Strengthening in governance helped state-owned companies

Shielding increased and improved results, but did not prevent political interference

12/27/2022

Brazil’s postal service will close this year with R$3 billion in cash — Foto: Valor

Brazil’s postal service will close this year with R$3 billion in cash — Foto: Valor

Correios, Brazil’s postal service, will close this year with R$3 billion in cash, not counting debts, six times more than at the end of 2019. Oil giant Petrobras made almost the same profit in the nine months of this year alone as in the previous four years combined. Banco do Brasil paid R$11 billion in taxes and R$21.8 billion to its shareholders.

These are some of the numbers in the survey conducted by Valor Data with six of the largest federal state-owned companies – Petrobras, Banco do Brasil (BB), Caixa Econômica Federal, Brazilian National Bank of Social Development (BNDES), Correios and Eletrobras, the latter privatized in June. The data show the result of a financial clean-up process of these companies after a period marked by the misappropriation of public resources.

Together, these companies earned R$213.6 billion from January to September of this year – R$145 billion from Petrobras alone. Anyway, all of them improved in the period and the number represents a leap compared to the R$69.2 billion that the set profited in 2018, still under the government of Michel Temer (Brazilian Democratic Movement, MDB).

Much of these results, which reversed years of losses for shareholders and citizens, can be credited to a law, passed in 2016 in the wake of the corruption scandal involving several state-owned and private companies.

Not even these factors, however, have prevented the political interference of President Jair Bolsonaro (Liberal Party, PL) in state-owned companies. The successive interference in Petrobras amid high fuel prices and the use of funds from Caixa in the electoral campaign machine are the most notorious cases.

Now, on the eve of the new Lula administration, the law of state-owned companies itself is in jeopardy. In the middle of December, the Chamber of Deputies passed in a blink of an eye changes in the law to allow Aloizio Mercadante to be appointed by the elected Workers’ Party administration to run the Brazilian Development Bank (BNDES). It was even considered that the text would be passed in the Senate the following day, but the idea ended up not succeeding after the strong reaction to the maneuver.

In addition to reducing from three years to 30 days the quarantine of nominees who have occupied party decision-making structures or participated in electoral campaigns to leading positions of state-owned companies, the document passed in the Chamber provides for an increase in the advertising spending limit to 2% from 0.5% of gross revenue. In the case of Petrobras, for example, this means an increase of R$8.5 billion.

These changes put at risk, according to analysts, lawyers and governance experts consulted by Valor, the advances achieved in recent years. The share price of Petrobras, the largest Brazilian company and the hardest hit during the years of mismanagement, fell 10% the next day and has accumulated a loss of R$100 billion in market capitalization since November.

The change in the law of state-owned companies is “alarming” and has questionable outlines by the manner and speed with which it was approved, according to a manifesto signed by the Association of Capital Markets Investors (AMEC) and the Brazilian Institute of Corporate Governance (IBGC).

Banks and brokerage firms had already been correcting their target prices for state-owned companies, especially Petrobras, foreseeing a reduction in dividends and more expenses outside what is currently considered the company’s main business: deep-water exploration. The change in the law was another blow to the valuation of the company, whose investment thesis, according to the Citi report, is anchored in its bylaws, in the Brazilian Corporate Law, and in the law of state-owned companies.

Since the second round of the elections, out of 15 banks and brokerage companies monitored by Valor, seven have downgraded their recommendation for Petrobras’ shares, mostly from buy to neutral, and nine have cut their target prices.

With all the turbulence and interference attempts during the Bolsonaro administration, mainly motivated by fuel prices, the professionalization of Petrobras’ management has brought record yields for its shareholders and for society, in the form of taxes. Compared to 2018, sales revenue is 50% higher, profit has grown 300% and debt shows a downward trend. The skyrocketing oil prices found the company adjusted, which allowed unprecedented levels of profitability while internal controls prevented deviations in governance.

There has been criticism of the record distribution of dividends and the allocation of resources, which could, hypothetically, have financed more investments. What the current transparency guarantees is that these criticisms are based on reliable figures, which is a much better situation than the one in which funds leaked off the financial statement.

The financial yields were accompanied by huge tax expenditures. At the end of 2021, Petrobras paid R$203 billion in taxes, fees and contributions, more than double compared to the previous year, the year of the pandemic, and 11% more than in 2018.

A point in common among the companies in the survey, besides the general improvement of indicators – and part of the explanation for this advance – is the process of downsizing the workforce, mainly through the use of buyout plans.

Eletrobras, which went through a restructuring process for privatization, which occurred in June, and Petrobras cut about 30% of their workforce between 2018 and 2021. At Correios, the cut totaled 15% of the workforce, and at Banco do Brasil, 13%. The exception was Caixa, which was practically stable: there is a slight decrease in the four years, with an increase of 5% in 2022 until September.

This movement is not restricted to this group of state-owned companies most exposed to public scrutiny. The survey conducted by the Secretariat of Coordination and Governance of State-Owned Enterprises (Sest), linked to the Special Secretariat of Privatization, Disinvestment and Markets of the Ministry of Economy, with 47 companies under the direct control of the federal government, shows a reduction of 4.4%, or 20,550 employees, in 2021, compared to the previous year.

The consolidated performance of this group was also largely positive, with the significant influence of the largest companies, such as Petrobras and Banco do Brasil. Together, the 47 companies earned R$187.7 billion last year, three times more than in 2020, which resulted in a payment of dividends to shareholders of R$101 billion, 535% higher. The companies’ net equity grew 18%, to R$903.7 billion.

The overhaul of the state-owned companies also fits in with the Bolsonaro administration’s policy of reducing the presence of the government in the economy, which had its most successful example in the dilution of Eletrobras’ control. The privatization of Petrobras was already seen as a more difficult undertaking and is now definitively buried. Correios was a more viable option in the privatization queue but will most likely be shelved by the new government. This week, the president-elect, Luiz Inácio Lula da Silva, said that there will be no more privatizations in the country.

