Findings affect indicators like leverage ratio, net equity

01/12/2023

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CEO Sergio Rial and CFO André Covre resigned after inconsistencies were found in one of Brazil’s largest retail chains — Foto: Brenno Carvalho/Agência O Globo

Retail giant Americanas revealed on Wednesday that it found “inconsistencies” in the funding of its suppliers in previous years, including 2022, the company said in a material fact released Wednesday night. In a preliminary analysis, the company estimates that these values reached R$20 billion on September 30 – the amount does not impact cash reserves, but affects key indicators like leverage and net equity.

In light of the discovery, CEO Sergio Rial and CFO André Covre, both in office for 10 days, resigned with immediate effect. Mr. Rial will be an external advisor to the shareholder 3G throughout the process of investigating and putting the house in order.

The arrival of the duo had boosted Americanas shares by 32% in the beginning of January alone as investors bet they would turn around the company. A number of large investors, such as U.S.-based Blackrock, have recently built positions in the stocks betting on this thesis.

It helps explain why the loss reported in the material fact fell like a bomb among asset managers and investors, surprised with the huge amount and the even more negative signaling of the resignation of the new administration.

Americanas says that “the accounting team identified the existence of financing operations for purchases, in which the company is a debtor with financial institutions and that are not adequately reflected” in the financial statement.

In other words, they are accounts for purchases from product suppliers that have already become debt with banks — but were left in a limbo on the financial statement.

Sources believe, based on the statement, that those are operations of factoring of receivables with banks, classified as “forfait,” very common in retail, and that may not have been registered as debt, as defined by the accounting rules.

The operation works in the following way: the company has a trade bill to pay, for example, and makes an agreement with a bank so that it pays the producer, then the retailer pays the bank back later with interests.

This way, the bank finances the company, and the chain pays the supplier in cash (receiving some discount for this).

“The point is that everything indicates that this amount was underestimated for years, or that it was not properly accounted for. And there is still the question of the exact size of this issue, because the notice of material fact says that, among the inconsistencies, there is this operation with financial institutions,” says one asset manager.

There is no impact on cash reserves because this debt would migrate from the line of suppliers to the line of loans and financing — but with an effect on the debt indicators — and consequently in the debt parameters agreed in the debt contracts — the so-called covenants.

If the covenants are broken, the creditor can ask for the acceleration of debts. Therefore, there are other related impacts.

“The text is not entirely clear, but it indicates that the amounts were classified as suppliers and not as Interest-bearing liabilities,” says a former chief financial officer of a retailer.

Another fund manager that follows the stock and competitors adds that there are some “accounting options” in retail balance sheets, which can justify the inconsistencies without necessarily being fraud.

But he also reinforces that the financial volume and the scare of the new administration, “which clearly does not want to take statutory responsibility for what may come next,” put strong pressure on the company.

On January 3, Mr. Rial appeared in a live-streamed video with 40,000 employees, stressing the encouraging expectations of a new job at the group. “He had no idea about this shakeup,” a source familiar with the matter said. “It reportedly emerged from a complaint with the audit committee,” the source said. The company declined to comment on this information.

In the notice of material fact, the company said it is not yet possible to determine all the impacts of such inconsistencies on the company’s income statement and financial statement. It also emphasizes that the number is preliminary — that is, it may possibly increase.

The estimate is still subject to confirmations and adjustments resulting from the conclusion of verification work and work by independent auditors.

The board of directors appointed João Guerra on an interim basis as CEO and chief investor relations officer. He is an executive from the technology and human resources areas “not previously involved in accounting or financial management.”

The board also decided to create an independent committee to investigate the circumstances that caused the inconsistencies, with the necessary powers to investigate divergences in the amounts.

Americanas’s primary shareholders, formed by 3G Capital partners (who, until last year, were the controlling shareholders), told board that they intend to “continue supporting the company.”

This means that the primary shareholders can use their own funds once again in case the company needs a capital injection, given the situation of equity, which is going into negative territory, and leverage.

The need for a capital injection is being considered by two major equity fund managers.

But it also points to the monitoring in the auditing process by the trio of executives, who have high credibility in the market.

The company called a group of institutional investors and analysts for a conference call on Thursday morning, at 9am, held by BTG Pactual. Sources say the meeting will have Mr. Rial’s participation and will be restricted to the guests, without participation of reporters.

Asset managers question the external audit and the internal audit committee. “In the United States, this would be a case for class action. In Brazil, they will face questioning from CVM,” a source said.

*By Adriana Mattos, Maria Luíza Filgueiras, Manuela Tecchio — São Paulo

Source: Valor International

https://valorinternational.globo.com/