Combination of the two companies could generate revenue of R$16bn and capture a market share of approximately 17% in the laboratory industry
10/22/2024
Negotiations for a merger between EMS and Hypera could mark the start of a second wave of consolidation among Brazilian drugmakers.
There is an expectation that other groups may accelerate mergers and acquisitions following the announcement of the EMS-Hypera deal on Monday (21), given the potential for combining two companies that together generate revenue of R$16 billion and hold a market share of approximately 17%, while typically, pharmaceutical companies do not exceed a 10% market share.
The economies of scale are significant. The combined company, for example, would gain negotiating power with distributors and pharmacies, a factor that is likely to drive business growth.
However, industry sources remain skeptical about the feasibility of advancing the deal.
The view of experts consulted by Valor is that it is not straightforward to approve a transaction stemming from a hostile bid. In addition to the largest shareholder of Hypera, João Alves de Queiroz Filho, known as Júnior, having previously rejected merging the businesses because he does not want to become a minority stakeholder in the combined entity, he also holds a significant 21.38% share, which presents challenges for widespread acceptance, one person noted.
Another person familiar with the matter pointed out that it is rare for a hostile offer from a privately held company to succeed, as the board of directors of the target rival may require extensive due diligence on the numbers presented by the bidder to feel comfortable recommending the deal.
One source mentioned that EMS is attempting to mobilize Hypera’s investors by making a hostile offer, effectively pressuring them to accept the deal. However, a potential side effect could be attracting new interest in Hypera, as all players in this industry are eyeing potential M&A deals. If this occurs, the interested company could approach Mr. Queiroz Filho and attempt to negotiate amicably.
To illustrate the potential transaction between EMS and Hypera, they rank first and third, respectively, in the generic-drug market considering Neo Química, a division of Hypera. This segment generated approximately R$29.2 billion in the 12 months ending in September, according to industry association Sindusfarma, based on data from consulting firm IQVIA.
Hypera boasts a large portfolio of over-the-counter medications with well-known brands such as Neosaldina, Rinossoro, Lisador, and Coristina. The OTC segment reported revenue of R$21.3 billion.
For an industry expert, pharmaceutical companies that do not manage to merge are likely to drive prices down, opting to reduce margins rather than lose market share. The pharmaceutical industry generates approximately R$200 billion in revenue.
Rafael Freixo, director of LEK Consulting, said if completed, the deal would be the largest transaction in the sector in recent years. “This new company would dominate several product categories. Hypera has a very strong business in over-the-counter medications. It also has a significant presence in the pharmaceutical channel, while EMS is strong in generics and similar products.”
On Monday, shares of Hypera had an unusual trading day, with transactions reaching R$1.07 billion amid the volatility caused by two announcements that elicited opposite reactions from shareholders. A working capital optimization program negatively impacted market sentiment in the morning until a proposal for a business combination made by EMS shifted the mood in the late afternoon.
The Hypera’s stock closed the day up 1.9%, at R$26.16. The trading volume of R$1.07 billion was the second-highest on the B3 stock exchange, trailing only Vale, which had R$1.15 billion, and was roughly seven times the R$151 million traded by Hypera on Friday (18).
Ana Beatriz Bartolo and Felipe Laurence contributed reporting.
*By Beth Koike, Fernanda Guimarães, Ana Luiza Carvalho — São Paulo
Early redemption of debentures totaled R$76.4bn from January to September, nearly ten times the amount from the same period last year
10/22/2024
Felipe Moraes — Photo: Rogério Vieira/Valor
Amid a rush by investors and issuers into the corporate debt market, and consequently, a sharp reduction in risk premiums, companies have already repurchased R$76.4 billion in debentures from January to September, a record amount in Brazil’s market, according to a survey by fintech Bamboo commissioned by Valor. The total is nearly ten times higher than the R$8.3 billion repurchased during the same period last year and more than double the R$28.9 billion in 2022. On the one hand, companies are taking advantage of favorable conditions to improve their capital structure; on the other hand, investors and asset managers face an unprecedented wave of early redemptions.
Buybacks are provided for by law, and the terms are specified in the offering rules, including the date from which it can occur and the additional payment the issuer must make to the buyer on top of the remuneration and interest established in the transaction. However, until recently, this option was rarely used by companies. Since the start of this year, demand from investors for funds that allocate to these securities, as well as direct purchases, particularly tax-exempt ones, has surged.
With the increase in demand, prices in the secondary market have risen significantly, which affects the final spread. By paying more for the security, it effectively yields less—resulting in a lower spread. Depending on the acquisition price, the buyback can lead to losses.
Ricardo Nunes, credit and high-net-worth investment director at Paramis Capital, explained that many debentures are below the breakeven point. “There are likely asset managers incurring losses because they didn’t consider the calculations or didn’t think the risk of a buyback was significant.” He noted that if the volume remains high for another two or three months, “it will start to cause a stir,” as funds are required to update the daily value of their units based on the value of the securities in the market, and the buyback can impact the unit value, Mr. Nunes said.
One example of a debenture below the breakeven level in the secondary market is Equatorial Energia’s EQTL15, issued at the Interbank Deposit Certificate (CDI) rate plus 1.55% and maturing on December 15, 2026. It can be redeemed starting December 15 of this year with a 20-basis-point annual premium. According to one fund manager’s calculations, the breakeven is at CDI plus 1.26%. However, market transactions now range between 0.9% and 1.20%, thus below that threshold. Equatorial declined to comment.
Jean-Pierre Cote Gil, credit manager at Vinland Capital, agreed that there is a potential loss in fund value but stressed that it is limited since there aren’t many securities with a close buyback window and a price gap of over 0.5% from the market value. He explained that when evaluating secondary-market securities, he considers the buyback price and the likelihood that issuers will exercise the option. “In some cases, it makes sense to buy at a price above the buyback price if the early redemption period is still in its grace period.”