In the long list of hijackings of state-owned companies by politicians, Correios has a particular symbolism. A leaked video of a company employee in 2005 started the crisis with the so-called “Mensalão”, the scheme of payments to politicians that almost put an end to Mr. Lula’s first term in office. Later, the Federal Police’s anti-corruption task force Car Wash would reveal even bigger schemes in large listed companies such as Petrobras and Eletrobras.

The final report of the Joint Parliamentary Inquiry Commission installed in 2005 to investigate the Correios’ scandal revealed the use of R$2 billion in bribes and called for the indictment of more than 100 people. In that year, the company was healthy, with a net worth of R$2.26 billion. Ten years later, when the state-owned companies law was passed, it was practically bankrupt, with R$3.42 billion in accumulated losses.

*By Nelson Niero — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Friction between new government and rural sector is expected

Bolsonaro administration was marked by good relations and joint victories, some criticized by public opinion

12/27/2022

The four years of the Bolsonaro administration have been marked by a flagrant alignment between the president and a large part of Brazilian agribusiness, in a relationship in which both sides have reaped fruits. As seen in the elections, when Mr. Bolsonaro (Liberal Party, PL) won in the main “agricultural” states of the country, the return of Luiz Inácio Lula da Silva (Workers’ Party, PT) tends to end this period of harmony, and the expectation is that the sector will have more difficulties in implementing its demands, despite the great weight of the rural caucus in Congress.

The Parliamentary Agricultural Front (FPA), deputy Sérgio Souza (Brazilian Democratic Movement, MDB, of Paraná), assesses that the sector has been better accepted by society in general in recent years. “We have demonstrated that agriculture is good for human health, for the citizens’ pockets, and for the trade balance. We have mitigated the effects of urban legends that say that agriculture is not good for Brazil.”

Agribusiness is one of the most important sectors of the Brazilian economy. In addition to accounting for about 50% of the country’s exports, the sector is among the most innovative: agribusiness is the third sector with the most companies on the list of Brazilian startups with the greatest growth potential, according to a recent survey by business school Fundação Dom Cabral. Efforts to adopt good environmental, social and governance practices (ESG) are also on the rise, as attested by research such as that of the consultancy Michael Page on the demand from agribusiness for professionals specialized in ESG practices, which grew by 50% between January and May this year.

On the other hand, Mr. Bolsonaro had the rural caucus as a shield in Congress and in the formation of ministries to advance an agenda of measures that pleased the sector but generated strong criticism in public opinion in large urban centers. In this list are the facilitation of access to firearms, the recrimination of land invasions, and the paralyzing of the demarcation of indigenous reserves and the creation of agrarian reform settlements.

“This was the worst management in the environmental area since the end of the dictatorship,” says Eugênio Pantoja, director of Public Policies and Territorial Development at the Amazon Environmental Research Institute (IPAM). “The government lacked the leadership to structure an integrated and forceful action to reduce deforestation in the Amazon.”

Despite climatic adversities, pandemics and war in the last four years, it was a period of abundant harvests, high turnover and record exports, even with criticism from senior authorities against China, the main destination of the sector’s exports. And legislative changes favored private funding to the sector in times of budget tightening that hindered the increase of subsidies in rural credit.

Tereza Cristina — Foto: Valor

Tereza Cristina — Foto: Valor

In Congress, also under heavy criticism from society, the rural caucus managed to move forward with proposals on pesticides, environmental licensing, self-monitoring of agriculture and cattle ranching inspection, bio-inputs, and land tenure regularization. There were more difficulties for the agribusiness agendas in the Senate, where the FPA hopes to advance in the next legislature, with the election of congressmen like the former Agriculture Minister Tereza Cristina, a central name in the countryside’s support for Mr. Bolsonaro.

From 2023 on, one of the caucus’ missions will be to fight agendas such as the demarcation of indigenous lands. “We are concerned with the right to property and with the possibility of our sector not being heard”, said congressman Pedro Lupion (Progressive Party, PP of Paraná), who will head the FPA starting in February.

.But perhaps the main problem, with consequences that are difficult to reverse, is environmental policy. The growing deforestation in the Amazon has tarnished the image of agribusiness and has put a brake on trade agreements, such as those between Mercosur and the European Union. Because of the lack of control that has been established, the EU recently approved rules to restrain the importation of products originating from deforested areas.

The rural caucus achieved advances in historical agendas in the Chamber of Deputies, such as the approval of proposals on pesticides, environmental licensing, self-monitoring of agriculture and cattle ranching inspection, bio-inputs, and land regularization, also under heavy criticism from part of society. The obstacle was the Senate, where the FPA hopes to advance in the next legislature with the reinforcements elected in October, such as the former minister of Agriculture, Tereza Cristina (Progressive Party, PP, of Mato Grosso do Sul), who was instrumental in the countryside’s support for Mr. Bolsonaro.

The mission from 2023 on will be to approve these projects and combat agendas such as the demarcation of indigenous lands. “We are worried about the right to property and with the possibility of not having our sector heard,” said deputy Pedro Lupion (PP of Paraná), who will head the FPA as of February.

The possible lack of fertilizers due to the war in Ukraine, the sector’s greatest recent fear, was overcome without major problems, even without significant advances in the National Fertilizer Plan launched this year – now Russia is promising to tax exports of the input.

“It won’t be an easy year. The cost will fall, but not as fast as we would like, and there may be stagnation in the sector depending on the intensity of the drop in prices of agricultural products,” said Bruno Lucchi, CNA’s technical director. The concern is greater with the segments aimed at the domestic market, such as vegetables, fruit, dairy products and independent pig farming.

The future of the Ministry of Agriculture is another source of concern for CNA. “We had a strong, high level ministry, for having these sectors agglutinated. If it is split up, there will be an increase in fixed costs and there may be a loss of efficiency in processes,” said Mr. Lucchi. Family farmers and indigenous communities, among other groups, however, praise the division that will be made by Mr. Lula.

