Government reduces fiscal risk in courts

The 2025 Budget Guidelines Act indicates a budget of R$3.60tn, down from R$3.76tn at the end of 2022

05/02/2024

Jorge Messias — Foto: Divulgação/Daniel Estevão/AscomAGU

Jorge Messias — Foto: Divulgação/Daniel Estevão/AscomAGU

In its first year, the Lula administration has set a downward track for the federal government’s fiscal risks within the justice system, which had been on the rise and are a primary concern for the government starting in 2027, the year when all “precatórios”—IOUs issued by the judiciary branch—amounts will revert to primary expenses.

Data from the fiscal risk chapter of the 2025 Budget Guidelines Act indicate that the federal government’s exposure to judicial risks stands at R$3.601 trillion, down 4.2% from R$3.758 trillion at the end of 2022. This is the first drop since the transition from 2019 to 2020, after which the risk track record had increased.

The current amount does not yet account for the federal government’s gains from the lifetime pension revision thesis, ruled by the Supreme Court this year, as the figures were finalized considering outcomes until the end of 2023. Therefore, an additional R$480 billion remains to be deducted from the fiscal statistics.

“We have decided to set this track on a downward path, and my perspective is to deliver, during the president’s first term, this curve pointing downwards,” Jorge Messias, the federal attorney general, told Valor. “We cannot talk about a sustainable public debt track record without addressing the growing debt that will pressure the federal government’s budget, which is the court-ordered debts.”

Ms. Messias emphasized that the Federal Attorney General’s Office’s (AGU) strategy prioritizes reaching settlements when full wins in cases are unattainable. “Sometimes, it’s cheaper to acknowledge the rights still in the administrative phase than to move the decision to the courts. There have been administrations that chose to swap the budget for IOUs,” he said.

Moreover, according to Mr. Messias, in addition to seeking victories in court, there are “less obvious” strategies, such as settlements. “I joke that here at the AGU, I never lose. Either I win or I make a deal,” he said.

Despite the improvement in numbers, experts claim there are still risks in the scenario, as primary expenses for IOUs are on an upward track. Until 2027, the Lula administration received a waiver from the Supreme Court in the case that declared unconstitutional the establishment of a cap for IOUs in 2021, during Paulo Guedes’ tenure at the Ministry of Economy. Thus, it was permitted for the Lula administration to pay some of the court-ordered debts outside the fiscal rules until 2026.

A significant portion of the value that became a remote risk stems from favorable tax rulings for the federal government. This risk has been a priority for Finance Minister Fernando Haddad since the beginning of the year, with direct involvement in cases. He has even met with ministers on more significant issues, such as the Workers’ Severance Fund (FGTS) inflation adjustment trial, still pending review with an estimated impact of R$295 billion, and the lawsuit involving changes in the calculation base for the Business Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) on sales tax ICMS subsidies.

Lawsuits against the federal government are classified into three risk levels: probable, possible, and remote. Probable risk includes issues with a financial impact of R$1 billion or more that have had unfavorable rulings from the Supreme Court and Superior Court of Justice. Possible risk covers lawsuits already in the higher courts but not yet definitively judged—that is, when there has been some unfavorable decision by a collegiate body, but an appeal is still possible. Other lawsuits are considered remote risk and are not included in the fiscal risk schedules.

Possible risk actions decreased to R$2.586 trillion in 2023 from R$2.741 trillion in 2022, a drop of 5.7%. Probable risk actions slightly fell to R$1.015 trillion from R$1.016 trillion, a reduction of 0.1%.

The federal government’s risk classification considers the case phase—whether it is in a trial court or higher courts, for example, following the guidance of an AGU ordinance. This is different from the criterion used by companies in their risk analyses and provisions in financial statements, which consider the likelihood of winning or losing.

The classified lawsuits involve cases that could result in direct government expenses, the IOUs, as well as cases that will impact future projected revenue. This occurs, for example, when the government can no longer collect a certain tax or when there will be compensation.

One of the reductions in impact estimates last year occurred due to the Supreme Court ruling that recognized the incidence of social taxes PIS and Cofins on financial revenues. The risk estimated at R$115.2 billion was reclassified to remote. The merits were judged in 2023.

Three multi-billion cases awaiting decision from the Superior Court of Justice were also reclassified to remote after rulings in which the federal government won. The main one concerned the sales tax ICMS subsidies, with an estimated impact of R$47 billion. The decision upheld tax benefits related to the state tax in the calculation base of the Business Income Tax and Social Contribution on Net Income.

Also removed from the fiscal risk schedule were disputes about the crediting of social taxes PIS and Cofins in the resale of products taxed at a zero rate, estimated at R$31 billion, and the recognition that sales tax ICMS comprises the base of the Business Income Tax and Social Contribution on Net Income in presumed profit, with an estimated impact of R$2.4 billion.

One of the main topics that reduced the impact of non-tax lawsuits was the trial on the Pension Reform (as per Constitutional Amendment 103, of 2019) at the Supreme Court. The analysis has not yet concluded—may be finished next week—, but some votes have already led the federal government to estimate a reduction in impact to R$497.9 billion, compared to R$621 billion projected at the end of 2022.

The conclusion of another trial eliminated a risk of impact in this case, involving the calculation of the pension by family quota and per dependent. Another reason for the reduction was a change in the calculation methodology made by the Ministry of Social Security.

For federal public autarchies and foundations, the risk fell by R$2.5 billion. This happened due to the ruling on compensatory interest for expropriation for agrarian reform purposes, which limited it to 6% instead of 12%. The decision became final in 2023.

“The improvement in the fiscal risk estimates of the Budget Guidelines Act reveals that the government is succeeding in acting alongside the courts to uphold theses in favor of the Treasury and the Constitution,” said Felipe Salto, chief economist at Warren Investments. “Regarding the IOUs, it is necessary to develop better systems for identifying the conditioning factors of these expenses. The IOUs do not arise spontaneously.”