To mitigate the challenge of difficult allocation, where secondary and primary issuance spreads are very low and early redemptions are high, many asset managers have opted to increase the portion of their funds in liquid assets, often dominated by LFTs (fixed-rate treasury bonds). This is the case for Vinland, which manages over R$1.5 billion in credit. “In general, we have opted to hold more cash rather than acquire securities with the risk of losses from buybacks,” Mr. Cote Gil noted.
Paramis, in addition to increasing cash holdings, has raised the share of bank securities in its portfolio, such as CDBs (Bank Deposit Certificates) and senior financial bills (LFs), which cannot be repurchased—only subordinated and perpetual LFs allow early redemption. The company has also allocated more to credit rights investment funds (FIDCs), which offer higher rates. “Nearly half of the corporate debt portion of our DI [Interbank Deposit] fund is now in bank securities. In our high-grade fund, we have one-third, and in the high-yield fund, 28%. In these adverse conditions, we remain selective,” Mr. Nunes said.
Juliana Tomaz, head of structured credit strategy at AMW, Warren Investimentos’s asset manager with R$1.9 billion in credit, noted that the cash level in her funds has risen from a typical 10%-15% to between 20% and 30%, waiting for a market correction. She mentioned that banks have recently started to exercise early redemption of perpetual LFs. “For fund managers, with reduced spreads and early redemptions, allocating resources is a challenge. We are filtering and managing to purchase securities, but the flow of opportunities is low,” she said.
Felipe Moraes, CEO of Bamboo, said the strong growth in corporate debt—totaling R$423 billion in issuances from January to September, compared to R$395 billion last year—has driven many asset managers to invest in this segment, increasing competition. Many are actively seeking companies to offer debt restructuring services, swapping shorter, more expensive debt for longer, cheaper options. This allows them to secure the mandate for offerings in the market with better terms for the issuer.
“We look for companies that have issued at least once in the capital markets and have a good payment history. A swap from two-year to five-year securities, for example, with a one-year grace period for repayment, provides breathing room for the business,” Mr. Moraes explained. The platform, which facilitates access for companies with revenues between R$20 million and R$200 million to capital markets—structuring and distributing primarily real estate receivables certificates (CRIs), debentures, and commercial notes—expects to end the year with R$500 million in originated transactions, a 300% growth compared to last year. “Many first-time clients from last year have returned.”
The Bamboo survey considered only corporate debentures, which are mostly bought by institutional investors, such as mutual funds and bank treasuries. The movement is even larger, as tax-exempt securities, like incentivized debentures, CRIs, and agribusiness receivables certificates (CRAs), which are favored by individual investors, are also being redeemed early.
This year, the most notable deal in the market was JBS’s repurchase of R$3.9 billion in CRAs in September, while its subsidiary Seara raised R$1.5 billion in October across three series of 5, 10, and 20 years. The shortest was adjusted by the exchange rate plus 5.3%, but the longer securities had the lowest spreads over the NTN-B (government inflation-linked bonds) in JBS’s history (0.3% and 0.45%, respectively). In May, the company had already raised almost R$1.9 billion under highly favorable terms. The CRAs were issued at 6% in the first series (in U.S. dollars) and at the IPCA official inflation plus rates between 6.6% and 7% in the other three. For comparison, JBS’s average debt term in May was 11.1 years, at a cost of 5.78%.
“Investors were not used to this; it’s something new, as individuals tend to hold the security until maturity,” said Raphael Vieira, co-head of investments at Arton Advisors, a multifamily office managing R$8 billion, R$3 billion of which is in corporate debt. However, he noted that early redemption, while potentially disappointing for those planning to hold the debenture, creates opportunities for asset migration. “Some reinvested in the company’s new issuance, while others chose to switch. However, investors who bought in the secondary market may face a loss on the principal.”
Mr. Vieira explained that the taxation of exclusive or restricted closed funds led to the dismantling of these structures. In their place, it has become common to form a managed portfolio with tax-exempt securities and credit funds. Furthermore, the poor performance of multimarket funds has triggered many redemptions, with that money flowing into fixed income. Compounding this, in February, the National Monetary Council (CMN) imposed restrictions on real estate and agribusiness credit notes (LCIs and LCAs), increasing their minimum maturity from 90 days to nine months.
“The market has grown significantly, but it’s limited in terms of company size and debt issuance capacity,” a report from BTG Pactual’s research division highlighted. The allocation of individual investors in debentures, CRIs, and CRAs reached R$317 billion in July of this year, compared to R$261 billion in December 2023. This volume represents 4.5% of the total assets under private and retail management, up from 4% in December 2023.
Mônica Araújo, an allocation strategist at InvestSmart XP, one of the country’s largest offices in terms of advisors, said that due to reduced risk premiums and the high volume of buybacks this year, they do not prioritize these securities. “We have to respect the client’s profile and preferences, but if they are interested in corporate debt, we recommend funds that offer diversification and professional management. Direct investment in securities doesn’t offer a return that justifies the risk.”
Thiago Giantomassi, a partner at Demarest Advogados, noted that new transactions are still expected this year, as companies continue to approach the firm. He explained that when buybacks are coupled with new issuances, a mix of solutions is considered. The acquisition of a company’s own debentures, he said, is part of its “liability management,” which involves managing risks to avoid mismatches between assets and liabilities.