Family farmers and indigenous communities, among other groups, however, praise the division of the portfolio that will occur in the Lula government. “The current scenario is one of dismantling public policies and lack of incentive for the sector, with an increase in violence in the countryside, aggravated by the government’s policy of allowing weapons,” criticized Aristides Santos, president of the National Confederation of Agricultural Workers (Contag).

During the Bolsonaro administration, Brazil’s grain harvest went to 271.2 million tonnes in 2021/22 from 241.3 million tonnes in 2018/19, and the 300 million tonnes barrier is forecast to be broken in 2022/23. Agribusiness exports jumped to more than $150 billion this year from $101.1 billion in 2018.

“We cannot allow a regression. We used to have tremendous insecurity, which scared away investments,” said the minister of Agriculture, Marcos Montes, while highlighting the 450,000 property titles delivered during his administration, some of them provisional.

Among the current government’s disputes with the sector, one of the most important was with the biofuels area, which complained about the cuts in the biodiesel mix in diesel and the gasoline price policy, which affected the competitiveness of ethanol – although the direct sale from the mills to the service stations was approved.

By Rafael Walendorff — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Nutrien to prioritize integration of acquisitions

After nearly tripling in size in Brazil, company does not rule out new purchases

20/12/2022

Andre Dias — Foto: Silvia Zamboni/ Valor

Andre Dias — Foto: Silvia Zamboni/ Valor

After nearly tripling in size in Brazil by 2022 and reaching revenues of R$8 billion, Nutrien has elected as goals for the country in 2023 to ensure the proper integration of assets purchased this year, foster the organic expansion of the current distribution chain of agricultural inputs, open new stores and continue to keep an eye out for acquisition opportunities.

“After a year like this, in which our growth was very accelerated, we had to rebalance priorities. We will consolidate our platform, but without stopping advancing,” said André Dias, president of the Canadian multinational in Latin America, to Valor. This advance happened mainly in the area of retail inputs, although the company continues to invest in the expansion of its fertilizer blending business in Brazil.

The investments in the acquisitions of three new distribution networks in the country totaled R$500 million this year. With Marca Agro and its seven stores, Nutrien improved its position in Minas Gerais and its access to coffee growers; with Casa do Adubo and its 39 points of sale in 11 states, it added annual sales of around R$2.5 billion and consolidated the local sourcing of the operation; and with the purchase of Safra Rica, which still depends on the approval of Cade, the antitrust regulator, it incorporated nine more units in São Paulo and Minas Gerais, with an eye on sugar cane and orange producers.

Safra Rica was Nutrien’s seventh acquisition in this segment since the company entered the Brazilian market in 2020. Now, the company already has 120 commercial units – the retail chains in Argentina, Chile, and Uruguay combined reached 188 units in Latin America, a region where the company’s revenue will reach R$12 billion in 2022. Of the R$4 billion forecasts for the other three countries that complete Latin America’s revenues, Argentina accounts for approximately three quarters.

Of this year’s purchases, the one that is demanding more effort in the integration process is Casa do Adubo. Besides the large number of stores and states of operation, the business model is different, with a focus on sales to small producers and small distributors (via the subsidiary Casal). “And that is why it attracted us. Certainly, this process will serve to guide our next acquisitions,” said Mr. Dias.

Despite the strong growth reported in 2022, when the number of customers exceeded 110,000, it was a difficult year for sales of agricultural inputs in the country, especially because of the risk — which was not confirmed — of shortage of fertilizers in Brazil after the Russian invasion in Ukraine and the sharp rise in nutrient prices in the domestic market derived from this risk. In May, fertilizers reached a peak of more than $1 per tonne, compared to about $600 today. In 2023, the scenario may improve.

At the same time, Nutrien plans for next year the inauguration of its fifth fertilizer blender in the country, in Alfenas (Minas Gerais). The company has four units of this kind, located in Itapetininga (São Paulo), Araxá (Minas Gerais), Cristalina (Goiás), and Morrinhos (Goiás). The blenders receive the raw materials and formulate the fertilizers used by farmers in their plantations.

*By Fernando Lopes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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New wave of railroad projects totals R$61bn

Package includes auctions, renewals, and an authorization regime

12/20/2022

In the last four years, the railroad sector has seen a wave of new projects. At least R$61 billion in investments were contracted (considering the values at the time of contracting), including auctions of new stretches, early renewal of concessions, and a new private railroad.

The impact of most of these projects is still to come since they are long-term enterprises. However, specialists assess that a real change in the cargo transportation matrix in Brazil, still very concentrated on highways, is still far off. A greater transformation will depend on attracting more private investment and resuming the role of the government in the growth of the network.

In 2022, railroads should be responsible for 19% of the country’s cargo movement – without much variation concerning the level observed since 2004, according to data from consultancy Ilos. Highways will continue to represent about 63% of the transportation matrix.

“We have made progress, but only in specific points. It will take time for us to put a change into practice because at the same time that investments are made, the country continues to increase its production, its harvest. The new projects are extremely necessary, but, in the short term, there will be no change in the participation of the modals,” says Maria Fernanda Hijjar, executive partner at Ilos.

“The truth is that we have had no evolution [in recent years]. On the contrary, we are losing rails, because of the existing 30,000 km, only 12,000 km are operational. We have 18,000 km of abandoned or underused railroads and many of them are even being returned to the federal government,” says Marcus Quintella, head of FGV Transportes, the Fundação Getulio Vargas’ Center for Transport Studies.

He also points out that the contracted investments will bring some progress. “The early renewals will guarantee, at least, the improvements in the railroad network that is already in operation. In addition, the inclusion of cross-subsidies, with the allocation of part of the investments to new railroads, will have a positive effect,” he says.

In recent years, the federal government finally managed to get the plan to renew major railroad concessions off the drawing board, as a way to bring forward new investments – a plan started in 2015, but which was stuck for years due to resistance from the public spending watchdog TCU.

