latin America accounts for 20% of global volume, but revenue is lower. In the United States, most cars boast 18-inch rims, here 85% of cars use 16-inch tires,” he said.

On the other hand, he complained about foreign products that are strong competitors in the replacement market. Mr. Alarcon is one of those who have taken to the government the industry’s complaints about the product, which comes mainly from Asia. He accused these rival brands of “dumping” and said that in addition to lower prices, they are companies that are not committed to the country’s environmental cause.

In Campinas, water from the factory is reused, and waste is no longer sent to landfills. “We even recycle tires that come from other countries. It’s necessary to have equality in a country where the industry’s share of GDP has been declining,” he said, commenting that if it weren’t for “unfair competition,” Pirelli wouldn’t have to have 400 employees currently on temporary leave with suspended employment contracts.

The country’s macroeconomic environment, on the other hand, does excite him to some extent. “I often tell people in the government that, as an Argentinian, I feel a certain jealousy,” he said. “Brazil’s economy is healthy and growing, despite the changes in government.”

The executive’s complaints relate to the country’s loss of international competitiveness, which he said is due to excessive costs that put the country at a disadvantage compared to nearby countries such as Mexico.

The tax overhaul, he said, has brought about a positive simplification. “But that is not enough. We need to create the conditions for efficiency.”

*Por Marli Olmos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Central Bank expected to cut key rate to 10.75% per year

Market sees monetary authority cutting Selic by 50 basis points this week

18/03/2024

Eduardo Jarra — Foto: Silvia Zamboni/Valor

Eduardo Jarra — Foto: Silvia Zamboni/Valor

The market is eagerly awaiting this week’s decision by the Central Bank’s Monetary Policy Committee (COPOM). Unlike January, when there were no surprises, this Wednesday’s decision is being closely watched by agents. At a time when the collegiate body is still defending the need for a contractionary stance to tackle inflationary pressures, the debate on the appropriate level of restriction is gaining momentum in the market, increasing anxiety about the COPOM’s announcement.

Valor consulted 135 financial institutions and consultancies and the consensus is that the key interest rate Selic will be cut by 50 basis points this week, to 10.75% from 11.25% per year. In the longer term, the median of the estimates points to a base rate of 9% at the end of this year and 8.5% in December 2025.

Despite the stagnation in central expectations, the context of this week’s COPOM meeting points to a more complex macroeconomic environment. Since the January meeting, there have been significant upside surprises in economic activity; current inflation has been much higher than expected by the market—and by the Central Bank itself—in recent months, with pressures on the services side; and the market has once again postponed expectations for the start of interest rate cuts in the United States.

In Valor’s monitoring of Central Bank forecasts for the Selic rate at the end of the cycle, 16 institutions have raised their estimates since January. In some cases, the revisions were more modest, such as Itaú Unibanco and Quantitas, which raised their forecasts by only 25 basis points. On the other hand, some financial firms made more significant revisions, such as Genoa Capital (to 9.25% from 8.5%) and Opportunity (to 9% from 8.25%).

On the other hand, 20 firms lowered their interest rate forecasts at the end of the year. Most of them had forecast a more restrictive monetary policy at the end of the cycle in their scenarios and are now closer to the market consensus. This was the case for Ativa Investimentos (to 9.5% from 10.5%), Morgan Stanley (to 9% from 10%), and MCM Consultores (to 9.5% from 10%).

“There is a sequence of data that points towards stronger activity, with a more heated labor market, with low unemployment and rising wages. The latest data puts an upward bias on our growth forecast for this year, which is 1.7%,” said Eduardo Jarra, chief economist at Santander Asset Management. “However, we haven’t seen any cyclical event that would force the COPOM to change its communication.”

The Santander fund manager cut his estimate for the Selic rate at the end of this year to 8.5% from 9.5% at the turn of the month. “We were hoping for more confidence in the disinflation process,” said Mr. Jarra, who now sees Brazil’s official inflation index IPCA at 3.6% per year at the end of 2024. “There is a benefit to the Central Bank proceeding cautiously, taking measured steps at a prudent pace. They can stretch it out a bit more,” said the economist.