Lack of “deliveries” in fiscal area concerns, with pressure on exchange rates, interest rates
10/21/2024
Silvia Matos — Photo: Leo Pinheiro/Valor
The anticipated cooling of economic activity after a surprising first semester is beginning to show in indicators, along with decreasing fiscal momentum. What could be seen as a relief and good news for inflation, however, is overshadowed by the growing deterioration of agents’ risk perception regarding the Brazilian fiscal scenario—a situation that pressures the exchange rates and the interest curve. In such a scenario, it is necessary to urgently “deliver” spending adjustment.
The October edition of the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV)’s Macro Bulletin slightly revised the expectation for 2024 GDP growth from 2.9% to 3%. Following August data, the third quarter projection was adjusted from -0.1% to 0.1%, compared to the previous three months.
Annually adjusted, it is still a strong expansion of 3.2%, according to Silvia Matos, the survey coordinator. “Household consumption will likely remain very strong, we anticipate a year-on-year increase of 3.8%. Although the job market remains tight, the peak of fiscal stimulus is passing, along with the electoral cycle. It will eventually pressure down not only government consumption but also household consumption and investments in the third quarter,” she explained.
Ms. Matos notes that sectorial data from industry, services, and retail also point to accommodation, while confidence indicators suggest a cooling of business sentiment.
The Business Confidence Index (ICE) calculated by Ibre-FGV dropped 0.8 points, the first decline after six consecutive rises and only the second in 2024.
In terms of supply, the perspective is that the service sector should continue leading with a 0.4% increase compared to the previous quarter, followed by industry (0.3%), while agribusiness should see a 1% decline.
Except for the latter, these are more modest numbers than seen in the second quarter (1% and 1.8%, respectively).
On the supply side, a similar situation is seen. Two of the previous quarter’s drivers, household consumption is expected to slow from 1.3% to 0.2%, while government consumption goes from 1.3% to 0.5%. Ibre-FGV expects zero growth in gross fixed capital formation on a quarterly comparison. Meanwhile, exports could slow from 1.4% to 0.7%, and imports, from 7.6% to 0.4%.
“It will not be a sharp slowdown, the output gap will not return to negative, especially since we expect a resumption of activity in the first quarter of 2025,” Ms. Matos added. Ibre projects a 2% growth next year.
This scenario could help the inflation outlook but it has been pressured by two components. First, the severe drought and its impacts on food, as well as on energy tariffs. Economists André Braz and Mateus Dias note that farm products inflation rose by 8.4% in September, compared to a decrease of 6.9% a year earlier.
“This pressure is already felt by consumers, with food at home prices rising 6.1% in the last 12 months, against a drop of 0.78% in the same period of 2023,” the economists write. Given the change and maintenance of higher tariff flags, electricity has risen approximately 10% this year, adding 0.4 percentage points to the Extended Consumer Price Index (IPCA).
Ibre estimates the indicator to close 2024 at 4.7%—above the upper target pursued by the Central Bank, and to slow to 4.3% in 2025. In addition to the effects of the drought and strong activity, Ms. Matos highlights the sharp worsening of the fiscal perception, which has kept the exchange rate and interest curve high, a movement that pressures agents’ expectations about inflation and, consequently, the Central Bank.
“The inflationary situation worsens in the short term, so the Central Bank needs to act more decisively. With projections trending above the target this year, it’s hard to see the Selic policy interest rate falling next year,” Ms. Matos pointed out. “Even the international scenario may not help much, as was once expected. The Federal Reserve began its rate-cutting cycle with 0.5 percentage points but indicates it might opt for 0.25 points at the next meeting, or even pause it, amid issues around the U.S. elections. Trump has a rather protectionist agenda, which can be inflationary.”
The economist notes that, in Brazil, for a while, the market gave the benefit of the doubt to the fiscal framework. “Some had a very optimistic view. Now the market is waiting for some concrete measure of spending control.”
Ms. Matos regrets that, in Brazil, a severe worsening of the scenario is needed so that there is a favorable policy in tackling the fiscal issue. “We need to see a prospect that some positive primary result can be foreseen on the horizon, which has not yet occurred. The transition proposal to amend the Constitution (PEC) was approved at the end of 2022 without major disruptions—and it violated the Fiscal Responsibility Act by increasing recurrent spending by around 1% of GDP without saying how this would be financed. That 1% is exactly the current gap. Simply put, this issue remains hindering a scenario that could rather be much more positive, with growth slowing down slowly, a smaller interest rate hike.”
In this context, the proposal for income tax exemption for individuals earning up to R$5,000 could cause even more distress if it is compensated by applying a minimum tax of 12% to 15% on taxpayers with income exceeding R$ 1 million annually. “That is a way of re-taxing incomes that are currently exempt, such as profits and dividends and certain types of financial investments. According to Federal Revenue data, the top 0.01% of the Brazilian population with the highest income receives more than half of its income in the form of profits and dividends,” economist Manoel Pires wrote in the report. From a macroeconomic standpoint, however, “the redistributive change should produce an expansionary impact on aggregate demand. By taxing the richest to finance the relief of the lower-middle class, the proposal should stimulate consumption,” he warned.
Mr. Pires acknowledges that little is known about the measure. He considers its discussion inopportune at the moment, given its strong electoral impact and on public accounts. He adds that the biggest problem concerning the individuals’ income tax is not the exemption bracket, but its design.
“In a comparative study of 2023, published in the Fiscal Policy Observatory, it was found that, in Brazil, the deduction per dependent is very low compared to that of OECD countries. For example, a four-member—with three dependents—tends to have a much higher tax burden than a single-parent household with the same income,” Mr. Pires pointed out, noting that the latter has a much greater capacity to contribute. “Adjusting this type of inequality is more efficient and cheaper for the government.”
Another consequence of the overheated activity starts to appear in the external sector accounts: the current account deficit moving towards near 2.5% of GDP. Although exports remain strong, there was a significant increase in imports. Economist Livio Ribeiro points out that, although such a deficit does not pose a threat to the country’s external sustainability, “it will require more short-term capital, which could make the balance of payments results more unstable.”