In 2023, the federal government created a fiscal risk committee involving the Federal Attorney General’s Office and the Ministries of Finance and Planning to monitor these fiscal risks. On average, the Attorney General receives 90,000 notifications per day. The expectation, in the coming years, is to act strategically, including the possibility of proposing legislative changes if necessary to keep judicial fiscal risks more controlled or, at least, more predictable.

  • Por Guilherme Pimenta, Beatriz Olivon — Brasília
  • Source: Valor International
  • https://valorinternational.globo.com/
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Moody’s raises outlook for Brazil’s rating

Change comes just over two weeks after Brazil reduced the fiscal target for 2025

05/02/2024

Dario Durigan — Foto: Marcelo Camargo/Agência Brasil

Dario Durigan — Foto: Marcelo Camargo/Agência Brasil

Moody’s raised on Wednesday (1) Brazil’s Ba2 credit rating outlook to positive, from stable, indicating an improved chance of upgrading the country’s rating in the future. The agency cited positive GDP growth prospects and continued, albeit gradual, progress toward fiscal consolidation. The change comes just over two weeks after the country reduced the fiscal target for 2025 and 2026, which caused market stress and losses for domestic assets.

Last year, the other two main rating agencies—S&P and Fitch—upgraded the country’s rating. However, in the three agencies’ reading, Brazil remains below the best-rated countries, those with an investment grade. Despite the improved outlook, Moody’s cited negative aspects of the Brazilian economy, such as a high public indebtedness.

In the assessment released on Wednesday (1), Moody’s affirmed that GDP growth prospects are “more robust than in the pre-pandemic years, supported by the implementation of structural reforms over multiple administrations, as well as the presence of institutional guardrails that reduce uncertainty around future policy direction.”

The agency expects real GDP growth of around 2% in 2024 and 2025, on average. Over the medium term, the expectation is well above the annual average rate of a 0.5% contraction seen from 2015 to 2019.

“In the next few years, Moody’s anticipates growth will be broad-based extending to both the industry and the services sectors with domestic demand propelled by a strong labor market and higher real wages,” the agency wrote, also citing the government’s energy transition agenda.

The report also highlighted improvements in the monetary policy framework, strengthening of the Central Bank’s independence, improvements in the governance of state-owned companies, and measures to boost the business environment.

“The upcoming overhaul of the tax regime, while taking effect over a long period, also marks a notable structural reform,” the report says.

As for the fiscal scenario, the agency says the framework introduced last year is expected to result in gradual consolidation of public accounts. “Moody’s expects Brazil’s primary and overall fiscal deficits will narrow in 2024-2025 supported by revenue measures,” the agency said, projecting stabilization of government debt in a few years unless there is some type of shock in the economy. However, Moody’s points out that risks to fiscal consolidation efforts remain due to the government’s reliance on fiscal revenue growth and restricted ability to cut spending.

The maintenance of the Ba2 rating reflects “still relatively weak fiscal strength, given Brazil’s spending rigidity, high debt burden, and weak debt affordability.” The rating also takes into account Brazil’s sovereign credit strengths, which include a large and diversified economy, moderately strong institutions and governance, and a solid external position.

Among the factors that could lead to an upgrade in the rating, Moody’s cited an improvement in the primary result and fiscal deficits, which would enhance fiscal policy credibility, as well as continued solid GDP growth. Negative risks would be a weakening of the commitment to fiscal consolidation and, as a consequence, negative credit pressure. “Persistently low GDP growth would represent a credit-negative development that would adversely affect Brazil’s credit profile,” the report says.

Although the review of Brazil’s rating outlook by Moody’s is considered positive by the market, agents pointed out that the timing was unexpected, especially given the signals that the government has been sending in the fiscal area.

For Carlos Kawall, former Treasury Secretary and a partner at Oriz Partners, the government’s attempts to weaken the fiscal framework and structural reforms of recent years go in the opposite direction of the points cited by Moody’s.

“In recent months, the government has been taking steps towards weakening the framework, questioning the Central Bank’s autonomy and privatizations, and seeking to change the labor reform, while the improvement in the outlook is linked to these reforms,” he argues. “The intentions expressed to go backward in these reforms are in the opposite direction to the improvement in the outlook,” he points out.

Mr. Kawall argues that the government should not consider the outlook change as an endorsement of recent measures. “That would be an opportunistic reading. The change in the outlook is positive but it was made looking back, seeing reforms that ensure greater potential growth,” he said.

Alberto Ramos, head of Latin America economics research at Goldman Sachs, sees the new bias in the current rating as positive. “However, the timing was unexpected, following the market stress around the change in the trajectory of the government’s primary results,” he said. “Fiscal concerns have grown, not diminished. And a lot remains to be defined regarding reforms, including tax overhaul.”

In the opinion of Marcelo Fonseca, chief economist at Reag Investimentos, the change was “inappropriate” as it did not consider, for example, the shift in fiscal target announced last month. “It seems like we are talking about two different countries,” he said.

According to him, “the shift to a more flexible fiscal regime, as was the approved framework, does not place the country on a level of stability.” Furthermore, “fiscal targets are also very difficult to achieve.”

“Even from a political point of view, the government has struggled to defend its agendas in the Parliament, which will impact the primary result,” he said.

According to Mr. Fonseca, the change is not expected to have major impacts on asset prices. Combined with the fact that it does not change Brazil’s “speculative” grade, “investors know what the real risks of investing in Brazil are.”

The improvement in Brazil’s rating outlook was welcomed by the government. To Valor, Dario Durigan, executive secretary of the Ministry of Finance, said the review reinforces that the federal government’s economic agenda is “on the right track.” As examples of the strengths of the Brazilian economy, he mentioned “growing GDP, falling unemployment, increasing household income, strong external accounts, low inflation, and recovering fiscal [situation].” Mr. Durigan also emphasized the implementation of “important reforms” to increase the “productivity of the economy in the medium and long terms,” including tax overhaul.

Another source from the government’s economic team adopted a similar speech but acknowledged that the warnings made by Moody’s reinforce “the importance of not slacking off and remaining firm” in pursuing the balance of public accounts. For this source, the game “is not over”, and society “needs to continue supporting our agenda for the sake of the country.”