Given that inflation is expected to fall, that core measures will continue a gradual process of disinflation, and that there have been no relevant changes in either the external scenario or the information on the conduct of fiscal policy from the Central Bank’s point of view, Mr. Jarra believes that the great interest of this week’s meeting will be focused on the “forward guidance” that the Central Bank has been using to guide economic agents regarding the next steps in interest rates.

Since the beginning of the cycle, in August 2023, the COPOM has indicated in its statements that its members “foresee a reduction of the same magnitude in the coming meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process.” If this view is now maintained, the market would understand that the Selic rate may fall to at least 9.75% per year. However, if the guidance is removed or softened, the committee would be sending a more hawkish message.

“This issue has been frequently raised during the period between the meetings, and based on what Central Bank leaders have said, it will be addressed. There will certainly be a discussion at the meeting, but I’m not sure about what will happen, whether they will keep the plural or adopt the singular. None of these scenarios would surprise me,” said Mr. Jarra.

*Por Victor Rezende, Augusto Decker — São Paulo

https://valorinternational.globo.com/

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Nadir targets U.S. market with large glassware

Glassware manufacturer holds less than 1% market share in the U.S.

03/11/2024

“Copo americano," or "American glass cup” is one of the company’s hallmark products in Brazil — Foto: Divulgação

“Copo americano,” or “American glass cup” is one of the company’s hallmark products in Brazil — Foto: Divulgação

A leader in the Brazilian glass household utensils market, the century-old company Nadir—formerly known as Nadir Figueiredo, which dropped its founder’s surname two years ago—is aiming to boost its exports to the United States following the expansion of its plant in Colombia.

As a potential candidate for an IPO on B3 and currently under the ownership of the private equity fund HIG, the owner of the Duralex and Marinex brands and the maker of Brazil’s traditional copo americano (“American glass cup”) holds less than 1% market share in the U.S. However, it is optimistic about increasing that to 3% by 2025 through adjustments to meet customer preferences.

In Brazil, one of the company’s hallmark products, the “American glass cup”—which, despite its moniker, is Brazilian and was launched in 1947 by Nadir Figueiredo designed for the tropical climate with a 190 ml capacity, crafted to keep beer chilled—is not expected to be the main export to the U.S. “Americans prefer larger glasses since everything is served in bigger portions there,” stated CEO Patrício Figueiredo, a descendant of the founding family, who is no longer a shareholder following the sale to HIG.

A key strategy for expanding in the U.S. market is leveraging its operations in Colombia. By acquiring Colombian Cristar in 2021, a glassware company previously part of the American O-I Glass group, Nadir has taken advantage of tax benefits for exports to North America through bilateral treaties. “In Brazil, the export tariff to the American market is 28%, but it’s zero from Colombia,” Mr. Figueiredo explained.

Colombia represented 22% of Nadir’s revenue last year, with approximately 70% of its Colombian production now destined for international markets. The country’s geographical advantage of access to the Pacific Ocean and the Caribbean Sea is also beneficial. “We have added two more production lines at the Colombian facility, which should boost the furnace’s capacity by 17%.”

Exports constitute 25% of Nadir’s sales, a figure expected to rise given the U.S.’s consumption potential. The company’s revenue reached R$2 billion last year, marking a 2% increase from the previous year. Nadir caters to both end consumers and the B2B market, being one of the top producers of curd cups, for instance.

In Brazil, the focus for 2024 is on enhancing online sales, which currently account for 0.5% of total sales, especially after the launch of its own e-commerce platform in January for direct consumer sales. “We previously had an e-commerce operation through a marketplace with partners, but we’ve now chosen to bring the operation in-house,” Mr. Figueiredo said.

The company, celebrating its 112th anniversary this year, had previously gone public but delisted in 2020. In 2021, Nadir filed for an IPO but withdrew due to deteriorating market conditions. Now, it is among the firms considering a return to the stock exchange after a two-year hiatus with no new listings on B3.