Ibre-FGV study shows formal job openings in 2024 increased by 45.2% for women and 10.1% among men
10/21/2024
Janaína Feijó — Photo: Leo Pinheiro/Valor
In a scenario where women remain underrepresented in the job market, the rate of formal job creation for them in 2024 has so far been much higher than for men. This movement has helped reduce inequality in the composition of these new jobs in Brazil. These were the findings of the study “Quais os grupos mais beneficiados com o bom desempenho do mercado de trabalho em 2024” (or “Which Groups Benefit Most from a Stronger Job Market in 2024”), carried out by the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV) researchers Janaína Feijó and Helena Zahar.
Experts welcome the trend seen in 2024—driven mainly by the employment boom—but point out that it does not change the existing structural gender inequality in the job market, and it remains to be seen if the trend will continue in the future.
Based on data from the General Register of Employed and Unemployed Workers (CAGED), the study shows that the balance of formal jobs held by women grew by 45.2% from January to August 2024, compared to the same period in 2023. Among men, the increase was 10.1%. Of the balance of formal jobs created in 2024 up to August, 46.4% were occupied by women and 53.6% by men. In the same period of 2023, these shares were 39.6% and 60.4%, respectively.
This movement contrasts with 2023—when there was a loss of the female share in the balance of new formal positions—and marks a return to levels close to 2021 and 2022, although they were considered atypical as they were driven by post-pandemic recovery, Ms. Feijó says.
“Although the labor market is still imbalanced, it was much more so in the past. The strong performance in 2024 helped absorb the overall female workforce. This year, the market reacted and helped combat this inequality,” said Ms. Feijó, an economist specializing in gender issues in the job market, among other topics.
Behind the faster expansion of formal positions among women in the country in 2024, the Ibre-FGV researchers believe there is an influence of the profile of the sectors that drove the expansion—mainly services, commerce, and customer service—, where the female demographic is more present.
“The occupations that have been generating the most [positions] are also those that tend to absorb more women, as is historically the case with the services sector. However, compensation is not high. It’s a double-edged sword: it can absorb, but not address the salary equality issue,” the Ibre-FGV economist said.
Ana Luiza Barbosa, a researcher at the Institute of Applied Economic Research Institute (IPEA) and vice-president of the Society of Family and Gender Economics (GeFam), says the news of a better composition of the balance of formal job positions is positive. She says it results from better job market dynamics and hides the persisting gender inequality.
“There is a significant difference in the pace of growth in the formal job balance. The job market is continuously tight. Of course, that is a good thing but it somewhat masks a structural gender inequality,” Ms. Barbosa said.
In her reading, it is hard to tell if that is a permanent trend. As it is closely tied to the dynamics of the Brazilian job market as a whole, it could be a temporary movement. “Reducing inequality in the balance of new positions is different from doing so in the entire market. The study portrays the market’s dynamics, and how it is functioning. It is still positive news but we can’t say it will continue,” the IPEA researcher argued. She describes the reduction in gender disparities in employment in the country as “very slow.”
Janaína Feijó, one of the study’s authors is also wary: “What we see in 2024 is that the formal job market is absorbing more women but we are not addressing the quality of these positions. More observation over time is necessary to say if this will continue. For that to be seen as a permanent trend, the market must continue creating formal jobs and absorb more women,” she states.
Even with the faster rate of increase, the absolute balance of formal positions in 2024 is still smaller among women (800,200) than among men (926,200). The gender disparity is evident when comparing the female participation in the population as a whole with that in the job market when considering the total number of job positions.
In the population aged 15 or older, women make up 51.8% of the total, and men 49.1%, according to the 2024 population projections by the Brazilian Institute of Geography and Statistics (IBGE). Data from the Continuous National Household Sample Survey (PNAD Contínua)—which includes both formal and informal job markets—show that women make up 43.7% of the labor force, which includes workers who are employed or seeking a job. Men account for the remaining 56.3%, a share greater than their portion of the Brazilian population.
The employment rate among women reached 48.1% in the second quarter of 2024, a record since official records began in 2012, but still below 50%. Among men, the rate is 68.3%. The indicator points to the share of people aged 14 or older who are employed.
The study shows the greater incorporation of female labor in formal job positions in 2024 but that is only one part of the inequality observed in the market, Janaína Feijó argued. “We are only talking about the absorption of female labor, which is a good thing, although it is not everything.” Data from the New CAGED, from the Ministry of Labor, indicate little change in women’s average income in the formal market.
On average, the real average entry salary for formal workers was R$2,156.86 in August 2024, with relative stability over the previous 13 months. For men, it is slightly higher at R$2,245. Women’s monthly earnings are R$2,031, although it shows stability.
“Over the last 13 months, there have been small monthly variations but the difference between men’s and women’s average salaries remains evident, with women consistently receiving an average entry salary around 10% to 11% lower,” Ms. Feijó concluded.
In Brazil alone, $64.5bn is expected to be invested by 2028, according to the Brazilian Mining Institute, not counting potential acquisitions
10/21/2024
Gold mining area located along the banks of the Peixoto de Azevedo River, in northern Mato Grosso — Photo: Lalo de Almeida/Folhapress
Interest in tech-related and energy-transition metals like lithium and copper has driven a surge in the search for mineral deposits and projects worldwide, spurring mergers and acquisitions in the sector. In addition to these minerals, gold remains in high demand, with Brazil being a key target for foreign companies and governments due to its significant reserves.
Globally, according to Dealogic data, announced M&As in the industry amounted to $48 billion by August, an 8% year-over-year increase, including deals that impacted Brazil. This figure could have nearly doubled had Anglo American not declined BHP’s $43 billion acquisition offer in May.