Government officials also used their social media accounts to comment on the change and highlight the roles of the Legislative and Judiciary branches. Finance Minister Fernando Haddad said the review “has to do with the joint work of the three branches of government, which placed the country’s interests above surmountable differences.” Minister of Planning and Budget Simone Tebet said there is a joining of “efforts by the government, Parliament, and the Judiciary to overcome budgetary challenges and boost our economy.” President Lula said Brazil “is once again respected worldwide” and “has credibility.”

*Por Augusto Decker, Estevão Taiar, Caetano Tonet, Gabriela Pereira — São Paulo and Brasília

Source: Valor International

https://valorinternational.globo.com/
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Chinese consumers willing to pay more for deforestation-free meat

A survey carried out in Beijing and Shanghai shows that consumers are willing to pay 20% more for Brazilian meat that has nothing to do with the destruction of the Amazon

04/30/2024

Kevin Chen and Eduardo Assad — Foto: Rogerio Vieira/Valor

Kevin Chen and Eduardo Assad — Foto: Rogerio Vieira/Valor

At a time when China is increasing the number of Brazilian slaughterhouses authorized to sell beef to the country, a survey conducted in Beijing and Shanghai reveals that some Chinese consumers are willing to pay more for the product, provided it is not linked to deforestation in the Amazon.

The research, a collaboration between the Chinese Academy of Social Sciences and FGV Agro of the Getulio Vargas Foundation, is supported by the American NGO The Nature Conservancy. Despite the small sample size of consumers who buy Brazilian beef in China—only 720 were interviewed in the country’s two largest cities—the results surprised researchers. On average, respondents indicated they would pay 22.5% more than the current price for Brazilian meat if it came with assurances that it was sourced from cattle raised in zero-deforestation areas. Currently, a kilo (about 2.2 pounds) of tenderloin reaches Chinese consumers at prices ranging from about $40 to $70.

Last year, Brazilian beef exports totaled $5.73 billion—almost 1.2 million tonnes. Brazil accounts for about 60% of the beef imported by China, which is Brazil’s largest beef importer. In March, China authorized 38 more Brazilian meatpacking plants to supply its market, most of them beef producers. This increases the total number of Brazilian meat plants (beef, poultry, and pork) authorized to sell to China to 144.

Kevin Chen, a Chinese academic and member of Zhejiang University, suggests that deforestation-free Brazilian meat could potentially be sold in Chinese markets with a seal confirming its traceability. Mr. Chen is in Brazil this week for meetings and to present details of the research at an event in São Paulo on Tuesday (30).

Eduardo Assad, a researcher at FGV Agro, notes that Brazil’s meat industry has made strides in traceability. However, there remains a segment of producers who place less emphasis on sustainability, arguing that there will always be consumers who disregard this issue when purchasing. Mr. Assad believes that the survey of Chinese consumers supports a stance he has advocated for years: “It’s not going to be the government [that pushes for change in production methods], nor a regulatory body. It’s going to be the market. This is already happening, albeit on a small scale, but it will explode when China agrees to pay more for sustainable meat.”

Discussing the idea of a future label, Mr. Chen cautions against appearing naive: “I’m not saying that a label of this kind will solve all the problems,” he remarked. However, he adds that there is a possibility that Chinese consumers would agree to pay extra to ensure they are not contributing to deforestation on the other side of the world. “Research shows that this is feasible. Both the industry and the government need to take note of this.”

Mr. Chen is an influential voice in the Chinese government on issues related to sustainability and food. And there is a marked difference between the path he is proposing in China and that adopted by the European Union. The Europeans have approved rules that will prevent several products from entering the bloc if they don’t get the green light from a control and auditing system.

“We don’t want a future seal system to be mandatory. We want it to be voluntary. When it’s mandatory, whether it’s a good policy or not, it becomes a controversial issue. If it’s voluntary, we let the market decide,” said Mr. Chen.

Fernando Sampaio, Sustainability Director of the Brazilian Meat Industries Association (ABIEC), says that the country has the potential to produce more in smaller areas and that the market is the driving force to increase this efficiency.

Regarding deforestation, the ABIEC is talking about the need for more control measures on the part of the state as well as the private sector. One of the weak links in the country’s meat chain continues to be indirect animal suppliers. These are farmers who don’t sell cattle to meatpackers but who supply animals to farms that have contracts with the industry. “The issue is that we don’t have any information about these indirect suppliers,” explained Mr. Sampaio.

Despite the results of the survey, Mr. Chen says that today, consumers and importers in China don’t consider it a problem that they don’t have enough information about meat traceability. “At the moment, it’s not [an issue for consumers]. But it will be in the future. For a few reasons: one is that the international community is paying attention to the issue of deforestation and so is China, which imports a lot of products from Brazil. This has become an important concern.”

*Por Marcos de Moura e Souza — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Casas Bahia’s request for out-of-court restructuring approved

Market harbors doubts, however, about the retailer’s ability to emerge from reorganization

04/30/2024

Renato Franklin — Foto: Rogerio Vieira/Valor

Renato Franklin — Foto: Rogerio Vieira/Valor

Casas Bahia’s request for extrajudicial restructuring was approved Monday night by a São Paulo court, marking an attempt by the retailer to close this chapter and convey to the market that its focus is now squarely on operational recovery. However, market concerns remain about execution and the network’s ability to restore its financial performance, which is crucial for meeting its obligations to creditor banks.

As Valor reported on Monday, the backdrop of credit line cuts by foreign insurers—which protect the industry from sales risks—is among the challenges in turning the page. During a conference call with investors on Monday, the company management team detailed the plan, and the stock closed the session up 34.2% at R$7.3. The surge reflects not only the stock’s months-long decline but also optimism about the plan, despite cautious stances concerning its execution.

“We are aware of the challenge. No one here believes it will be easy,” said CEO Renato Franklin on Monday. “However, restructuring our debts with the banks provides us enough time to work and allows management to focus on operations.” According to him, the company also gains time to navigate the current high-interest environment, even after the drop in the Selic key interest rate and the still weak demand in the durable goods retail sector.