The pioneer was Rumo’s Malha Paulista, in May 2020, which included works estimated at the time at R$6.1 billion. Since then, Vale has also managed to renew the concessions of two railroads, in exchange for some R$24.7 billion in investments. Part of the funds has been allocated to other projects: the construction of the Ferrovia de Integração Centro Oeste (Fico), currently being built by Vale, and the purchase of equipment for the Ferrovia de Integração Oeste Leste (Fiol).

MRS also had approval for its addendum, with a commitment of about R$9.7 billion in new work in the system.

In addition, two auctions of new concessions were held. In the first of them, in 2019, Rumo won the central stretch of the Norte-Sul highway, which began operating in March 2021.

The second auction, of Fiol’s initial stretch, was won by Bamin (Bahia Mineração) in April 2021. The company expects to start work in the first quarter of 2023 to complete the railroad (whose construction was started by the government). Until now, the group has been evaluating the projects and carrying out due diligence on the site, as well as starting services for the remediation of environmental liabilities.

This newly contracted investment wave, however, is already encountering problems. The operators are asking the federal government to acknowledge the need for an economic and financial rebalancing of the contracts, due to the strong inflation of inputs observed as of the second half of 2021 – when a good part of the agreements was already signed.

“The increase in inputs is an effective problem, which has generated liabilities that have not been resolved. The prices have not yet been readjusted. The construction work is going to happen, but the government needs to signal that this abyss is going to be solved,” says Fernando Paes, head of ANTF (National Association of Railway Carriers).

Besides the auctions and renewals, another advance in the sector was the approval of the authorization regime, which brought the possibility of private companies building railways on their own, without participation or sharing of risks with the government.

In the market, the expectation for authorizations is positive, but much more modest than the exorbitant projections released by the federal government – in total, the requests filed could add up to R$258 billion, according to the Ministry of Infrastructure. The expectation is that, in practice, a small portion of those applications will get off the ground. Still, the model is seen as an important step.

“It is very difficult to predict which and how many projects will come to fruition. When we look at the experience of private port terminals, the rate of projects not coming to fruition is quite high, so it is something natural,” says Mr. Paes.

For him, the most viable projects will be the smaller ones, with easier and less costly implementation, and for which there is already a forecasted load. “It can also be a good way to solve stretches of existing railways that are unused or have low utilization,” he says.

Besides private investments, a general perception in the sector is that, in order to build new large railroads and generate development in regions of the country where demand is not yet given, the actions of the federal government will be indispensable.

“The private company is not going to build a groundbreaking railroad, that is the role of the government,” says Mr. Quintella, with FGV Transportes.

For him, there is no short-term perspective of the country returning to large public works, due to the fiscal crisis. However, he ponders that it is already possible – and necessary – to invest again in the elaboration of good projects and in planning for the country’s logistics, including beyond railroads. “It is important to think about intermodality. It is wrong to think of investing only in railroads,” he says.

Mr. Paes, with ANTF, also sees the need for the government to participate more actively. “Only authorizations or only cross-subsidies are not going to be enough. The federal government needs to assume a role as a protagonist of the railway network, whether in construction, financing, or via public-private partnerships (PPPs). We need to take that leap.”

Despite the challenges and costs, experts point to major benefits in promoting a better balance of the transportation system in Brazil. For logistics, this change would represent a multi-billion cost reduction, according to Ms. Hijjar, with Ilos.

A projection by the consultancy indicates that if the Brazilian matrix was similar to that of the U.S. – in which the railway modal represents 33% of the total; the pipeline, 19%; and waterways, 9% – the transportation costs, in 2021, would have been R$208.42 billion less. “Of course, it is only a theoretical exercise, but it already gives the dimension of the impact,” she says.

*By Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Delinquency on revolving credit cards hits all-time high, 44%

Credit card deterioration has driven the worsening of individuals’ defaults

12/20/2022

Delinquency on revolving credit cards – when the client does not make full payment of the invoice – reached the level of 44.4% in October, which is the most recent data released by the Central Bank. This is the highest level in the records, which began in December 2011. Since April 2017, the customer can only use the revolving credit for 30 days. After this period, he is referred to other credit lines.

In February 2020, i.e., before the pandemic arrived in Brazil, the default on the revolving credit line was 35.5%. It fell to a low of 25.4% in April 2021, following a generalized drop in default rates due to measures adopted by the government and the payment breaks offered by banks, and has been rising almost uninterruptedly since then. Total credit card delinquency, which in addition to the revolving credit also includes installment payments, is currently at 8.2%, the highest level since September 2016, when Brazil was going through the worst recession in its history.

Credit card deterioration has driven the worsening of defaults of individuals, segment in which the index of delays in free credit is at 5.9%, the highest since January 2017. Many in the banking industry have been warning in recent quarters about a significant drop in asset quality in cards. One of the most vocal critics is Milton Maluhy Filho, CEO of Itaú Unibanco, who has commented several times that there has been an oversupply in this industry, where “in 30 minutes on the Internet you can get about six different cards.”

Itaú is the market leader in credit cards, in terms of market share in total payment volume (TPV). The bank has 41.2 million active cards, from a total of 190.838 million units in the country. Banco do Brasil (BB) has 51 million cards and Nubank has about 28.5 million. Santander and Bradesco do not disclose this number.

Not every default cycle is the same. In 2015/16, for example, the worsening was more pronounced in business entities, with many large companies affected by the unfolding of anti-corruption task force Car Wash. In 2012, the deterioration in asset quality was greater in individuals but pulled by automotive financing. Now, cards are the biggest problem spot.

“When the Selic went to 2% in 2020, banks had to migrate to riskier lines, and the revolving credit card was one of them,” commented Everton Gonçalves, superintendent of the economic advisory services of the Brazilian Association of Banks (ABBC). In this movement to expand the base, many banks went seeking clients with whom they had no previous relationship, which means a higher risk precisely because of the lack of knowledge about the credit profile of these borrowers. Now, almost all of them have returned to focus more on their own bases, and within them, on higher income clients.