*Por Silvia Rosa — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Energy investment cycle in Brazil requires R$225bn by 2026

Investments aim generation expansion and transmission auctions; most of the funds will be in the Northeast region

03/11/2024

Amount corresponds to investment in large generation plants, of which 34% are related to renewable sources, such as wind and solar — Foto: Pixabay

Amount corresponds to investment in large generation plants, of which 34% are related to renewable sources, such as wind and solar — Foto: Pixabay

After attracting $35 billion (R$ 175 billion) in already contracted investments for decarbonization in 2023, Brazil is preparing for a new cycle of multi-billion-dollar investments between this year and 2026. The electricity industry will require around R$225 billion in new investments to enable the expansion of generation and transmission networks to deliver power to all regions of the country.

The study was carried out by energy research company Empresa de Pesquisa Energética (EPE), linked to the Ministry of Mines and Energy, which mapped the main investments announced and planned to meet Brazil’s electricity needs.

To enable the expansion of generation in the Ten-Year Energy Expansion Plan (PDE) reference scenario, until the year 2031, R$192 billion should be raised by the end of 2026.

The amount corresponds to investment in large generation plants, of which 34% are related to renewable sources, such as wind and solar, currently the drivers of the Brazilian electricity sector growth. The capital expenditure should be made, primarily, in the free energy market, a segment in which consumers can choose a supplier and sign agreements according to source, term, or price.

The other 66% encompasses technologies such as the mandatory implementation of natural gas thermal plants with mandatory power generation 70% of the time, on average (which does not allow flexibility), according to Law 14,182, which authorized the privatization of Eletrobras.

Additionally, they include other plants with the ability to adapt to energy demand, which plays a key role in meeting demand at peak times, designed to support the use of intermittent sources such as wind and solar. This support aims to ensure the continuous supply of energy from renewable sources, meeting electricity demand at any time of the day or night.

In this context, electricity transmission infrastructure plays a pivotal role in increasing the flow margin of renewable generation to consumer centers, improving regional service in the states, and improving reliability and continuity in energy supply to the different regions of the country. In 2023 alone, Brazil contracted R$37.5 billion in projects through two auctions.

For future projects, EPE has pointed to works to be authorized in auctions expected to result in R$32 billion in investments by 2026 for the construction of 9,000 kilometers, in addition to substations. Most of this total, equivalent to R$23 billion (or 72%), is planned to be allocated in bids scheduled for March and September 2024.

The Northeast region accounts for almost half of the planned investments, reaching R$ 15 billion, 49% of the total. The allocation of such funds aims to expand the capacity to transport surplus energy and improvements in the Southeast region, the country’s largest consumer center.

The study was coordinated by Thiago Prado, president of EPE, jointly with Renata Carvalho, advisor for EPE’s Electric Energy Studies Department. According to them, the plan outlines guidelines for public policies aiming to explore integration in the system expansion as demand grows.

“Given the expected auctions for contracting transmission networks, the maturing of the capacity market that adds energy security and the adoption of new technologies, as well as the continued expansion of renewable energies and the growing interest in hydrogen, Brazil continues to be a reference in renewables and new projects in the world,” Mr. Prado said.

“The integration of power generation and transmission planning is a key element for the renewability of the Brazilian electrical mix, providing safety and reliability, at the lowest cost for consumers,” Ms. Carvalho added.

On the other hand, Luiz Barroso, CEO of PSR consultancy, notes that the thermal electric plants included in the Eletrobras privatization law are considered riders—provisions added to a bill having little connection with the subject matter—that could be costly to Brazilians.

“The amount of investment is substantial, which shows Brazil is a great country to receive direct capital flow,” he said. “On the consumer side, every investment increases the electricity bill, and investments that are not economically proven from a planning perspective will end up increasing the cost of energy for consumers.”

Companies are already preparing to get projects off the ground. The most recent announcement was made by energy company Casa dos Ventos, with more than R$12 billion to be allocated by the end of 2026 to support its business expansion cycle. The company’s plans also include approving the first solar projects, which should total around 1 gigawatt of installed capacity.

Chinese money is expected to flow to Brazil from state-owned companies, especially State Grid, which won 80% of the last transmission auction. The agreement is expected to be signed in April, with investments exceeding R$18 billion.