The plan only involves unsecured debts with financial sector creditors. Suppliers and employees are not part of the deal, as it is not a court-supervised reorganization that encompasses all liabilities.

Under the proposal, the renegotiated debt with these creditors pertains to four bond issues and one Bank Credit Bill, totaling R$4.1 billion, with extended terms from 22 months to 72 months, including a two-and-a-half-year grace period for the principal. This arrangement reduces cash outflow through 2027 to R$500 million from R$4.8 billion.

The debt will be converted into a debenture issue of R$4.1 billion, with two series (part can be converted into shares). At the end of 72 months, the chain expects to save R$60 million annually in debt interest.

Banco do Brasil and Bradesco hold 54.5% of this liability and have already approved the plan, in negotiations that have been ongoing since mid-last year. Therefore, the restructuring request and the 159-page plan were submitted last Sunday to the 1st Bankruptcy and Judicial Recovery Court of São Paulo and were accepted early Monday evening. Despite being an out-of-court reorganization, the court must review the request.

The expectation is for a “cleaner” first quarter of 2024, said Mr. Franklin, without the burden of maturities, with operational issues better addressed. The retailer has been in operational restructuring since the beginning of 2023.

Even with this expectation, there are still some issues on the company’s table that need to evolve. Casas Bahia had problems with product supply from major manufacturers in categories such as appliances and electronics at the end of last year and the beginning of this year when it sought to replenish stocks. This reflected a reduction in lines from foreign credit insurers and suppliers.

According to sources, the tighter credit situation continued at least until February. Negotiations are ongoing in search of normalization, but this credit flow is still not ideal, in the view of the management board. “If we had the lines of credit, we would have sold more [in recent months],” said a source.

No major foreign supplier, such as Whirlpool, Samsung, LG, and Motorola, closes a deal to supply to national retailers without insurance coverage of some percentage of the sale. The crisis in the Americanas retail chain made insurers more selective.

The recovery plan and the recent improvement in the network’s cash generation may create space for normalization of these lines, believes a person close to the retailer. In November, a rating downgrade of Casas Bahia by S&P helped reduce this credit flow.

Regarding the deal with Bradesco and Banco do Brasil, the institutions wanted to definitively remove the “Casas Bahia risk” from the table, Valor has learned. The idea was to move away from temporary solutions, which would push the issue a year or two forward, to something more “definitive,” said a source.

In February, there was a debt restructuring anchored by Bradesco and BB, but with difficulties for the group to raise new funds, and with short-term bond maturities, the chain had to return to the negotiating table. More than R$1.5 billion in debentures with the banks were due this year.

From the banks’ perspective, piecemeal renegotiation solutions “here and there” would only delay a stronger dose of medicine, people familiar with the talks say. “If a broader agreement were delayed too much, the timing that still existed could be lost, and then only a court-supervised reorganization plan, which is the worst scenario, would resolve it,” said a creditor.

In negotiations with the institutions, one of the issues demanded by the banks concerned advancing the migration of the Direct Consumer Credit Line (CDCI) to the Credit Rights Investment Fund (FIDC), Valor has learned. The CDCI places the chain as responsible for settling customer financing installments with the banks. In the FIDC, the risk is diluted across thousands of consumer transactions. This migration to the FIDC was already under negotiation last year but was delayed and did not materialize. Now, this must progress.

According to the retailer, the priority from now on is the recovery of results. Focuses include improving gross margin, offering more services in stores, and gaining market share with a more accelerated sales recovery, said Mr. Franklin.

Analysts consider the out-of-court reorganization plan positive due to the substantial renegotiation of values, but highlight the risk of dispersion of current partners (Michael Klein is the largest one) after the issuance of debentures converted into shares. The restructuring was orchestrated by Lazard and the Pinheiro Neto law firm.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Number of companies in reorganization surges in Q1

An increase of 3.9% compared to the last three months of 2023, according to data from the RGF Monitor

04/30/2024

Rodrigo Gallegos — Foto: Rogerio Vieira/Valor

Rodrigo Gallegos — Foto: Rogerio Vieira/Valor

The number of companies in court-ordered reorganization in Brazil continues to rise. By the end of the first quarter, 4,203 companies were under court supervision to renegotiate debts with creditors. This marks a 3.9% increase compared to the last quarter of 2023, according to data from the RGF Judicial Recovery Monitor, conducted by consultancy RGF & Associados and shared exclusively with Valor.

The monitoring reveals that 1.87 out of every 1,000 small, medium, and large corporations were undergoing restructuring, from a total of 2.3 million. This ratio is the highest since RGF began compiling the figures in the second quarter of 2023. The situation is particularly severe in the Midwest region of the country, where three out of every thousand companies are facing reorganization. In the state of Goiás, the figure approaches five.

The concentration of these cases in certain locations is not random. Among the five segments facing the most significant financial challenges, three are tied to the agribusiness sector, which is predominant in the region. Leading the list is sugar cane cultivation, with 29 companies in reorganization per one thousand, followed by dairy production (15.88), road and railroad construction (15.05), municipal public transportation (15.03), and soybean cultivation (11.83).

In the January-March period, notable cases of companies entering reorganization include the DIA grocery stores chain in São Paulo, with a debt of R$1.1 billion; OSX, one of businessman Eike Batista’s companies in Rio de Janeiro, with liabilities of R$7.94 billion; and the Libra Bioenergia Group, an ethanol producer in Mato Grosso, owing R$534.7 million. Meanwhile, Schumann Móveis e Eletrodomésticos, a chain from Santa Catarina, exited the process.

According to restructuring and judicial recovery specialist Rodrigo Gallegos, a partner at RGF, the figures still reflect the aftermath of the COVID-19 pandemic. “With the rise in interest rates, companies began to lose cash flow, and financial stability ended in 2023,” he explains. He also mentions the impact of the Americanas case, which entered reorganization early last year and caused “all financial institutions to hold back on credit.”