Experts and industry executives noted that this trend is likely to accelerate in the coming years. The planned investments are substantial: in Brazil alone, $64.5 billion is expected to be invested by 2028, according to the Brazilian Mining Institute (IBRAM), not counting potential acquisitions.
Australia’s lithium giant Pilbara Minerals entered Brazil in August by acquiring fellow Australian company Latin Resources for $370 million. Last month, Pilbara announced a R$2.2 billion investment to develop its Salinas project in Vale do Jequitinhonha, Minas Gerais.
“The Salinas Lithium Project, with its potential to become one of the world’s largest hard rock lithium operations, will be vital for consolidating our leadership position in the North American and European battery markets,” said Dale Henderson, managing director and CEO of Pilbara Minerals.
Sigma Lithium, the leading company in Brazil’s lithium sector, also operates in the Jequitinhonha River region.
In the same week, G Mining Ventures purchased the rights to explore the CentroGold gold project in Maranhão from BHP. Shortly before, Australia’s St. George Mining announced its acquisition of the Araxá project, a niobium and rare earth metals operation in Minas Gerais.
“This activity will remain very strong. Since 2020, the number of transactions has accelerated,” said Alexandre Pierantoni, executive director of Kroll in Brazil. Between 2013 and 2019, Mr. Pierantoni noted, the number of global M&A deals in the industry averaged 750 per year. Since 2020, that average has risen to 1,200 to 1,300 deals annually—in 2023 alone, according to Bloomberg data, there have been 1,500 transactions, moving $80 billion.
The global drop in interest rates is expected to fuel further deals, although volatility in commodity prices makes asset valuation more challenging. “There are triggers that drive demand, like the energy transition. But this comes with a cost, meaning the world can’t completely abandon the [energy] base it’s built. Significant investments in oil and gas are still ongoing,” Mr. Pierantoni said.
In recent years, countries’ commitments to reducing greenhouse gas emissions have fueled growing demand for electric vehicles, whose batteries depend on lithium, copper, rare earth elements, and other minerals. Technologies like wind energy generation and solar panels also rely on these critical minerals.
“We are in an extremely productive phase in terms of new research, especially for minerals related to the energy transition, like lithium, nickel, vanadium, and rare earth elements. There is significant appetite in Brazil for these minerals,” said Julio Nery, director of sustainability at IBRAM. “This surge in research is happening in many countries,” he added.
*By Stella Fontes, Marcos de Moura e Souza — Sao Paulo
Loans made with funds from the Brazilian Savings and Loan System (SBPE) will be limited to properties up to R$1.5m
10/16/2024
Caixa to reduce financing quota for real estate, increase down payment — Photo: Marcelo Camargo/Agência Brasil
Responsible for 68% of the country’s real estate financing, state-run bank Caixa Econômica Federal has announced restrictions for new loan concessions. Financing made with funds from the Brazilian Savings and Loan System (SBPE) will be limited to properties up to R$1.5 million. The client also cannot have another active housing loan with Caixa.
Caixa will now only finance up to 70% of the property’s value through the Constant Amortization System (SAC). In the current model, the percentage is 80%. Under the Amortization Schedule system, the share will drop to 50%, down from 70%. According to the bank, the changes in financing quotas and the limitation on the property value to R$1.5 million do not apply to housing units linked to projects financed by the bank.
Caixa had maintained that the 2024 budget was guaranteed and that challenges would be for 2025, but the above-expected growth of its portfolio made it take measures to prioritize existing resources. With savings experiencing withdrawals and few deposits in recent years, Caixa has long been warning about funding difficulties and trying to enable other sources for the sector. The easiest alternative is the Real Estate Credit Bill (LCI), but it has a higher cost, and the state-owned bank resists passing this on to customers.
In a statement, Caixa said that, considering the observed demand and the housing credit budget approved for 2024, the portfolio will exceed the maximum projected limit for the period. “Thus, we inform that Caixa constantly studies measures aimed at expanding the service of the excess demand for housing financing, including participating in discussions with the market and government, to seek new solutions that allow the expansion of real estate credit in the country, not only by Caixa but also by other market agents.”
Caixa’s CEO, Carlos Vieira, has said that for 2024 the budget was resolved, but that for 2025 there would be challenges if nothing was done to address funding difficulties. At the same time, the bank is gaining more and more market share, which ended up putting pressure on its budget. He said in August that the discussion on significant changes in funding would not take place in 90 days but that there was still time, by the end of the year, to “find ways and build opportunities.”
In July, Caixa’s housing portfolio was R$783.6 billion, with an annual increase of 14.8%. While savings deposits rose by 6% in a year, the capture of credit bills soared 50.1%, to R$185 billion, and already represents almost 30% of the bank’s funding.
Caixa’s vice president of housing, Inês Magalhães, said that there was no “silver bullet” regarding funding and that a set of actions was needed. The bank has asked the Central Bank to reduce the reserve requirements, but the demand has not resonated with the monetary authority. It also seeks a reduction in the minimum term for LCI, which would return to three months.
Among other possible alternatives, but with effects more in the medium and long term, are the development of a secondary market that allows for the securitization and sale of portfolios; and the permission for pension funds to invest in housing. Another option would be an international bond issuance, which could have the hedge part addressed by the EcoInvest program, which the government intends to implement to make this type of application more attractive to international investors.
Caixa had a budget of R$70 billion for contracts this year via the Brazilian Savings and Loan System (SBPE), and R$120 billion for the Workers’ Severance Fund (FGTS), which goes to the Minha Casa, Minha Vida (MCMV) housing program. “Caixa has prioritized the low-income population, with a record budget for FGTS-backed credit. But the funding issue is a problem for the industry as a whole,” said a person with knowledge of the matter.