Claudio Gallina, Financial Institutions Senior Director da Fitch Ratings — Foto: Claudio Belli/Valor

Claudio Gallina, Financial Institutions Senior Director da Fitch Ratings — Foto: Claudio Belli/Valor

For Claudio Gallina, senior officer of financial institutions at Fitch Ratings, the card industry is going through a challenging context, with rising interest rates and delinquency, in addition to an increase in competition, which has made the large banks run after new entrants in serving the lower classes. “The data from the Central Bank show that a few years ago people had a relationship with two financial institutions. Now there are five. The clients are more leveraged and salaries don’t rise at the same speed. So, any of those five can go unpaid,” he said.

Citi recently did a study that indicates that defaults have been worse with low-income clients, meaning that different institutions are affected to different degrees. Since the first quarter of 2021, the total payment volume (TPV) of the big four banks have been growing at more or less the same rate, with Santander deviating slightly, in line with what has been indicated by the bank’s management to reduce risk in the portfolio. However, when analyzing the use of the revolving credit card, BB and Bradesco rise much more than Itaú and Santander.

“We observed a lower expansion of the balances of high-income individuals, which can be explained by the greater financing needs of low-income individuals, leading to a greater number of installment purchases. If this is the case, the performances of Banco do Brasil and Bradesco can be partially explained by their greater exposure to the low-income segment,” added analyst Rafael Frade.

In the case of Itaú, Citi points out that portfolio growth comes more from clients using the credit card limits they already had, which would show a greater appetite for risk. “For the first time Itaú reduced its total credit card limits in the third quarter, with new limits being insufficient to offset reductions in existing limits,” he said.

In Nubank’s case, Citi points out that the bank has been gaining market share in terms of TPV, and is already in third place with 13.5%, behind only Itaú (29.3%) and Bradesco (14.9%), and ahead of BB (13.4%) and Santander (10.5%). However, in terms of the interest-bearing portfolio (i.e., revolving credit use), Nubank is still in fifth, with a much smaller share of 8.0%. “Given Nubank’s client profile (lower revenue than its competitors), one would expect a higher usage of revolving credit than other banks, but the data indicates a different profile than expected,” said Mr. Frade.

For him, Nubank has been very successful in exploiting the unbanked public and, despite showing a worsening in defaults recently, it has continued to grow strongly. “Of course, there have been adjustments, but they have been able to continue growing.” According to Citi, in the third quarter, Nubank’s defaults rose 0.6 percentage points, which can be considered positive given the sharp deterioration shown by the other banks in credit cards.

Other institutions that operate with lower classes have also seen a strong deceleration in the issuing of cards. Pan, which released 708,000 new cards in the third quarter of 2021, granted only 173,000 in the same period this year. At Inter, the 12-month growth in total cards used has slowed from 94% last year to 46% now.

If analysts and even some banks say that there was excess in the concession of credit cards, the Brazilian Association of Card Companies (Abecs) defends the sector. For Rogério Panca, Abecs’ president, the revolving credit card has the participation of only 3.1% of the families’ indebtedness. Moreover, only 26.4% of the total credit card portfolio of the financial system earns interest, i.e., it is of people who entered the revolving credit. “Out of ten people, more than seven use the card only as a means of payment, they don’t use credit itself. Does card default hurt? Yes, but if we look at it, it is a very small part of the families’ debt”, he said.

According to Mr. Panca, the outlook for 2023 is for a drop in card delinquency because issuers have done their homework and adjusted their concessions. “Many of our associates report that the new cards issued are already performing very well. Macroeconomic conditions are important, we have many uncertainties in the scenario, but we project an improvement in the [default] curves for 2023,” affirmed Mr. Panca.

He doesn’t believe that there was an exaggerated euphoria in the concession of cards and highlights that the instrument was very important in helping millions of people to become bankable. “This movement is impossible to go back. We can’t imagine that people will stop using cards and go back to going to a bank branch to withdraw cash to make their payments,” added Mr. Panca.

Although banks can reduce the concessions and adjust the limits of the cards, analysts say that this is not so easy to put into practice. First, because you can’t reduce the limit if the client is already using all of it, and second, if the person is already struggling, reducing the available credit can end up making the situation worse instead of better. “Bigger banks, with more products, may even be retracted for longer, but what about the smaller ones, which depend more on the card?”, said Mr. Gallina, with Fitch.

“A card is a different tool; one you can’t adjust much in origination. The bank offers a limit today, but it may take a year for the client to use it. It is something that will be solved gradually”, said Mr. Frade, with Citi.

To Mr. Gonçalves, with ABBC, the moment requires calm. “The default rate is going up, monetary policy affects credit, and we have to wait and see how the expected slowdown of the economy is going to be. I think the banks view the situation with caution, but not panic”, he said.

*By Álvaro Campos — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Imports put pressure on rubber producers

Import tax of 16% levied on truck tires and latex was zeroed in 2021; industry expects the return of the charge

12/19/2022

The estimate is that Brazil can achieve self-sufficiency in the production of natural rubber with a slight expansion in the production area — Foto: Anna Caro

The estimate is that Brazil can achieve self-sufficiency in the production of natural rubber with a slight expansion in the production area — Foto: Anna Caro

The natural rubber production sector and the Brazilianl tire industry have been pressuring the federal government to reverse the measure that, at the beginning of 2021, zeroed the import tax on truck tires, rubber artifacts, and items such as latex. There is an expectation that the proposal to tax foreign purchases again at 16% will be approved by the Foreign Trade Chamber (Camex) on Monday.