Mr. Gallegos anticipates that the effects of the pandemic will continue to be felt in the coming months but should improve towards the end of the year and the beginning of 2025. “If everything remains as it is today, with the economy improving, the government’s efforts, and the Central Bank gradually reducing interest rates, these are excellent signs for the cost of debt to start declining.”

Despite these statistics, RGF experts observe a slowdown in the rate of companies in this situation, indicating that the growth is not exponential. “From the third to the fourth quarter, we saw a significant increase, both in absolute terms and in the index. It’s still growing, but at a slower pace than last year,” notes Roberta Gonzaga, a consultant specializing in restructuring at RGF.

The absolute number of companies entering judicial reorganization was 17% lower in the last quarter compared to the previous period—296 in 2024 versus 357 in the fourth quarter of 2023. However, as fewer companies exited the process at the start of the year, the total number of companies in this predicament continues to rise. There were 196 exits from court supervision at the end of last year but only 138 at the beginning of this year. Under the Judicial Reorganization and Bankruptcy Act (Law 11101/2005), judicial protection lasts two years from the date the procedure is authorized, a period that the judge can extend.

Ms. Gonzaga highlights a positive development in the three-percentage point increase in the category of companies that have resumed normal operations after exiting legal proceedings. It rose from 60% to 63% and has consistently remained above half. In the third quarter of 2023, it was at 55%.

According to lawyer Cinthia de Lamare, a partner in the restructuring and insolvency department at the law firm Cescon Barrieu, another discreet reason for the continued rise in judicial reorganizations is their evolving perception. They are no longer viewed solely as a means to renegotiate debtor debts but also as a business environment.

“Within court-ordered reorganizations, we see everything from financing with debtor-in-possession at more attractive rates for investors to the sale of assets and corporate operations on the capital market. It all signals to the market that the process can be an appealing solution for viable companies,” she explained, noting a paradigm shift.

Ms. Lamare also points out that the greater involvement of creditors has made the tool more sophisticated, enhanced by the reform of Law 14112 in 2020, which has bolstered entrepreneurs’ confidence in seeking judicial reorganization. “Today we have clearer rules, and the court-supervised recovery plan itself is crafted by many hands, which makes the recovery more successful.”

The RGF Judicial Recovery Monitor, which utilizes data from the Federal Revenue Service, only considers judicial recoveries that have already been approved by the courts, not applications. Micro-entrepreneurs and government companies are excluded from the database, as are subsidiaries, so only the parent company is considered.

In the first quarter, according to data collected by Serasa Experian, 501 requests for judicial reorganization were submitted, and 427 were granted. The difference in data results from the disparate research methodologies. While RGF uses data from the Internal Revenue Service, Serasa, which has been tracking the data since 2005, when the historical series began, gathers information from courthouses, bankruptcy courts

and official and state court gazettes.

*Por Marcela Villar — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Delay in U.S. monetary easing boosts Brazilian bonds

Review of prices following more conservative tone in the U.S. monetary policy opened opportunities in inflation-indexed bonds

04/30/2024

Luciano Telo — Foto: Rogerio Vieira/Valor

Luciano Telo — Foto: Rogerio Vieira/Valor

The sharp movements in interest rates on U.S. Treasury bonds in April led to a review of prices worldwide. In Brazil, that translated into higher premiums for fixed-income investments. Tesouro IPCA+, an inflation-indexed National Treasury note, is once again yielding 6% above inflation, while long-term, fixed-rates bonds are at 12%, compared to the 10.75% per year of the Selic policy interest rate. As the U.S. Federal Reserve delays its monetary easing cycle, these securities appear in the main recommendations by market experts for May. As a result, a more consistent performance has been delayed in the stock market and other risk assets.

Until Monday (29), the benchmark stock index Ibovespa had lost 0.6%, while the small caps index fell 5.8%. The dollar appreciated nearly 2% against the real. All fixed-income indices were below the month’s CDI (the interbank deposit rate, used as an investment benchmark in Brazil). Year to date, the best result was seen at IMA-B 5, comprised of inflation-indexed Treasury bonds maturing in up to five years, which is up 2%, compared to 3.5% for the reference rate. So far, floating-rate bonds offer the best return free of credit risk. ANBIMA’s debenture index is up 4.7%. The index by the Brazilian Financial and Capital Markets Association is comprised of securities linked to the CDI.

At the beginning of the year, the market expected that the Fed could start its interest rate reduction cycle in June. However, reality set in, as the U.S. economy has shown a stronger-than-anticipated performance driven by hefty consumption and a tight job market, according to Luciano Telo, chief investment officer for Brazil at UBS Global Wealth Management.

April marked the recalibration of expectations, with consequences for assets in general. “The scenario points to high interest rates for longer and stronger activity. It’s now possible that we won’t see any cuts or just one or two ahead,” said Mr. Telo. In light of the market, the executive says that, as long as U.S. Treasury bond rates remain attractive, other assets are unlikely to take off.

He points out that, under last week’s pressure, 10-year U.S. Treasuries rates hit 4.6%, a level seen on September 2023, before the Fed changed its statement to indicate a more easing stance starting in November. “To bet on interest rate cuts again, we need to see a sequence of data that could bring more confidence to the market and the Fed, a more prolonged sequence of inflation moving into a favorable territory,” he said.

The expected reaction in Brazil, also driven by a looser fiscal target, is that the Selic will now fall by 25 basis points at the next meeting of the Monetary Policy Committee (COPOM), a slower pace than the 50-bp cuts seen recently. “Concern arose in the market that, if Brazil started to cut its interest rates at a faster pace than the rest of the world, of 50 bp, the lack of synchronization could appear in the foreign exchange, removing the [larger] spread of rates,” said Mr. Telo.

According to him, there would be room for further cuts, but the Central Bank will look at interest rates globally and the Fed’s signals. “Therefore, the timing of cuts in Brazil may hinge on what happens abroad.”

Although the most recent inflation figures came in line with market expectations, a single-digit Selic is unlike in the short term.

In this environment, many asset classes are favored by spreads, and less to capture capital gains, he says. That is the case with fixed-rate and inflation-indexed bonds. The higher opportunity cost also works to delay a more solid recovery for the stock market. “Part of the market’s perspective was that, as interest rates fell, the appetite for risk in the domestic portfolio could increase. However, prolonged high real interest rates delay a pronounced bet on stocks.”