Potential collaboration stems from high-level talks between India’s Oil Minister Hardeep Singh Puri and Petrobras CEO Magda Chambriard, as India aims to boost energy self-sufficiency while balancing its transition to green energy
India is trying to attract Petrobras to explore oil in the deep waters off its coast. This was the key topic during a visit to Brazil in September by India’s minister of Petroleum, Hardeep Singh Puri, who held a meeting with Petrobras CEO Magda Chambriard, among other commitments.
In an interview with Valor, Mr. Puri said Indian companies want to leverage the expertise Petrobras has gained from pre-salt exploration, adding that future partnerships with the Brazilian state-owned oil giant in exploratory projects are possible. He described this “initial conversation” with Ms. Chambriard as “very positive.”
“I met with the Petrobras CEO, and we had a long and comprehensive discussion about the ongoing cooperation between India and Brazil in the energy sector, and we also discussed ways to strengthen this cooperation,” he said. “We talked about expanding traditional business, increasing collaboration in biofuels, and Petrobras providing assistance since it has unique expertise in what is called deepwater exploration.”
Petrobras confirmed that Ms. Chambriard and Mr. Puri had discussions but said no decisions have been made so far.
Mr. Puri said India has a sedimentary basin of about 3.5 million square kilometers, and recently, the country opened up 1 million square kilometers for exploration in areas that were previously off-limits.
“We are now inviting companies to participate,” he said. “Our firms would like to invite Petrobras to assist with technical knowledge, and if successful, they could potentially form partnerships.”
Energy demand in India, he said, is growing at a rate three times higher than the global average, with imports currently accounting for 85% of domestic consumption. Brazil is the 12th largest oil supplier to the Asian country. The Indian government, led by Prime Minister Narendra Modi, aims to achieve energy self-sufficiency in the medium to long term.
“We need to expand traditional energy, but our main goal is to ensure availability, affordability, and sustainability—green energy,” Mr. Puri explained. “The economy is growing at 7%, and the increase in consumption demand is three times the global average. Moreover, the International Energy Agency has predicted that over the next two decades, 25% of demand growth will come from India.”
Mr. Puri stressed that energy transition is a key commitment for India, but despite climate change challenges, the country will need to continue expanding fossil fuel production for some time.
“Like Brazil, India is transitioning to green energy. But you need to survive,” he said.
With a population of 1.4 billion, India has set a target of achieving net-zero CO2 emissions by 2070. The country has already started implementing measures to promote renewable energy, including increasing ethanol blending in gasoline and launching green hydrogen projects. India also plans to double its solar and wind energy capacity over the next decade and aims to reduce coal use until 50% of its energy consumption comes from renewable sources.
However, India still has large coal reserves, and with such a vast population, it is challenging to phase out polluting sources that remain cheaper.
Mr. Puri was pragmatic, noting that an energy shortage caused by a ban on fossil fuels could have electoral consequences for Prime Minister Modi, as well as broader implications for the country’s democracy.
“If you have a population of 1.4 billion, you have 960 million registered voters. In the last election, when Mr. Modi won his third consecutive term, 680 million people voted. Now imagine 680 million people going to the polls. Imagine if there were an energy shortage, or if energy prices rose, what the political and democratic consequences would be,” he said. “In academic discussions, everyone will agree that we need to transition tomorrow. But you must have the transition fuel ready. You can’t go to your population and say, ‘Starting tomorrow, we’re moving to green energy.’ They will ask, ‘Very well. How much does green energy cost? Where is it?’”
The positive sentiment in local markets, buoyed by more favorable fiscal signals from the Brazilian government, was short-lived. External factors once again dominated the movements of domestic assets on Tuesday, with increased bets on a win by Republican Donald Trump in the U.S. presidential election significantly impacting emerging markets. The sharp drop in oil prices also played a role in the session, marked by a surge in the exchange rate and future interest rates.
The possibility of a “red wave,” with a Republican victory in both the White House and Congress, gained traction in betting markets. According to the betting site Polymarket, which compiles options involving both the presidential race winner and the majority in the Lower House and Senate, there is now a 40% chance of a “red wave,” which has rattled emerging markets.
In the Brazilian market, the real weakened to R$5.6565 to the dollar, the highest FX rate in two months. The interbank deposit (DI) rate for January 2029 futures soared from 12.635% to 12.77%, closing at the day’s high. The rate abandoned the morning decline when government signals about spending restraint had an impact. The benchmark stock indexIbovespa closed with a slight gain of 0.03%, at 131,043 points.
The government’s signaling was insufficient to support the real or the decline in future interest rates. The possibility of Mr. Trump’s victory became more prominent in business, especially affecting Latin American currencies. By late afternoon, the dollar was up 1.50% against the Mexican peso; 0.83% against the Colombian peso; and 1.42% against the Chilean peso.
“If Trump confirms what the betting markets are indicating, the dollar tends to strengthen initially,” said EQI Asset’s Chief Investment Officer (CIO) Ricardo Cará Monteiro. “The dynamics of our currency have a significant global component. We depend on foreign investors seeing a weaker dollar worldwide to allocate funds in Brazil.”
On Tuesday (15), Mr. Trump reiterated in an interview his proposal to radically increase tariffs on imports, further pressuring emerging currencies, which were already pressured by the oil price slump abroad, resulting from the removal of premia related to the Middle East conflict and weak demand prospects.
According to the EQI Asset executive, Mr. Trump’s tariff measures may not necessarily focus on Brazil, but impacting Mexico affects Latin American assets as a whole. “These measures are not very relevant to us, but when Mexico suffers, Brazil also suffers as they are in the same group of emerging markets. They are markets with two of the worst currencies of the year. If we had our finances more ‘in order,’ perhaps we wouldn’t be so affected,” Mr. Cará Monteiro said.