Brazilian state-owned Petrobras is looking for ready-made renewable energy projects to “buy time” in the energy transition. The oil giant is currently studying 45 memorandums of understanding. The company recently signed a partnership with equipment manufacturer WEG for the development of the wind production chain in Brazil.

Alexandre Silveira, minister of Mines and Energy, said that in March 2024 the department will carry out another mega-auction, which, added to the competitions held in 2023, should total more than R$60 billion in the expansion of the transmission network. According to the ministry’s calculations, each real injected into this infrastructure should result in R$3 in investments in renewable generation, especially in the Northeast.

“We will bring more dynamism to the investment environment in the coming years. Brazil is one of the most attractive markets to invest in the energy transition, given the quality of its energy resources, and also thanks to its regulatory stability and legal security,” Mr. Silveira said.

The financial viability of projects brings uncertainties, as it is a capital-intensive industry. Therefore, development banks should play a pivotal role. Luciana Costa, director of Infrastructure and Climate Change at the Brazilian Development Bank (BNDES), emphasizes that the bank is the main global supporter of renewable energy projects, with expertise in the sector, being committed to support initiatives. In this context, the bank’s main funding route will remain focused on renewable energy for the free energy market.

“The transmission sector is mature, proven, and capable of obtaining funding on its own at competitive costs. However, Brazil is a volatile country and sees the capital market constantly opening and closing. Therefore, the bank is preparing to provide funding. In 2023, BNDES approved R$20 billion in operations encompassing energy transmission, distribution, and generation, including gas thermal plants. The exception is coal projects,” she said.

Another issue is that many institutions require projects to have long-term agreements as a guarantee, while the BNDES does not include such a condition. The bank has adopted capital market instruments, helping to attract private investment, and chooses to co-finance projects to share risks. “At times when the market is closed, as we saw in the first half of 2023, we enter and make a large funding with our own funds,” Ms. Costa adds.

According to James Ellis, the head of research for Latin America at BloombergNEF, Brazil accounted for 82% of total new investments in clean energy in Latin America in 2023, attracting $25.4 billion. This combination of investments is focused on renewable energy and electrical network infrastructure (transmission and distribution). Thanks to the substantial volume of investments, the country has an extensive pipeline of renewable projects backed until 2030.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazilian pulp exports to China at all-time high in 2023

China accounted for 49% of shipments, Ibá industry association’s study reveals

03/11/2024

Paulo Hartung — Foto: Gladstone Campos/Divulgação

Paulo Hartung — Foto: Gladstone Campos/Divulgação

The largest pulp exporter in the world, Brazil continues to post record highs in the planted forest sector. Last year, the country exported 18 million tonnes, considering all types of raw material, with almost half, or 49%, shipped to China. It was the largest purchase of Brazilian pulp ever made by the Chinese, both in volume and revenue.

In volume, Brazilian pulp shipments to China reached 8.9 million tonnes last year, generating $3.8 billion in foreign exchange. Of the total amount of fiber exported by Brazil, another 24% was shipped to Europe—which once was the largest market for the Brazilian product—and 14% to North America. The data was released by the Brazilian Tree Industry (Ibá), the association representing the planted tree production chain, in a bulletin with statistics for both the fourth quarter and consolidated year 2023.

According to Ibá, Brazilian pulp exports have doubled in the last 10 years and the sector currently accounts for the fifth item in the agribusiness export balance. “We have the challenge of maintaining and opening new markets. In addition, coordinating a new cycle of productivity growth for our planted trees,” said Paulo Hartung, Ibá’s executive president.

Brazil is expected to continue posting record highs in the industry in the coming years, in the wake of a robust portfolio of expansion projects not only in the pulp market but also in paper, wood panels, and forest planting. In the second half of the year, the sector had an investment portfolio of R$61.9 billion until 2028, of which R$22.2 billion was related to Suzano’s Cerrado project.

With 2.55 million tonnes of installed capacity, the company’s new plant, located in Ribas do Rio Pardo, Mato Grosso do Sul, will enter into operation by the end of June. The Cerrado project is expected to produce 900,000 tonnes this year, with sales of 700,000 tonnes. The volume will be exported, mainly to China.