The price of National Treasury notes series B (NTN-B or Tesouro IPCA+) indicating rates above 6% and fixed-rate three-year bonds reaching 11% is considered attractive from a historical perspective, the UBS executive adds.

For Mr. Telo, it will take at least two or three weeks of less volatility in U.S. Treasuries—a performance based on macroeconomic data—to create a more encouraging scenario for placing risk in investor portfolios.

The recent increase in future interest rates in Brazil opened an opportunity to expand exposure to fixed-rate public bonds, the National Treasury Bills, said Luís Augusto Barone, partner and director at Galapagos Wealth Management.

“The premium rose way beyond the news would suggest. I usually say investors should spend only 20% of their time in fixed-rate securities. Only a few times will the bond market give enough return, and now is one of these times.”

His current recommendation is towards securities maturing in three years. On Monday (29), among Treasury notes, the LTN maturing in 2027 paid 10.78% per year, compared to the current 10.75% for the Selic. If the rate decreases at least another 0.50 percentage points, there would be a gain to be captured over the CDI just with the appreciation of the securities. “There is a premium, it makes sense to allocate 5% to 8% of the portfolio,” Mr. Barone said.

The executive points out that inflation data allows the Central Bank to maintain the roadmap to reduce the Selic by 50 bp at the next COPOM meeting.

On the stock market, the recommendation has been to allocate up to 5% of the portfolio, but investors resist. According to Mr. Barone, investors have been spoiled by the net interest rate spread and expect a big check every month. “They are very risk averse,” he said.

In the high-income retail banking segment, the main position is in credit, which responds to 60% to 70% of the portfolio, depending on the firm’s profile. “A tax-exempt bond is a bad incentive for Brazil,” Mr. Barone acknowledges. He expects the long-term trend for the net interest rate spread over public bonds to fall, with an increased demand for such securities.

The changes in the speech by Fed Chair Jerome Powell have increased investors’ willingness to take risks globally, with the United States acting as a major attractor of funds for bonds or the stock market, said Alexandre Silverio, founding partner and chief executive at Tenax Capital. “The Fed rate at 5.25% with the two-year rate near 5% is a high interest rate. That attracts capital from all over the world. We rely on the Fed’s decision.”

In this environment, the hypothesis of the Selic rate at 9% with the foreign exchange at R$4.8 per dollar is now ruled out. “The scenario has changed. A stronger U.S. economy points to a stronger dollar, which pressures the real, not to mention domestic issues, with fiscal discussions ahead”, the asset manager says. “The Central Bank will have to balance. The higher exchange rate [in Brazil] could hit inflation.”

Still, Mr. Silverio sees room for the COPOM to reduce the policy rate at least three more times, by 25 bp each. “Let’s see where the foreign exchange ends up, it’s a key variable.”

The COPOM will meet again next week, with new inflation data and a Fed meeting on the table—the Federal Open Market Committee (FOMC) meets on Wednesday (1). The executive holds positions in shorter-term bonds in Brazil, believing that there is a little more room for the Selic to fall than the market assumes in its current prices.

On the stock market, at least in the macro multimarket, his choice was to have no exposure.

*Por Adriana Cotias — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Casas Bahia reaches agreement for R$4.1bn debt

Agreement with BB and Bradesco includes out-of-court reorganization

04/29/2024

Renato Franklin — Foto: Rogerio Vieira/Valor

Renato Franklin — Foto: Rogerio Vieira/Valor

The Casas Bahia group informed the market on Sunday (28) that it has reached an out-of-court reorganization agreement with its main creditors, Banco do Brasil and Bradesco, to carry out a reprofiling of the entire company’s debt.

The payment term for the R$4.1 billion of gross debt—in updated values—was extended to 72 months from 22 months, with a 1.5 percentage points reduction to the average cost, which will now be the CDI plus 1.2% per year. A grace period of 24 months to pay interest and 30 months to pay the principal has been set. The CDI, or interbank deposit rate, is an investment benchmark in the Brazilian financial system.

With the changes, the company will no longer have to disburse R$4.3 billion by 2027.

The two banks hold 54.5% of Casas Bahia’s debt and have agreed to the reprofiling. As a result, the other creditors, which are pulverized, will automatically follow suit, according to Casas Bahia CEO Renato Franklin. “When you have the approval of more than 50% [of creditors], it’s automatic. That is the advantage of having an out-of-court agreement.”

According to him, the retailer’s lawyers are optimistic about the approval. The out-of-court reorganization request was filed on Sunday (28) and should be analyzed by the courts for up to a week. After that, there are 30 days to raise objections before ratification. Once these steps have been completed, the group can implement the out-of-court reorganization and replace the current financial debt with new instruments.

The debt will be swapped into debentures of R$4.1 billion, with two series. The first one, representing 37% of the amount, has a rate of the CDI plus 1.5% per year. The second series has two versions: one includes “partner” creditors, described as such either because they will maintain the current loan facility terms that are not in the reorganization or make new funds available to the group. They will be able to swap the debt into shares by Casas Bahia within 18 to 36 months.

The shareholders will have preemptive rights to avoid dilution. According to Mr. Franklin, Banco do Brasil and Bradesco fit into that category. Non-partner creditors, in turn, will not have that option. The rate for partner and non-partner creditors will be the CDI plus 1% per year.

The negotiation of the reorganization involves only unsecured financial debts. Labor and supplier issues are not included in the agreement. There is also no discount on the principal amount.

In February, Casas Bahia restructured part of its debt, amounting to R$1.5 billion. However, according to the CEO, the debt extension of 3 years obtained at that time was insufficient to solve the company’s problem. “It remained tight. Therefore, we were seeking to build something permanent.”

According to him, the business restructuring plan announced in August 2023 requires cash, as it involves layoffs and store closures. The debt pile has put pressure on the retailer and “tarnished” its image in the market. “It hinders the company’s valuation and some of its businesses,” the CEO said. With the reorganization, the company expects to improve its credit outlook and relationship with suppliers.