Among market players, possible explanations for the increased bets on a “red wave” include the increased tensions in the Middle East and the effects of Hurricane Milton. Additionally, some polls, albeit of lower quality, have shown a rise in Mr. Trump’s polling numbers in recent days.
“At the end of September, we were at a 50/50 probability. Today, the most one can say, considering some progress for Trump, is that he has a 52% chance of winning. That is very generous. Or rather, not yet sufficient to take a confident market position,” Quantitas’ Chief Economist Ivo Chermont wrote in an article published on Tuesday (15).
The economist, who has been closely monitoring the U.S. presidential elections, notes that the reliability of poll numbers continues to spark debate among market participants, as they failed to capture Mr. Trump’s voting intentions in 2016 or 2020.
Currently, Mr. Chermont maintains a forecast of a 50/50 outcome for the U.S. presidential election or 52/48 in favor of Trump, given the high uncertainty surrounding the scenario.
In Mr. Cará Monteiro’s assessment, a more positive internal environment would be required for domestic assets to navigate a more turbulent external scenario well. He notes that the real has struggled to take advantage of narratives that would benefit it, such as the prospect of an increased interest rate differential. “That’s because we lack a trigger on the fiscal front. In all my market experience, whenever fiscal issues arose as a concern, there was also fear that the interest rate would not be sufficient to control inflation and anchor the currency,” he said.
In the market, some start to speculate that Brazil may soon face a fiscal dominance scenario—described by the reduction or removal of monetary policy effects due to a high level of public debt. According to BB Asset Management’s chief economist, José Maurício Pimentel, there is no empirical evidence that Brazil is currently experiencing such a scenario, but this environment is plausible if market expectations deteriorate.
“The market is pricing the yield curve based on a fiscal outlook that deteriorates over time. Today, the market treats good fiscal news as neutral, neutral news as bad, and bad news as very bad,” Mr. Pimentel said. He emphasizes the negative impact of agents’ perceptions on the yield curve and exchange rate.
“If this trajectory continues, we could enter a fiscal dominance regime. When that happens, monetary policy loses its potency regarding its ability to anchor inflation expectations,” he explained.
(Eduardo Magossi, Maria Fernanda Salinet, and Cristiana Euclydes contributed reporting.)
*By Arthur Cagliari, Gabriel Caldeira, Victor Rezende — São Paulo
Amid government pressure, company risks losing concession; process would be slow and complex
10/15/2024
Alexandre Silveira — Photo: Fernando Frazão/Agência Brasil
The crisis opened by the blackout in São Paulo is expected to complicate the renewal of Enel’s concession, which expires in June 2028, according to experts interviewed by Valor. The current perception is that the contract would head towards a bidding scenario at the end of the term. Faced with government threats, the company risks losing the operation even before that, although analysts point out that a forfeiture process would be complex, lengthy, and fraught with uncertainties about who would take over the service in such a case.
São Paulo’s power distribution company is under strong pressure from federal, state, and municipal governments since a storm hit the city last Friday (11) causing a power outage that affected 2.1 million people. By Monday (14), about 400,000 customers in Greater São Paulo were still without power.
The minister of Mines and Energy, Alexandre Silveira, set a three-day deadline, until Thursday (17) morning, for Enel to restore power to most of the city. “The company has the next three days to solve the major volume problems. After that, it can only present, if necessary, specific issues regarding locations that cannot be accessed due to unforeseen events,” the minister said in a press conference held on Monday (14).
The minister also criticized the Brazilian Electricity Regulatory Agency (ANEEL) for not yet opening a forfeiture process against Enel—which could strip the Italian company of the contract—and said the agency is promoting a “boycott” against the government.
Following the criticism, the regulatory body issued a statement reiterating its autonomy and saying it is taking all measures to resolve the crisis. “ANEEL informs that it is conducting a rigorous and technical investigation into Enel SP’s work during this critical period,” it said. “The agency will not hesitate to adopt the sanctioning measures provided for by law, which may include severe fines, administrative intervention in the company, and opening a forfeiture process of the company’s concession.”
The risk of Enel losing the contract due to forfeiture exists but it would not be simple, experts say. A lawyer experienced in the field said Enel is not expected to lose the concession in São Paulo for now, as there are other stages before, such as fines and warnings.
Diogo Lisbona, a researcher at the Center for Studies in Regulation and Infrastructure at Fundação Getulio Vargas (FGV Ceri), points out that the most recent contracts in the sector include an automatic trigger providing for forfeiture in cases of repeated failure to meet targets. However, the Enel SP concession is previous to that. The contract provides for forfeiture but within an administrative procedure following a series of steps. “We would have to wait for this procedure, and it is not a quick process.”
Lawyer Ligia Schlittler, a partner at TozziniFreire, points to another challenge—finding another company interested in the contract. “It’s a big headache. If the government penalizes the concessionaire, it must hand it over to a competent party.”
Another industry source, who requested anonymity, mentioned the case of Amazonas Energia, where, although the inability of the concessionaire is even more evident, the forfeiture process is hindered by the transfer to a new concessionaire.
While forfeiture is an unlikely scenario at the moment, the crisis is likely to complicate a possible renewal of Enel São Paulo’s concession, experts say. In June, the federal government published a decree with the rules for extending electricity distribution concessions for another 30 years, and ANEEL should open a public consultation with drafts of the amendments this week.
Bruna de Barros Correia, from BMA Advogados, said an option could be for the concessionaire to present ANEEL with a plan for transferring corporate control as an alternative to the termination of the grant, as long as it benefits the proper provision of public service.