Without the tariff since January 2021, imports have hit record highs in recent months. The purchase of tires jumped to 518,000 in November from 143,000 per month, on average, before the tax exemption. That’s 3.5 million units imported this year. Interlocutors of the transition team say that the tax rate will be re-established in 2023, but rubber tappers and the industry say that the problem gains scale every day and can generate a “dismantling” of the production chain.

Producers who began extracting rubber in September had their production refused by processing plants, which don’t have the demand to process the quantity that was planned before. “Monthly production volumes are being canceled. People are leaving the activity, converting the rubber areas into sugar cane or soy. It’s the opportunity cost”, said Fernando do Val Guerra, executive director of the Brazilian Natural Rubber Producers and Graders Association (Abrabor).

In São Paulo, the council of processing plants informed the cancellation of purchases of 60% of the total volume of the tire industries in November and December, which generates a liquidity shortage in the chain. “This is a reflection of the flood of imported products,” said Mr. Val Guerra. The United States and China, which also zeroed import taxes at the beginning of the pandemic, established tariffs of 17% and up to 50%, respectively, for the import of these items, said Abrabor’s director. “All production came to Brazil,” he said.

The segment says that the import tax exemption for cargo tires was assertive at the peak of the pandemic, but that it should have been temporary, just to combat the inflationary surge at the time when there was a shortage of containers and ships for sea freight. The tire industry, on the other hand, claims that the decision was taken too fast and that its effects have left companies at their limit. If the measure is not reversed, he warns, there is a risk of shrinking production and layoffs.

“If nothing changes, we have scheduled layoffs that are going to happen when employees return from the collective vacation, which is not standard, the drop in production forced the stoppage, and this is complicated,” said Klaus Curt Müller, president of the National Tire Industry Association (Anip). The entity represents giants such as Bridgestone, Continental, Goodyear, Michelin, and Pirelli. The segment has 20 plants in the country and invoices R$36.4 billion a year.

Mr. Müller complains about the government’s lack of sensitivity to the theme and lack of support for the development of the local industry. Production has dropped in recent years and is back to 2012 levels, he said. “We are at the limit. The sector has R$1.5 billion in investments that are in slow motion. This shows that we are going backwards, and in this situation, you have to shrink everything,” he added.

Mr. Val Guerra points out the lack of a specific policy, or a “state plan”, to give security and predictability to the natural rubber segment, with the provision of long-term contracts and income insurance linked to rubber plantations. The country cultivates about 250,0000 hectares with rubber trees, of which 180,000 are in full production, and produces little more than 200,000 tonnes per year, for an installed demand of 417,000 tonnes. Most of the production (66%), processing (80%), and consumption is in São Paulo. Production and processing move about R$30 billion per year

The estimate is that Brazil can achieve self-sufficiency in the production of natural rubber with a slight expansion in the production area. With 1 million hectares of rubber plantations in production, the country could export and supply the entire demand of the U.S. The advance would take place in degraded pasture areas of Cerrado, the second-largest biome in the country. Asia holds 92% the world’s production of natural rubber, which is estimated at 14.5 million tonnes in 2022.

“It is a sector in which the whole industry is already installed and can export processed products, unlike the other agricultural and mineral commodities that come out in natura,” said Mr. Val Guerra. “Depending on rubber imports for tire manufacturing in a road country is critical. It is a macro strategic issue. In the West region, Brazil is the only country that has rubber production and tire factories. This fact alone should have more attention from the government to the sector”, added Mr. Müller, from Anip.

Sought by Valor, the ministries of Agriculture and Economy did not comment.

*By Rafael Walendorff — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Privatization of Corsan faces court challenges

Government is still trying to overthrow the injunction that prevents the bidding process from taking place on Tuesday

12/19/2022

The Rio Grande do Sul government is trying to get the privatization of Corsan (Companhia Riograndense de Saneamento) off the ground this Tuesday, amidst legal offensives that are trying to stop the sale of the state-owned water and sewage company. At least one group — Aegea — has submitted a proposal for the asset. The offers were received last Thursday.

Besides Aegea, four other companies have studied in depth the company’s privatization: Iguá, Águas do Brasil, Equatorial (which already operates the state’s energy distributor), and the investment manager I Squared Capital, according to industry sources. However, the government has not confirmed the total number of proposals that have been submitted.

The state is still working to overthrow an injunction from the Labor Court that ordered last Thursday the suspension of the auction for 90 days, following a request from Sindiágua — the sector’s workers union.

Judge Marcos Fagundes Salomão ordered the government to present studies on “the socioeconomic, labor, social security, and social impact of the privatization process.” According to him, the goal is to prevent the repetition in Corsan of “the situations caused by the privatization of CEEE [energy distributor, sold in 2021 to Equatorial],” in which there were “mass layoffs” and “suppression of benefits,” he said.

For the government, the expectation is to get the injunction lifted in time to hold the public session on Tuesday. Last week, the state had already overturned two other decisions that prevented the acceptance of bids.

If the auction takes place, the competition will be held at the B3 headquarters in São Paulo. The group offering the highest value for the company will win — the minimum was set at R$4.1 billion.

In the private sector, there is no expectation of a fierce dispute for the state-owned company. Sources who have followed the process closely observed that the risks involved in the privatization are quite high.

The main one is the uncertainty about the 198 contracts with municipalities served by Corsan that have not been normalized under the new sanitation law. The fear is that, after the sale, these municipalities will try to break their agreements, generating a wave of legal disputes.

Another point of attention for the interested groups is the company’s huge labor and social security liabilities. Moreover, the transition in governments brings regulatory uncertainties arising from the implementation, still in progress, of the new legal framework for sanitation — a factor that affects the entire market.

Aegea, which already operates a PPP in the metropolitan region of Porto Alegre, together with Corsan, has been pointed out as the main candidate to take the asset. The company confirms that it has submitted a proposal.

The privatization of Corsan may become a paradigmatic case for the sanitation sector and serve as a reference to other state-owned companies, according to market analysts.