The agreement with creditors solves the financial part of Casas Bahia’s restructuring plan, Mr. Franklin says. The operational part remains unsolved.

The company has laid off 8,600 employees, including 42% of top management positions. There was a plan of closing 100 stores but the CEO says only 55 were closed. “We managed to recover the others by reducing rental costs.” No new “restructuring” layoffs are planned.

Also on the operational side, the company is expected to continue reviewing product assortment and pricing, which will become more dynamic, according to Mr. Franklin. There is also an effort to expand services—which includes offering insurance and extended warranties—, the new digital advertising platform, and a store-in-store model with supplier points of sale.

The company ended the fourth quarter with a net loss of R$1 billion. In 2023, the loss was R$2.6 billion, almost eight times the total recorded a year earlier. Net revenue fell 6.6% in the same period, to R$28.8 billion.

Mr. Franklin says the effects of the reorganization should be seen in the second quarter’s results. “We are very happy.”

*Por Ana Luiza Tieghi — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Agricultural cooperatives expand investments in industrial projects

Leaders in the sector in Brazil, who announced investments of R$3.8bn in 2023, will prioritize industrial projects in new disbursements totaling R$7.4bn

04/29/2024

Fernando Degobbi — Foto: Divulgação

Fernando Degobbi — Foto: Divulgação

Despite a profitability decline in 2023, due to commodity price fluctuations, agribusiness cooperatives remain keen to invest—particularly in industrial projects aimed at adding value to their products. Among the largest cooperatives in the sector, Coamo, Lar, Aurora, Comigo, Cocamar, C.Vale, Frísia, and Coopavel have announced this year that they will invest R$7.4 billion in the industrial segment, according to data from Valor Data. In some cases, these investments will continue until 2026. Last year, these cooperatives announced investments of R$3.8 billion.

The increase in investments, even amid a depreciation of key products for the cooperatives, such as soybeans, will be possible thanks to their strong results in previous years. “The cooperatives are being called upon to use their reserves or seek financing to support the planting of the harvest or the expansion of the business, in light of the profitability loss of the members,” said Fabio Silveira, managing partner at MacroSector.

According to the economist, in 2024, the margins of the cooperatives will remain pressured by the low price of grains, the crop failure in Brazil, and the decrease in Chinese imports of meat. In 2023, the operating margin of the 15 largest cooperatives in the country dropped by 1.4 percentage points to 4.8%, and the net margin by 1 percentage point to 3.4%.

Coamo will disburse R$3.5 billion between 2024 and 2026, the largest investment announced this year. Last year, the country’s largest agricultural cooperative invested R$569.7 million in a feed mill, warehouses, and offices. Of the volume forecasted for the current triennium, the cooperative will allocate R$1.67 billion to a corn ethanol plant capable of processing 600,000 tonnes of grain a year. It will also build four warehouses, add 500,000 tonnes to its storage capacity, and modernize processing units.

Goiás-based Comigo will invest R$1.3 billion by 2026 in an industrial plant in Palmeiras de Goiás with the capacity to process 5,000 tonnes of soybeans daily. The plan includes a terminal on the North-South Railway, with a capacity for loading 80 wagons per month, and forest planting for wood production to fuel the industry’s boilers. “We are waiting for the permits to start the construction. The expectation is that it will be operational by 2027,” said Antonio Chavaglia, Comigo’s chair.

Cocamar, which invested R$315 million in 2023, announced this year that it will make investments of up to R$1 billion. Half of this amount will be used to expand by 50%, to 1.5 million tonnes per year, the soybean crushing capacity at the factory in Maringá, Paraná. The rest will be used to increase storage capacity.

After R$2.7 billion invested over the past three years, Aurora announced investments of R$783.4 million in 2024. The resources were for expanding and upgrading factories and for purchasing industrial plants. This month, Aurora inaugurated a meat processing unit in Chapecó, Santa Catarina, that consumed R$587 million in own resources and financing from the Brazilian Development Bank (BNDES/Finep).

C.Vale will expand its feed production capacity to meet the demand of its members, mainly for feeding chickens, according to the cooperative’s president, Alfredo Lang. In 2023, C.Vale completed an investment of R$1 billion in a soybean crushing unit in Palotina, Paraná, with a capacity to process 60,000 sacks of soybeans a day.

Together with Amaggi and Tecnobeef, Coopercitrus is investing an undisclosed amount to create a company that produces organomineral fertilizers in Altair, São Paulo, with a capacity of 200,000 tonnes annually. “This year, we are focused on consolidating our business and vertical integration in organomineral fertilizers, in line with our sustainability goal,” said Fernando Degobbi, CEO of Coopercitrus.

Castrolanda and five other cooperatives—Agrária, Bom Jesus, Capal, Coopagrícola, and Frísia—invested R$1.5 billion between 2021 and 2024 in the construction of Maltaria Campos Gerais, which can produce 240,000 tonnes of malt per year and is expected to be inaugurated next month.

The cooperative will also start the operation of Queijaria da Unium, a cheese factory joint venture with Frísia and Capal. The project included an investment of R$460 million in the unit, which will be able to produce 96 tonnes per day. “We consider this a year of preparation for sustainable growth,” said Willem Berend Bouwman, Castrolanda’s chair. The disbursements from Castrolanda were not included in the total of the projects because they involved resources from cooperatives that were not part of the group analyzed by Valor Data.

With these investments, the cooperatives aim to sell products with higher added value, thereby improving their profitability. In 2023, according to Valor Data, the net income of 15 of the largest national agricultural cooperatives fell by 23.6%, to R$6.08 billion.