Chilean company Arauco is also investing in the sector in Brazil. Its first pulp plant in Brazil, in the city of Inocência, Mato Grosso do Sul, will receive R$15 billion in investments and could produce 2.5 million tonnes per year. The start of operations is expected for the first quarter of 2028, with a second stage of the project expected in the future.

Another Chilean company, CMPC, has just concluded an allocation of R$2.75 billion in the Guaíba plant, in the Porto Alegre Metropolitan Region, marking the second-largest private-sector investment ever in the state of Rio Grande do Sul. The BioCMPC project is aimed at updating the plant, expanding its production capacity, and making it more sustainable. In addition to the 18% expansion in pulp production capacity, or an additional 350,000 tonnes from 2024 onwards, the project will result in reducing costs and cutting greenhouse gas emissions.

In 2023, according to Ibá, Brazilian pulp production reached 24.3 million tonnes, slightly below the volume produced in the previous year. The drop was due to adverse market conditions, especially in the first half of the year, when international prices for eucalyptus pulp reached record lows.

In this scenario, Suzano, the largest pulp producer in the world, announced in June it would reduce its production volume by 4% relative to its production capacity—10.9 million tonnes of pulp by the end of 2022.

From January to September, the Brazilian fiber production totaled 18.1 million tonnes, down 2.8% year-over-year. Exports were 13.7 million tonnes, 3.6% lower, with apparent national consumption stable at 4.5 million tonnes.

*Por Stella Fontes — São Paulo

Source: Valor Intrnational

https://valorinternational.globo.com/
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Petrobras effect raises market distrust

Government signals of extra dividends and spending pressures challenge domestic sentiment

11/03/2024

Fernando Siqueira — Foto: Celso Doni/Valor

Fernando Siqueira — Foto: Celso Doni/Valor

The calm that has prevailed in domestic markets in recent months has given way to a deterioration in risk perceptions.

The absence of extraordinary dividends from Petrobras, President Lula’s request for more credit from state-owned banks, and his desire to discuss an increase in the spending limit weighed on Brazilian assets last week. The sum of these factors increased investors’ mistrust of the government’s future handling of economic policy.

There was already some uncertainty in the air before Petrobras’s balance sheet was released on Thursday. However, this was contained as Brazilian assets underperformed their peers. On Friday, however, the deteriorating risk sentiment spoke louder. The blow to Petrobras shares, which fell around 10%, dragged Brazil’s benchmark stock index down—the Ibovespa fell 0.99% that day and 1.36% in the week, to 127,071 points. The foreign exchange rate gained 0.97% in the session to R$4.9816 per dollar due to capital outflows.

“The market is already used to this kind of talk from the government, but this time it came in the form of an attitude,” said Cesar Mikail, variable income manager at Western Asset, referring to the announcement that Petrobras will not pay extraordinary dividends for now. “And after the event, you always put something in the price for the company. Now the market can increase the asset’s discount rate, which is reflected in share prices.”

Concerns go beyond the Petrobras effect, however, as agents look at the macro context. President Lula’s comments signaling an increase in spending and the deterioration in the president’s rating measured by an IPEC survey have fueled the climate of uncertainty in the market. The perception of increased fiscal risk caused long-term interest rates to rise on Thursday and Friday, contrary to what happened abroad. The rate on DI contracts maturing in January 2027 rose to 9.97% from 9.905%, and that for January 2029 rose to 10.435% from 10.34% at the close of trading.

“There were doubts about whether the government would respect market laws or be more profligate; whether it would interfere in state-owned companies or not. So far, it had been less bad than expected,” said Daniel Delabio, partner and manager at Exploritas, citing respect for the Central Bank’s autonomy and the maintenance of the inflation target at 3% per year. “Now that the government seems to be getting closer to the [fiscal] target, Lula is taking the position that he wants to change it so he can spend more. If you look at this and the Petrobras decision, it creates an environment of risk aversion.”

Economist Yara Cordeiro of Novus Capital agrees. She highlights the fiscal impact of Petrobras’s decision, as a significant portion of the state-owned company’s dividends would go to the government. “The budget doesn’t provide for extraordinary dividends, but even so, everyone was counting on it being something that could help. In addition, there are doubts about the funds that were expected via CARF,” said the economist in a podcast, referring to the reinstallation of the casting vote, which tends to favor the government in the Tax Appeals Administration Council (CARF).

