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

04/30/2024

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Renato Franklin — Foto: Rogerio Vieira/Valor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/