*Por Cibelle Bouças — Belo Horizonte

Source: Valor International

https://valorinternational.globo.com/
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Bank profits to rise but outlook is uncertain

Delinquency continues to fall, and the portfolio is growing at a moderate pace, but the macroeconomic context can bring challenges

04/29/2024

Marcelo Noronha — Foto: Ana Paula Paiva/Valor

Marcelo Noronha — Foto: Ana Paula Paiva/Valor

Large publicly-traded banks are expected to see new profit growth in the first quarter, continuing the trends observed in recent periods: a slight decrease in defaults and moderate credit growth. However, the focus is likely to shift to the institutions’ expectations for the rest of the year. Despite recent guidance, the external environment has become more clouded, particularly regarding the direction of U.S. interest rates, domestic fiscal issues, and the uncertain performance of economic activities, especially in agribusiness.

A survey by Valor, covering nine companies, indicates that Itaú Unibanco, Banco do Brasil, Bradesco, and Santander are projected to achieve a combined profit of R$25.6 billion. This represents a 7.1% increase from the fourth quarter and a 9.5% rise compared to the first quarter of 2023. Itaú is expected to continue setting new records, while Banco do Brasil faces concerns about potential issues in agribusiness. Santander is likely to continue its recovery trajectory from the previous quarter, and Bradesco will remain under scrutiny due to investor expectations about its restructuring process.

Analysts from J.P. Morgan generally believe concerns about defaults are receding. However, they are keen to see the outcomes of renegotiated credit figures, especially with the federal government’s Desenrola program—a federal initiative designed to help individuals renegotiate their debts under more favorable terms. Meanwhile, recent data from the Central Bank shows that credit was slightly weaker than expected in the first quarter. “For loan performance, we anticipate weak trends, despite some improvements in the origination of certain products, such as vehicle financing and payroll loans.”

XP analysts predict that portfolio growth will start slowly and pick up pace in the subsequent quarters. “The first quarter tends to be negatively impacted by seasonality, particularly for individuals.”

Goldman Sachs notes that although revenue trends may be subdued due to slower loan growth and weaker service seasonality at the year’s start, most banks should see a decrease in provisioning levels and a sequential reduction in expenses from the typically high levels of the fourth quarter. “Additionally, net interest income growth should remain strong year-on-year, maintaining resilient average ROEs at 18%.”

UBS highlights that capital generation could be a notable aspect of the quarter. While Itaú is expected to continue with excess capital—having announced an extraordinary dividend payment of R$11 billion in February—Bradesco and Santander might start experiencing some medium-term capital pressure.

Banco do Brasil is expected to report a profit of R$9.4 billion for the first quarter. The state-owned bank had been competing closely with Itaú in recent quarters, but it is now anticipated to be the only one to experience a decline compared to the fourth quarter. Previously, its subsidiary in Argentina, Banco Patagonia, significantly boosted the group’s results due to the peso’s maxi-devaluation, an event unlikely to be repeated to the same extent. Additionally, the very low effective tax rate is expected to increase slightly.

In any case, analysts will primarily focus on agribusiness, a crucial sector for Banco do Brasil (BB). While a significant impact on defaults is not yet anticipated, provisions in this sector may already be on the rise. According to the Santander CIB report, “Although we expect a slight increase in defaults in agribusiness, there should be a reduction in the corporate segment, keeping overall defaults virtually stable in the first quarter. However, we foresee significantly higher provisions year-on-year.”

XP analysts note, “We expect another quarter of robust growth in Banco do Brasil’s loan portfolio, probably aligning with the midpoint of its guidance (8% to 12%), despite recent concerns related to a stronger-than-expected slowdown in the agribusiness sector. BB seems to have managed to navigate this challenging scenario.”

Both BB and Bradesco are expected to face further queries from analysts regarding their strategies for Cielo, which is anticipated to progress in its delisting from the stock exchange in the coming months. Bradesco is expected to report a profit of R$3.9 billion, a sharp increase from the previous quarter, which saw higher provision expenses and an extraordinary R$570 million in restructuring costs, particularly in the branch network. In the first quarter’s financial report, the spotlight was on the announcement of the strategic plan by the new CEO, Marcelo Noronha. The focus now shifts to the initial signs of strategy implementation.

“After several quarters of lower-than-expected results, expectations for Bradesco are already low,” states UBS BB. “The recent improvement in asset quality has likely shifted investors’ focus away from this. We believe the emphasis will be on the dynamics of net interest income after the very weak numbers in the second half of last year, the capital position, and the pace of branch reductions.”

Genial’s analysts believe that although the current results are not very encouraging, the worst is over, and Bradesco’s profitability is expected to improve with the recovery of the credit cycle. “We believe that both the 2024 guidance and the restructuring plan reflect more conservative outcomes, taking into account the lessons learned from several years marked by overly optimistic guidances that failed to materialize.”

In the case of Santander, a profit of R$2.8 billion is projected, supported by a strong recovery both annually and quarterly. This result should benefit from lower provisions and an improved margin with the market, which is expected to turn positive after seven consecutive quarters in the red. While defaults may rise slightly, driven primarily by the performance of the renegotiated portfolio, the pace of provisions is expected to decrease. “Santander will show signs of improvement and solid growth in net income year-on-year, the best in the sector, albeit from a low base,” summarized Bank of America (BofA).

Itaú is set to continue breaking records, with projected profits of R$9.7 billion and a return on equity (ROE) close to 21%. Although negative seasonality in credit cards might slightly dampen the expansion of the portfolio and fee income—given the bank’s leading position in this market—it will not overshadow the overall positive results. “We expect a seasonal increase in short-term delinquency rates, with 90-day delinquency remaining stable. Meanwhile, provisions are expected to decrease by 6% in the quarter,” reported Goldman Sachs.

In a recent report, Citi said that guidance for Itaú’s cost of risk this year seemed too conservative. “Despite an expected reacceleration and higher risk in the portfolio, we believe the continued improvement in default formation could be a positive development throughout the year.”

Finally, Nubank is expected to post a profit of $393 million. BofA estimates that the bank will reach 98.5 million customers, with a 48% expansion of the credit portfolio, but says that profit may end up coming in slightly lower than expected due to the larger investments in Mexico. “We expect provisions to increase by 27% in the quarter, given the continued strong growth in loans, as well as a low comparison base, as the fourth quarter benefited from discounts related to Desenrola,” Goldman Sachs stated.

*Por Álvaro Campos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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