Besides diverting funds that could contribute to the companies’ growth, the amount allocated to interest payments highlights the scale of the challenge the private sector faces with higher financial costs, said Guilherme Almeida, managing director at the consulting firm.

With the recent rate increases, about half of the listed companies are expected to generate insufficient cash flow to cover interest payments, the study found. Furthermore, the consultancy calculated that 62% of companies will likely face difficulties refinancing their debts under the same capital structure, considering the increase in the Selic policy rate—which could worsen further.

“We are perhaps facing one of the worst moments of the past four years. There are signs the situation is deteriorating,” Mr. Almeida said. “Companies endured a pandemic, then a first wave of interest rate hikes. Even after taking various corrective actions, companies remain on average weakened. With this new round of rate increases, there’s a pressing need to extend debt maturities, generate cash, and meet obligations.”

To assess companies’ ability to pay interest, A&M analyzed the latest available data from 237 publicly traded companies listed on B3, comparing free cash flow—EBITDA minus capital expenditures—with interest expenses over the past 12 months.

Debt refinancing challenges

The findings showed that 40% of the companies already had interest expenses greater than their cash generation. Now, considering the current Selic rate level, that proportion could reach 50% of companies, MR. Almeida said. In March of this year, Brazil’s benchmark interest rate rose by another 100 basis points to 14.25%, an increase of 350 bp compared to the 2024 average rate of 10.7%. Although the Central Bank has indicated that future hikes may be smaller, the tightening cycle is not yet over.

“The most concerning part is that this calculation pertains to listed companies, which are theoretically the healthiest in Brazil. If we look at smaller firms, the situation either replicates or worsens.”

The study also analyzed another indicator—the companies’ interest coverage ratio, essentially the ratio between cash generation and interest expenses. It found that six out of ten companies had a ratio below 1.5 times, a level generally seen as the minimum comfortable threshold in the market. “A ratio below 1.5 typically signals that the debt is unhealthy and that the company could struggle to refinance under the same capital structure,” Mr. Almeida said.

Industrials, materials, technology, and telecommunications showed the worst results. The consumer sector also had a low index, but it is now recovering after the crisis of recent years, he noted.

While the study did not name specific companies, an analysis of publicly available financial statements shows that groups across different sectors are struggling to reduce leverage.

One publicly listed company facing financial distress is Braskem, which is dealing with several issues, including the geological disaster in Alagoas and the downturn in the petrochemical market. The company ended 2024 with a financial leverage ratio of 7.42 times net debt to recurring EBITDA, excluding extraordinary expenses like compensation related to the Alagoas incident. Including payments linked to the disaster, the group’s cash generation was negative by R$542 million last year.

Asset sale strategies

Cosan is another company showing a high level of financial commitments relative to its free cash flow. The energy and infrastructure group is working to reduce its leverage, which has included selling its stake in Vale and could involve further divestments—the company has already said it may dilute its stake in Raízen and sell other assets, such as the São Luís Port in Maranhão.

Asset sales have become a common strategy for several groups. CSN (Companhia Siderúrgica Nacional), which aims to reduce its leverage from 3.49 times at the end of 2024 to below 3 times by the end of 2025, is one of them.

Late last year, CSN approved the sale of an 11% stake in CSN Mineração to Japan’s Itochu, and other similar moves are under study. These include seeking a partner for an infrastructure platform that would combine its railroad and port assets, as well as selling part of its energy division. According to sources close to the conglomerate, its cement division has also attracted interest, but that deal is not currently being pursued. Despite the deleveraging plan, the person said the group has enough cash to meet all its short- and medium-term financial obligations.

GPA (Grupo Pão de Açúcar) has also adopted asset sales to reduce its debt. Over the past two years, the retailer raised R$1.9 billion through asset sales. Other measures were also taken, including a secondary stock offering, staff cuts, and cost reviews.

A person close to the company said there is still room to sell land and stakes in non-core businesses, which could further boost cash flow. In addition, the retailer is considering another reduction in headcount and expects an improvement in business cash generation, relying on the resilience of its high-end customer base. “The scenario of the past 12 months does not reflect projections for the next 12,” the source said.

Leverage reduction plans

Another company working to improve its indicators is Klabin, which has just concluded its largest investment cycle and is now focusing on reducing its leverage, which ended 2024 at 3.9 times. The pulp producer made it clear there will be no discussions about new investments in the short term, with the focus firmly on deleveraging.

However, Gabriela Woge, corporate finance director at Klabin, said there is no risk of debt default. “We have more than enough cash to meet our commitments, along with a stretched debt profile,” she said. Between cash reserves and revolving credit lines, the company has R$10 billion available to meet payments.

She also said that the last two funding rounds completed by the company, in April, came at a lower cost than the current average debt rate. In addition, Klabin signed an agreement in 2024 to sell surplus land, which has already brought in R$800 million, with further payments expected to strengthen the company’s cash position this year.

Braskem, Cosan, CSN, and GPA declined to comment.

Despite sector-by-sector differences, analysts agree that the overall situation is very challenging. For Bernardo Parnes, founding partner of Investment One Partners, the outlook is even more complex because 2026 is an election year, which tends to bring additional instability to the capital markets. Given this perspective, he believes that even with high rates, some companies should seek to secure financing in advance.

“This is the time to tighten the screws, optimize operations, identify where profitability is leaking, and streamline processes to try to weather the period without major shocks. The scenario also forces companies to maintain larger cash reserves, which is even more costly,” Mr. Parnes said.

Mr. Almeida of A&M also noted that companies will need to focus even more on costs and internal processes to manage higher interest rates. “In this scenario, companies generally have a few options: they can begin financing themselves with more expensive debt, which is not ideal, or they can look inward. Our main hypothesis is that companies will need to reassess profitability and cut costs to navigate this period.”

Restructuring activity

Advisors specializing in restructurings and bankruptcy proceedings are already seeing increased activity. “The number of companies reaching out to us has grown significantly. The situation is even tougher for medium- and small-sized companies,” said Thomas Felsberg of Felsberg Advogados.

According to him, the complex external environment offers one advantage: creditors have a better understanding that the crisis is not solely the result of poor management. “On the other hand, the higher cost of financing complicates solutions, because restructuring usually requires some new capital injection and the presentation of guarantees,” he said.

The situation is even harder because many companies are still recovering from a series of crises over recent years, said Gustavo Salgueiro, partner at Galdino, Pimenta, Takemi, Ayoub, Salgueiro, Rezende de Almeida Advogados. “Some companies are still suffering financially from the pandemic. At that time, many banks eased terms and extended debt maturities, often requiring additional guarantees. In some cases, interest was accrued, the debt grew, operations did not rebound as expected, and companies lost access to receivables pledged as collateral. Now, with higher rates, servicing the debt has become unsustainable,” said Mr. Salgueiro, who also reported an increase in companies seeking assistance.

*By Taís Hirata  — São Paulo

Source: Valor International

https://valorinternational.globo.com/