The decline in the Selic rate and the resurgence of the capital markets are reducing borrowing costs, but concerns about fiscal policies and corporate default rates are warning signs
Isabela Tavares — Foto: Silvia Zamboni/Valor
Over the past three months, the financial health of companies has improved, following a challenging start to the year. This upward trend is expected to continue with the upcoming meeting of Central Bank’s Monetary Policy Committee (Copom) next week. The monetary authority is anticipated to implement another 50 basis points reduction in the Selic rate (Brazil’s Central Bank benchmark interest rate) and hint at further decreases in the future.
However, challenges persist. Corporate default rates remain high, and there’s skepticism concerning the government’s fiscal plan. These concerns suggest a potential slowdown in the decline of debt costs, which might only pick up pace towards the year’s end.
A study from the Center of Capital Market Studies (Cemec-Fipe) indicates that the debt costs for publicly traded companies peaked in the first two months of the year, possibly influenced by the “Americanas event” (the company filed for bankruptcy protection in January 2023 after uncovering a $4 billion accounting scandal). The cost remained high until May but began to decline in June. For large private companies, the debt cost closed the semester at 15.6% annually after a peak of over 16%. It reached 17.41% for mid-large companies, and for mid-small companies, it reached 19.54%. Among publicly traded companies, the debt cost stood at 14.74% for large companies, 16.12% for mid-large companies, and 17.93% for mid-small companies.
When the Selic rate dropped to a historic low of 2% between the end of 2020 and early 2021, the cost for large private companies dipped to nearly 8%. Current market expectations are for the Selic to reach 9%. However, since company borrowing costs typically surpass the Selic rate, the decline won’t revert to pre-pandemic levels. Cemec calculates companies’ debt costs based on the weighted average of the interest rates of the various sources of funds, in which the weights correspond to the percentage share of each source in these companies’ financial liabilities.
Regarding capital increase, the recent recovery predominantly comes from local capital markets, which accounted for R$89.314 billion in the quarter ending June. Targeted credit (excluding BNDES, Brazil’s development bank) took second place, with R$7.849 billion. Free-resource credit was third, with R$4.569 billion. Meanwhile, overseas funding was negative, with more debts maturing than being issued, resulting in a deficit of R$1.372 billion.
Carlos Antonio Rocca, the coordinator of Cemec-Fipe, notes, “The recovery of private credit, led by capital markets, stands out. There’s an expectation that the Selic’s decline will reduce borrowing costs. Nevertheless, corporate defaults remain high. There has recently been a worsening of confidence in the 2024 fiscal targets—clear in the long NTN-Bs [government bonds] and reflected in the future yield curve.”
Economist Isabela Tavares, from Tendências, believes that while companies’ financial conditions will improve in the latter half of the year, things are not in a euphoric state. “The main challenge is credit risk. We’ve noted a rise in company defaults, unlike individual consumers, where outlooks are brighter. Fiscal risk concerns, which had subsided for a while, have resurfaced and present major challenges for the upcoming year.”
Pablo Césario, president of the Brazilian Association of Publicly-Traded Companies (Abrasca), shares a similar but slightly more pessimistic view. He mentions that although reduced interest rates offer some relief, the actual economy has a long way to go before feeling the full impact. “The numbers of judicial recoveries and bankruptcies remain high, as do default rates,” he explained.
Data from Serasa Experian shows 79 bankruptcy filings in June, a 34.7% drop from May but a 16.2% annual increase. In the year’s first half, bankruptcies hit 546, a 36.2% rise compared to the first half of 2022. Filings for judicial recovery surged by 52.1%, with 593 cases. Central Bank data shows corporate default rates rose to 2.7% in July, the highest since May 2018.
In Cláudio de Moraes’ opinion, from Coppead Institute of Administration (Federal University of Rio de Janeiro), company defaults, while not skyrocketing, are not going to be resolved so quickly either, and the judicial reorganization instrument has not proved to be efficient. He expresses doubt about the efficiency of judicial recovery as a remedy. He highlights growing skepticism regarding the government’s fiscal goals. “When analysts started looking more deeply into the viability of the fiscal plan, uncertainty increased quite a bit. Everything depends on a strong increase in revenue, and there is no political space for cutting spending. Consequently, all this adds to the uncertainty.”
The positive surprise of the second quarter’s GDP may bring some optimism. Still, analysts point out that activity will likely slow down in the coming quarters. On the other hand, the external scenario is also uncertain, with speculation about the next steps in U.S. monetary policy, the possibility of a recession in Europe, and continuing geopolitical tensions in various parts of the world.
Despite the risks, the cost of financing companies should fall in line with the Selic rate. According to the Focus survey, the expectation is that the rate will fall from 13.25% to 9% by the end of next year. “In line with macroeconomic projections and especially with the expectation of a decline in the inflation rate and the Selic rate and near stability in the exchange rate, interest rates for all financing alternatives in the domestic market show, with some fluctuation, a downward trend over the period in question [until June 2024],” Cemec points out. For large private companies, the projection is that debt costs will fall from the current level of 15.6% to 12.74% at the end of the first half of next year.Guilherme Veiga Campos, a partner at Jive Investments, points out that many companies are emerging from recent challenges with inadequate capital structures due to high leverage or short-term obligations. His firm, specializing in “stressed” assets, sees opportunities in providing both debt and equity to unlock value more quickly. “It’s not a turnaround because these are companies with healthy operations. We try to equalize the optimal structure in terms of the debt level while also analyzing opportunities to access the capital markets to have this capital adequacy.”
He says this movement is even more evident in “small caps” (companies with lower market value and liquidity), which are more susceptible to the macro scenario, as they tend to be penalized more by high-interest rates and the need for credit. In this sense, the reduction in interest rates benefits companies not only because less cash is used to pay off debt. There is also a reduction in the opportunity cost, which makes it possible to improve the value attributed to equity.
Mr. Césario draws attention to another risk: the possible end of interest on equity capital, which could lead to a shock in the capital structure of companies. “Interest on equity capital corrects a distortion that exists, which makes it more expensive to raise money from partners than from third parties. If it ends, it could be a significant shock to the market, as it interferes with the cost and availability of capital. The likelihood is that there will be a greater demand for third-party capital, whether from banks or the capital markets.”
*Por Álvaro Campos — São Paulo
Source: Valor International