Rafael Vanzella, a partner at law firm Machado Meyer, observes that there has already been a previous privatization experience in the country, of Saneatins, in the state of Tocantins, in 2002 — currently controlled by BRK Ambiental (formerly Odebrecht Ambiental). However, this was a process with many peculiarities and regulatory exceptions, due to the recent creation of the state of Tocantins, which prevented the case from becoming a privatization reference to other state-owned companies in the sector.

“Now, Corsan may be a relevant laboratory for the model,” says Mr. Vanzella. “The result of the auction will be very emblematic for governments that may want to follow the same path,” he says.

*By Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Mergers, acquisitions regain vigor

Number of deals may grow 15% to 20% in 2023, but fiscal risk weighs against them

12/19/2022

The market for mergers and acquisitions regained vigor in the second half of the year, after a weak start in 2022, but the amounts involved dropped by almost half. For next year, there is a chance that the volume of transactions will surpass 2022 by 15% to 20%, depending on the improvement of the investment environment, industry sources say.

This year is expected to close with the number of transactions at the same level as 2021, hitting a record high with 1,627 transactions, according to the U.S. consulting firm Kroll. However, for the pace to accelerate again, clear signs of a commitment from the elected government with a responsible fiscal agenda and an unlocking of stock offerings will be needed. Investment banks also see greater participation of foreign capital in future deals.

A Kroll research revealed to Valor shows that until November there were 1,389 operations, slightly below the same period in 2021 (a decrease of almost 6%). The consultancy firm believes that 2022 is likely to repeat the level of around 1,600 deals because several operations are being announced in December. The survey does not show the value of the deals.

The data from Dealogic point out that in the year to date until last week, mergers and acquisitions totaled $50.5 billion, with 909 operations. In 2021, they were $90.2 billion, with 922 deals. In its survey, Dealogic considers the deals with disclosed values.

This difference in values can be explained, according to sources consulted, by the drop in “valuations” of businesses this year, with the greater instability in the markets and devaluation of assets, and the effect of the strong comparison base of 2021. In that year, transactions in several sectors were closed at high ticket prices before the election period.

This week, important transactions were announced — the national giant Eurofarma disbursed R$725 million to buy assets in the pharmaceutical sector (such as the Valda brand), and the American company Aligned acquired Odata, a data center company from Pátria fund, valued by the market at R$10 billion.

The entry of capital with new issuances on the stock exchange historically helps to accelerate negotiations.

“No one sees an ‘initial romance’ phase, with the acceleration of transaction announcements as early as the first months of 2023. But we see liquidity in the world and a demand from investors for projects in the country, such as in the financial services area, which is already increasing. This can gain pace if stock offerings grow,” said Alexandre Pierantoni, head of corporate finance at Kroll.

“These positive aspects help, at least, to maintain in 2023 the volume of mergers and acquisitions of 2022, especially with more operations in the second half of the year, when there will be greater visibility of the actions in the new government,” said Mr. Pierantoni.

A relevant part of the funds from initial public offerings (IPO) in the country in recent years was destined for growth through acquisitions.

Investment banks have a greater flow of mergers and acquisitions that may be concluded throughout 2023. Infrastructure and energy, retail, and healthcare are likely to remain on the radar of companies, bank executives said.

“We will continue to see sector consolidation happening in 2023 and most of the transactions will happen by exchange of shares [rather than cash payment] until the capital markets can become functional again. When it does, we will see a more balanced mix between cash and shares,” says Alessandro Zema, Brazil’s country head of Morgan Stanley and co-head of investment banking in Latin America.

The banks see a scenario of sector consolidation in which companies with stronger balance sheets seek more scale, private equity funds (which buy stakes in companies) capitalized to take the opportunity to invest more, and even global multinationals are once again looking at Brazil with greater interest, according to Mr. Zema.

According to sources heard by Valor, the Canadian Brookfield, one of the most active investment firms in mergers and acquisitions this year, is evaluating selling assets in solar energy, through the company Elera. The business is estimated between R$9 billion and R$10 billion, including debts, and there are already investors interested.

At the end of July, the Canadian investment firm, through Quantum, sold five transmission concessions to the group Energía Bogotá (GEB), for about R$4.3 billion. In renewable energy, it bought the Seridó wind project, in Rio Grande do Norte, and plans to make investments of R$1.8 billion. The Canadian company, which operates in several sectors, also bought year assets of the car rental company Localiza for R$3.5 billion and disbursed R$5.9 billion in 12 corporate buildings of BR Properties.

Luiz Felipe Thut — Foto: Silvia Zamboni/Valor

Luiz Felipe Thut — Foto: Silvia Zamboni/Valor

Felipe Thut, managing director of Bradesco BBI, recalls that 2022 was atypical because of the war between Russia and Ukraine, the lockdowns in China, and the capital markets having a low performance worldwide, not only in Brazil. “Many companies that thought about doing IPOs but couldn’t do it, resorted to M&A. Here at BBI this year was a record in revenues,” added Mr. Thut.

“We had a relatively good year in M&As and we project that the market will remain heated next year,” says Gustavo Miranda, head of the investment banking area at Santander. For Roderick Greenlees, global head of investment banking at Itaú BBA, there is more interest from foreign groups in Brazilian assets.

In the oil and gas market, for example, expectations for Petrobras are high. The state-owned company, which in recent years has gone through a movement of heavy divestments — this year, for example, it sold Gaspetro to the Cosan group — may buy assets in the area of renewables in the coming months, said a person familiar with the topic.

In 2022, estimates are 60% of transactions of groups with domestic capital and 40% with foreign capital, the same average in recent years. This year, in addition to energy and gas, financial services and technology have also grown — Safra closed weeks ago the purchase of the Alfa bank, and B3 this month acquired Neurotech Tecnologia da Informação.

In Mr. Pierantoni’s view, this profile of strategic acquisitions marked 2022 — about 70% may have this focus, and 30% for financial reasons — but in 2023 deals are expected to remain more selective.