Enel São Paulo could benefit from that but analysts see an adverse scenario for the company. In addition to the current crisis, São Paulo experienced a severe power outage in November 2023, which generated a dispute with ANEEL over the payment of large fines and enormous public opinion wear and tear.
“I’m not sure Enel would have the political and administrative conditions to continue, there were two serious occurrences in a very short period,” said former ANEEL director Edvaldo Santana. He notes that the refusal cannot be arbitrary and that conditions must be equitable. “The government can do everything to not renew but the rule has to be the same for everyone.”
Mr. Lisbona points out that, according to government rules, if a forfeiture process is opened, even if not concluded, it halts the progress of discussing a possible renewal. “The path [of renewal] is halted until a final decision in the administrative proceeding.”
If Enel is interested in renewing, it would have to apply at least 36 months in advance, meaning in 2025. An industry source points out that a possible renewal would require institutional alignment between the governments and ANEEL, a scenario far from the current reality.
Valor questioned Enel regarding the deadline for service resumption, the risk of forfeiture, and the possibility of contract renewal, but the company did not respond.
Without forfeiture or renewal, the path would be to let the concession reach its end and open a new bidding. Industry analysts claim it is difficult to foresee a scenario but doubts arise about the impact of the current crisis on a future bidding.
“Undeniably, it is a city with a high population density, dealing with its asset management issues, challenging to manage. There is a combination of challenges, and the intensification of climate change makes São Paulo an asset of greater operational complexity,” Ms. Schlittler pointed out.
A person close to distributing companies said that, behind the scenes, the topic of new bidding is already being discussed among companies. Experts point out that the area under Enel’s concession is too large for one single concessionaire and that some groups will likely seek to split the area. An industry analyst points out that if there are no arbitrary decisions by public authorities during the process, there will likely be interest. However, if the technical procedure is not followed, it could deter the market.
Enel acquired the São Paulo concession, previously controlled by AES, in 2018, after an intense dispute with Neoenergia, owned by Spanish company Iberdrola. In the competition, the Italian state-owned company paid R$ 5.55 billion for a 73.38% stake.
(Cristian Favaro contributed reporting from São Paulo.)
By Taís Hirata, Matheus Oliveira, Kariny Leal — São Paulo and Rio de Janeiro
Plan to be presented by December aims to establish measures as state policy, ensuring their continuity regardless of the administration in power
10/15/2024
A “significant package” of spending review measures is expected to be presented this year, an official of the economic team told Valor. The aim, the person explained, is to position these measures as state policy, meaning an effort that should continue regardless of which administration is in power.
Experts are considering announcing the measures after the municipal elections. While details of the proposed changes have not been disclosed, one criterion will be the alignment of a given expense with the fiscal framework. If the expense is incompatible, the government would face two options: change the fiscal rules or “do what needs to be done.” The Finance Ministry’s preference, the source said, is to uphold the framework.
To ensure the package’s approval, the plan is to appeal to both the legislative and judicial branches for a pact on the sustainability of public finances.
The measures, the person noted, are in line with a report by rating agency Moody’s, which earlier this month upgraded Brazil’s sovereign rating to just one notch below investment grade. The agency observed that the credibility of the fiscal framework is at a “moderate” level, reflected in relatively high debt costs. However, it believes that the potential for sustainable economic growth and the adoption of measures that support compliance with the fiscal framework justify the positive outlook.
The announcement of the spending review program was first mentioned by Finance Minister Fernando Haddad at an event hosted by Itaú Unibanco on Monday (14). When asked about changes to personal income tax (IRPF), he said the proposal was not yet ready and that before presenting it, he intended to submit a spending review program to Congress.
The importance of addressing spending adjustments was echoed by incoming Central Bank President Gabriel Galípolo at the same event.
The end of municipal elections is the target date for presenting these measures, as outlined by experts involved in the program’s development. Some believe the best window for approval is at the end of this year, during the final stretch of the current Lower House speaker and Senate president’s terms.
As reported by Valor on October 8, at least one spending review measure is expected to be sent to Congress before the end of 2024. The current trend suggests a more comprehensive package will be submitted.
The government’s spending review has three key pillars. The first is a detailed audit of programs such as Social Security, the Continued Payment Benefit (BPC), and unemployment insurance for fishermen. The second is the redesign of programs like the salary bonus and unemployment insurance. The third focuses on “modernizing” the indexation of expenses, ensuring their growth aligns with the fiscal framework.
“Submitting measures to curb mandatory expenses is a step toward normalizing the situation,” said Alexandre Manoel, chief economist at AZ Quest. It’s also an opportunity to reverse a negative trend. “We are heading towards a crisis via the credit channel.”
The financial market’s pessimism about public finances, which has driven future interest rates to around 13%, stems from doubts over President Lula’s support for the program proposed by the economic team, Mr. Manoel said.
The economic team’s strategy assumes that by 2025, fiscal policy will no longer be expansionary, as it has been until now with the injection of funds into the economy. At the same time, interest rates are expected to remain high, resulting in an economic slowdown, Mr. Manoel explained.
The most pessimistic view is that the government will not tolerate this scenario and will change the fiscal framework, he said. However, submitting the review measures would signal support for the current strategy.
There is an overreaction in the current wave of market pessimism regarding fiscal policy, said Fernando Montero, chief economist at Tullet Prebon Brasil. However, he noted similarities between the evolution of public finances under the current government and during the Dilma Rousseff administration.
The Brazilian real gained ground against the U.S. dollar after statements from Mr. Haddad and Mr. Galípolo. “The market is so bad right now that even narratives are affecting prices,” Mr. Montero joked. “At least it’s the right narrative.”
For Paulo Bijos, a budget consultant for the Lower House who led the Federal Budget Secretariat until mid-year, “the spending review is the most important agenda for Brazil right now.”
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