“We had expectations, at least on the government side, that there would be no resistance from Petrobras to reach an agreement with CARF. The amount expected to be paid to the government was quite significant, possibly reaching R$30 billion … With this setback suffered by the minority shareholders in the decision on dividends, the agreement now seems more distant and may face more resistance within the board of directors,” he said. “Not to mention that it was perceived as an attempt by the government to interfere in the company.”

Fernando Siqueira, head of research at Guide Investimentos, recalled that the issue has been discussed since the 2022 election cycle. “But [Finance Minister Fernando] Haddad managed to avoid it. Now we are seeing signs of a more negative path, and this should be on the radar of investors, especially local ones, who are looking at the political issue with a magnifying glass and are starting to fear what might happen.”

For Luiz Fernando Araujo, managing director of Finacap, recent events show that the risk of investing in state-owned companies has increased. “It has even increased for some privatized companies. We saw, for example, how the government tried to influence the choice of Vale’s CEO.”

Por Augusto Decker, Arthur Cagliari, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Rising demand for agribusiness debt restructuring

Surging interest rates combined with a decline in agricultural commodity prices have prompted an increasing number of sector companies to seek renegotiations with creditors

03/08/2024

Douglas Bassi — Foto: Fernando Martinho/Valor

Douglas Bassi — Foto: Fernando Martinho/Valor

Agribusiness, heavily leveraged, has emerged as a key player in the country’s debt restructuring processes, with numerous producers facing the dual challenges of high costs and price pressures on certain commodities. With the yellow light on, ways to alleviate the problem are being studied, including capital market mechanisms. The imminent need for cash by the companies most burdened by the cost of debt is already drawing the attention of funds specializing in alternative investments, the “special sits,” which are already analyzing opportunities in the area.

The challenging outlook contrasts with the country’s sector’s progress last year. The Gross Domestic Product (GDP) of agriculture grew by 15.1% and was the main driver of the 2.9% expansion of Brazil’s GDP.

A study by Virtus, a company specializing in corporate restructuring, reveals the situation. Using only companies listed on the stock exchange, the snapshot shows a drop in cash generation and an increase in the level of indebtedness, sounding alarm bells.

The earnings before interest, taxes, depreciation, and amortization (EBITDA) margin, an important profitability indicator that shows the ratio between a company’s cash generation and its net revenue, decreased from an average of 14.4% at the end of 2021 to 7.4% last year. Leverage, which represents the extent to which a company’s debt exceeds its annual cash generation, however, moved in the opposite direction, with an increase of 87%, to 3.1 times in the same period, according to the survey conducted at Valor’s request.

Of the companies analyzed in the study, 60% now have leverage above three times, which is generally one of the metrics observed for breaching covenants (financial obligations determined in a contract).

Douglas Bassi, a partner at Virtus, highlights that the price of commodities is a key factor in the financial health of agribusiness. Faced with the current scenario, Virtus has seen an increase in inquiries from producers who are experiencing financial difficulties. “The trend continues,” he noted.

The situation for non-listed companies is even more challenging. “Listed companies have easier access to capital, currently at an average cost of CDI plus 2%. But across the sector as a whole, the spread is much wider,” he explained. According to sources consulted by Valor, many rural producers have become indebted in recent years, investing the funds in expanding their land holdings during a period of high commodity prices. A significant number utilized Fiagro, investment funds that focus on the agricultural sector. However, a portion of these producers are now struggling to meet their payment obligations under their contracts.

The rising number of requests for court-supervised reorganization in agriculture underscores the issue. Data from Serasa Experian released on Thursday (7) shows that last year, requests for court-supervised reorganization from rural producers surged by 535%. Experts consulted by Valor indicate that the situation is deteriorating.

Consequently, some Fiagros have had to notify their shareholders of the non-payment. Galapagos Capital, for instance, had to report on the court-supervised reorganization of Grupo Elisa, owned by the Mitre family, involving an Agribusiness Receivables Certificate (CRA). The asset manager informed shareholders that it was “collaborating with the other creditors of the CRA to protect the fund’s interests.”