“It is clear that the ‘deals’ end up occurring today considering a more careful analysis of variables due to the increase in the cost of capital, after the key interest rate Selic high, and the risks involved. But in the current scenario, there is still a bias towards M&As in 2023,” said the Kroll executive.

From January to September, private equity groups led investments of R$35.8 billion, compared to R$4.5 billion in the same period in 2021 and R$6.2 billion in 2020, according to research by the Brazilian Private Equity and Venture Capital Association (Abvcap), which represents the sector, and KPMG.

Private equity and venture capital combined invested R$57.8 billion until September — a record sum for the survey, which exists since 2011. For Abvcap, with the loss of vigor in stock offerings in 2022, and with the higher cost of capital, funds were gaining ground and emerged as an option to lead part of those investments in companies in the year.

For 2023, despite the expectation that equity offerings gain ground — which helps “turbocharge” the M&As — Piero Minardi, president of Abvcap, also sees an increase in selectivity by the market.

This reflects the negative signals that the elected government has been sending to the market. If IPOs slow down in this environment, private funds may remain more active in certain specific segments, highlights Mr. Minardi.

“IPOs will come back but it won’t be such a strong wave because we have high-interest rates, and everything indicates that they will remain high longer. And even with active private equity, we will still see these intense price negotiations [of funds] with buyers, each seeking better conditions,” he said.

About the political risk, Mr. Minardi says that despite the increased level of uncertainty in the country due to Mr. Lula’s comments on rapidly accelerating public spending has been causing unbalance in the accounts, “there are many people still waiting, and taking the risk.” And this can affect the acquisition market if the government maintains this line.

For 2023, more optimistic estimates project paper offers of up to R$100 billion, as Valor reported last week — with an average of R$60 billion to R$70 billion. This year, issuances reached R$55 billion until November, but in 2021 they reached R$130 billion.

“If it reaches R$100 billion, we believe it could have a 15% to 20% rise in the number of M&A transactions because IPOs help to move this market as a whole,” said the Kroll executive.

Brookfield was not available for comment on ongoing negotiations. Petrobras informed that its plans in renewables are restricted to what the oil company has already disclosed in relevant facts.

*By Adriana Mattos, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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COP 15: ‘Historic’ global deal to protect nature agreed at UN biodiversity summit

Mon, 19 December 2022

COP 15: ‘Historic’ global deal to protect nature agreed at UN biodiversity summit

In this article:Countries have pledged to protect 30% of the world’s lands, seas, coasts and inland waters by 2030 as part of a new deal that aims to halt declines in nature.

Measures agreed at the UN Cop15 conference in Montreal also include a pledge to increase the flow of finance to developing nations to care for nature to 20 billion US dollars (£16.5 billion) by 2025 and at least 30 billion dollars (£24.7 billion) by 2030.

There are 2030 targets to halve global food waste, excess nutrients and risks posed by pesticides, reduce to “near zero” the loss of areas of wildlife-rich habitat, and reduce by 500 billion dollars (£411.7 billion) a year government subsidies that harm nature.

Countries also pledged efforts to complete or get under way with the restoration of 30% of degraded land, inland waters, coastal and marine ecosystems by the end of the decade.

They are among a series of 23 targets in the Kunming-Montreal Global Biodiversity Framework that have been negotiated in the Canadian city over the past two weeks, as well as four long-term goals to protect the natural world by 2050.

While the collapse of nature may be the less-well known sister problem to the climate crisis, scientists have warned that up to a million species are at risk of extinction, many within decades.

The natural world is deteriorating faster than ever as a direct result of human activity, including the clearing of forests and other habitats for crops and livestock, pollution, direct exploitation of wildlife, invasive species and increasingly climate change.

Plastic pollution has increased 10-fold in the seas since 1980, fertiliser run-off has caused a “dead zone” in the oceans, land is becoming less productive, and the loss of pollinators puts crops at risk.

That in turn is eroding “the very foundations” of economies, livelihoods, food, health and quality of life worldwide – all of which relies on healthy natural systems, experts warn.

The deal struck at Cop15 to tackle the problems nature faces has been described as a “landmark” agreement which includes the largest land and ocean conservation commitment in history.

A landmark global biodiversity agreement that provides some hope that the crisis facing nature is starting to get the attention it deserves

Brian O’Donnell, Campaign for Nature

Brian O’Donnell, director of the Campaign for Nature, said the deal is “a landmark global biodiversity agreement that provides some hope that the crisis facing nature is starting to get the attention it deserves”.

“At the heart of the agreement is a target to protect and conserve at least 30% of the world’s lands and oceans by 2030,” he said.

The “30×30” target marks the largest land and ocean conservation commitment in history.

“It will have major positive impacts for wildlife, for addressing climate change, and for securing the services that nature provides to people, including clean water and pollination for crops.

“Ocean conservation, which has historically lagged behind land conservation, will now be an equal priority,” Mr O’Donnell added.

Under the targets, 30% of the world’s lands, inland waters, coastal areas and oceans would be effectively conserved and managed, with an emphasis on areas that are particularly important for nature, and recognising the rights and respecting the rights of indigenous peoples and local communities.

Currently, 17% of the world’s land area and 10% of its seas are under protection.

The Wildlife Conservation Society said the 30×30 target is historic, but other areas are weak – including the goals to achieve the agenda to restore nature by 2050, which is too late – and governments need to treat it as a floor, not a ceiling for global action on the biodiversity crisis.

Susan Lieberman, vice president of international policy for the WCS, said the agreement is a compromise, and “although it has several good and hard-fought elements, it could have gone further to truly transform our relationship with nature and stop our destruction of ecosystems, habitats, and species”.

The deal had originally been scheduled to be negotiated in Kunming, China, in 2020, but talks were delayed by the pandemic, with a first stage of meetings taking place largely online last year, and the final part of the Chinese-chaired Cop15 conference was hosted in Montreal.

*By Emily Beament

https://uk.news.yahoo.com/
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