Elisa Agro stated that “court-supervised reorganization was deemed the best course of action in light of the macroeconomic challenges that have affected the company’s operations in recent years.”

“The company is confident that, in collaboration with its advisors and creditors, it will formulate a viable restructuring plan that aligns financial obligations with cash flow, ensuring the sustainable continuation of operations and the preservation of thousands of jobs,” it announced.

Another example is the Vectis Datagro Crédito do Agronegócio fund, which has declared it will call for the early maturity of Brasil Bio Fuels’ CRAs, as the latter sought judicial protection against debt collection. Brasil Bio Fuels explained that its application was for an emergency injunction “aimed at securing a 60-day window to negotiate a mutually agreeable resolution with its principal creditors.”

Mr. Bassi from Virtus recalled that many Fiagros were initiated during a period of lower interest rates and higher commodity prices in Brazil, a scenario that has since shifted on both accounts. According to January data from ANBIMA, there are now 98 active Fiagros, with net assets totaling R$36.4 billion—up from nine funds in August 2021.

In some instances of court-supervised reorganization in Mato Grosso, for example, trial court judges have rejected land as collateral for loans, supporting the argument that the asset is indispensable. This issue is being closely monitored by asset managers, who have started to anticipate problems.

Roberto Zarour, a partner at Lefosse’s Restructuring & Insolvency practice, notes that the agribusiness sector’s demand for judicial recoveries and restructurings has increased this year, marked by significant cases, indicating a strong trend. “The Selic rate is decreasing, yet it remains quite high. That has affected the more vulnerable companies, particularly those with bank debt in the capital markets,” he noted. He also highlights that many of these renegotiations have occurred outside the judicial realm.

In the financial market, various structures are under consideration to both capitalize and prolong the maturities of these producers. One method being discussed involves utilizing Fiagro itself to consolidate current debts and repackage them with different terms, extending the duration. Another approach, considered by special sits, involves leasing land; the fund purchases the land and establishes a long-term lease with the producer.

Rodrigo Aguiar, from Íntegra, a firm specializing in corporate restructuring, describes the most critical situations among soybean and corn producers who incurred debt for investments and were subsequently walloped by increasing interest rates and declining commodity prices. Ethanol producers with minimal sugar exposure are also facing difficult times.

Mr. Aguiar mentions that many creditors, initially lenient during the pandemic, are showing patience. Another challenge, according to him, involves negotiations with capital market creditors, who, as dispersed debt holders, are less familiar with the agricultural sector’s volatility. “Many producers were caught at an inopportune moment, at the height of their investments, before seeing the outcomes of these investments,” he explained.

Identifying opportunities in the market, ARC Capital is exploring lending to agribusiness under the Debtor-in-Possession (DIP) modality, within a court-supervised reorganization framework, shares partner Sérgio Firmeza Machado. “We’re examining some cases involving producers of soybeans, cotton, corn, and ethanol,” he said.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Petrobras disappoints with decision to withhold extra dividends

Company announces ordinary dividends of R$14.2bn, posts net earnings of R$124.6bn for 2023

03/08/2024

Jean Paul Prates — Foto: Leo Pinheiro/Valor

Jean Paul Prates — Foto: Leo Pinheiro/Valor

State-owned company Petrobras confirmed on Thursday night (7) what investors have been fearing and said it will not pay extraordinary dividends for the fourth quarter of 2023. The company announced the distribution of ordinary dividends of R$14.2 billion, following the calculation of 45% of free cash flow. The dividends correspond to R$1.09894844 per preferred and common share and will be paid in two installments, in May and June. If the proposal is approved at the shareholders’ meeting scheduled for April 25, the total dividends to be paid by the company for the year 2023 will be R$72.4 billion, considering the advances made over the past year.

The market’s reaction to the oil giant’s decision not to pay extraordinary dividends should be a point of attention on Friday (8). On Thursday (7), the news that there would be no additional dividends made the company’s shares fall by around 10% in post-market trading at the New York Stock Exchange.

Last week, the company’s shares fell following statements by CEO Jean Paul Prates indicating that investments in energy transition would require the company to be conservative in paying dividends.

Valor found that Petrobras’s management board proposed the payment of extraordinary dividends, half of which would be allocated to capital reserve and the other half to shareholders. However, the proposal was not approved by the board of directors in a meeting that lasted into the night. The reason, according to people familiar with the matter, was concerns that the company would run short on cash to execute the 2024-2028+ strategic plan, which focuses on projects related to energy transition.

“The approval of the dividend is compatible with the company’s financial sustainability and is in line with its commitment to generating value for society and shareholders, as well as the best practices of the global oil and natural gas industry,” Petrobras informed in a note.

The meeting’s agenda also included the approval of the company’s results, with net earnings of R$124.60 billion in 2023, 33.8% less than in 2022. Net revenue fell 20.2% last year compared to 2022, to R$511.99 billion, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 23% in annual comparison, to R$262.23 billion.

In the fourth quarter, net earnings were R$31.04 billion, below the average of six firms surveyed by Valor, which pointed to a R$34.1 billion bottom line for the period. Net revenue in the three months ended in December fell 15.3%, compared to the same period last year, to R$134.26 billion, above the average estimated by analysts, of R$128 billion. Adjusted EBITDA was R$66.85 billion, 8.5% down year-on-year and below analysts’ estimates of R$70.2 billion.

The meeting revealed the split in the board and the isolation of the CEO, who also has a seat on the board. Of the 11 board members, the five directors linked to Mines and Energy Minister Alexandre Silveira plus Rosângela Buzanelli, representing employees, voted against the payment of extraordinary dividends. Mr. Prates abstained and the four minority members voted in favor of the additional payment.

The capital reserve was approved in October to ensure funds for the payment of dividends, interest on equity (and their respective advances), buybacks, absorption of losses, and incorporation into the shareholder’s capital. The company’s executive board and the government have been defending lower dividends to back renewable energy projects.

“We recognize that energy transition will occur gradually and, therefore, we will continue to invest in oil and gas exploration and production, the segment generating the highest returns … We will also generate value with a fair and responsible transition, diversifying our operations into profitable low-carbon businesses and always prioritizing partnerships,” Mr. Prates said in a message attached to the financial report.

*Por Fábio Couto, Kariny Leal, Rafael Rosas — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Lula’s popularity fell after comments about war in Gaza, minister says

Social Communication Minister Paulo Pimenta spoke about Genial/Quaest poll; 35% rated government positively and 34% negatively

03/07/2024

President Lula — Foto: Cristiano Mariz/Agência O Globo

President Lula — Foto: Cristiano Mariz/Agência O Globo

Social Communication Minister Paulo Pimenta acknowledged on Wednesday that President Lula’s drop in popularity in the Genial/Quaest poll released on Wednesday (6) is related to his comments on the war in Gaza.

Weeks ago, President Lula compared the situation of the Palestinian people to the Holocaust, as the mass murder of Jews by the Nazis in World War II became known.

Despite this, Mr. Pimenta downplayed the results of the poll, stating that they were “not surprising” to the Lula administration and that the polls had not yet “reflected” any alleged change in Brazilian society’s perception of the massacre against the Palestinians. “We are not going to stop denouncing this issue [the war in Gaza]. We’re not going to change our opinion of Israel because of a cyclical issue. The poll was conducted on February 24, and since then the scenario has changed. I understand that the poll reflects an analysis of our position [on the Israel issue], but over time there has been a greater understanding of President Lula’s comments,” he argued.

The opinion poll released today shows that President Lula begins the second year of his term with a positive evaluation of his government at 35% and a negative one at 34%. Of those interviewed by the institute, 28% consider the administration as average, and 3% did not respond. However, in December 2023, 36% had a positive evaluation of the Lula administration, and 29% had a negative one. Another 32% stated that the administration was average.

Among respondents, evangelicals have the most negative perception of the Lula administration: 48% rate the government as negative and 22% as positive. Among Catholics, 42% view the government positively and 28% negatively.

*Por Renan Truffi — Brasília

Source: Valor International

https://valorinternational.globo.com/
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