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More companies will ask for protection from creditors this year, lawyers say

Experts predict wave of restructuring due to high interest rates

01/11/2023

The number of court-supervised restructuring requests nationwide in 2022 is the lowest in the last eight years — a total of 833 companies, according to credit bureau Serasa Experian. But this calm scenario is not likely to remain in place in 2023.

Lawyers say that many companies leveraged themselves with the supply of credit during the pandemic when interest rates were low and now — with the Selic, Brazil’s key interest rate, at 13.75% per year — are unable to honor the payments.

This situation can be seen in Serasa Experian’s delinquency indicator. It shows that in November the country had more than 6.3 million companies in the red, the highest level since records began, in 2016.

There are 45 million delinquent debts — or R$108 billion. Also, according to Serasa’s survey, most defaulted companies operate in the service sector (53.5%). In second place are those in commerce (37.5%) and in third are industrial companies (7.7%).

Some of these companies have already reached firms specializing in insolvency. Lawyers say demand grew after November and December.

“There was a boom, a scary one,” said André Moraes, of Moraes & Savaget Advogados. “One hundred percent of the clients who came to us at the end of the year complained about the same thing. They took out loans with interest rates at 3% that more than tripled, they can no longer pay.”

Three of Mr. Moraes’ clients filed for court-supervised restructuring in December. And two others have their documentation prepared to file for court-supervised restructuring requests in the first months of 2023.

“During the pandemic, we worked more for sectors affected by social distancing measures. Hotels, tourism agencies, and transportation companies. Now all sectors need help,” added the lawyer.

Juliana Bumachar — Foto: Leo Pinheiro/Valor

Juliana Bumachar — Foto: Leo Pinheiro/Valor

Juliana Bumachar, from Bumachar Advogados Associados, confirms the high demand at the end of the year and projects an increase in requests for 2023. “Companies had been renegotiating, but it got to a point where they can no longer afford,” she said, adding that had filed for court-supervised restructuring for one of her clients, in São Paulo, on the last day of the judicial recess.

Also in December, according to her, there were two other new cases at the office, one of them with liabilities of R$1.2 billion.

In the first half of the year, the scenario is not expected to change as there is no estimate of an interest rate reduction. The banks project that the Selic will remain stable at 13.75% per year until May. In June, when the monetary easing cycle would start, it would drop 0.5%.

“In the current economic scenario, with interest rates at this level, a wave of restructuring is likely. But what will dictate whether or not these processes will be done by judicial means will be the posture adopted by creditors, especially banks,” said Renato Franco, founding partner of Integra Associados, a consulting firm specializing in company restructuring.

To Mr. Franco, there was a change in the behavior of creditors, especially banks, during the pandemic. They began to show much more willingness to negotiate, even granting terms and discounts that were previously only possible through court-supervised restructuring.

With this attitude, and the offer of credit, companies were able to solve their financial problems with out-of-court agreements and the number of requests fell. In 2020, 1,179 were registered, and 891 in 2021, according to Serasa data.

In the pre-pandemic period, the rates were higher. The worst years in the historical series are 2016 and 2017. In 2016, when President Dilma Rousseff was impeached, 1,863 court-supervised restructuring requests were filed. This is more than double today’s numbers.

In the lawyers’ view, 2022 was an “aftermath” of what was seen in 2020 and 2021. The problem now, they say, is that companies may not have the means to renegotiate. “There are no more guarantees to offer to the banks,” said Mr. Moraes.

According to Vicente de Chiara, legal director of the Brazilian Federation of Banks (Febraban), the current situation is far from the scenario that existed in 2016 and 2017, and he stresses that financial institutions will continue to prioritize out-of-court negotiations. To him, all the major banks have restructured their credit and collection departments and now have teams focused on collaborating with the companies to solve the problem.

“In this pandemic and post-pandemic period, we realized that everyone should anticipate the move. Instead of letting the company file for protection from creditors and then sit down to negotiate, it brings forward the negotiation. That is better for everyone,” said Mr. de Chiara.

Some lawyers say that besides the pandemic factor, out-of-court solutions were also boosted by the new recovery and bankruptcy law, which came into effect in January 2021.

Now, companies can, for example, use the so-called stay period outside the court-supervised restructuring, that is, while they are trying to negotiate with creditors. This mechanism suspends collection actions against the debtor.

The deadlines, however, are different. In judicial recoveries, collection actions are suspended for 180 days. For negotiations, the new law provides for up to 60 days.

The new law also strengthened out-of-court restructuring. In both judicial and out-of-court restructuring, the debtor gathers its creditors to negotiate. A payment plan is drawn up, usually with a grace period, discounts, and installment plans. If the majority of the creditors approve these conditions, all the others are bound and will receive what is due to them in the same way.

The number of creditors involved, however, changes from one method to the other. In the court-supervised restructuring, all debts incurred up to the date of the beginning of the process are submitted (there is an exception for tax debts and amounts with fiduciary guarantees).

In the out-of-court restructuring, the debtor chooses the creditors with whom it wishes to negotiate — which allows it, for example, to spare suppliers, avoiding getting into trouble with those who are essential to the business. This negotiation occurs without interference from the Judiciary. Only after approval by the group of creditors is the payment plan submitted to a judge for ratification.

Before the new law, the agreement of 50% of the creditors with whom the debtor chose to negotiate was required. Now, if the debtor has one-third approval of the payment plan, the debtor notifies the judge and gets 90 days to try to convince the others — and reach the 50%.

During this period, collection actions are suspended. If even after this period the debtor cannot obtain approval, he can still file for court-supervised restructuring.

*By Joice Bacelo — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Central Bank mulls keeping high interest rates for longer

Policymakers seem to hope that situation will improve to the point of making additional hike unnecessary

06/21/2022

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

Central Bank’s Monetary Policy Committee (Copom) is now considering the possibility of maintaining interest rates at a high level for longer to meet the inflation target. This would complement or replace the previous strategy of raising the Selic, Brazil’s benchmark interest rate, to even higher levels in the final leg of the monetary tightening cycle.

In the minutes of last week’s meeting unveiled Tuesday, the policymakers say they analyzed this possibility. They have also discussed which message to send about monetary policy for the next meeting, to be held in August.

As the inflation environment has deteriorated, the Copom decided that it was about time to raise the interest rate even more last week, to 13.25% a year from 12.75% a year. The policymakers have also signaled that they will keep interest rates at a high level for longer than the markets have been expecting in order to complement the necessary tightening dose. “The strategy of convergence around the target requires a more contractionary interest rate than that used in the reference scenario for the entire relevant horizon,” the minutes say.

In last week’s meeting, the reference scenario provided for an interest rate of 13.25% at the end of 2022, 10% at the end of 2023 and 8.5% at the end of 2024. This way, considering what the minutes say, the Copom seemingly believes that the interest rates must be above each of these percentages at the end of each year.

The minutes could not make it clear how a higher interest rate at the end of 2023 or 2024 will help to meet the inflation target on the relevant horizon, which is 18 months ahead. The interest rates in 2023 will impact inflation more in 2024 than in the current monetary policy horizon.

The alternatives between raising the interest rate to a higher level now or keeping the rate higher for longer were also analyzed when the Copom discussed future monetary policy signals for the next meeting, in August.

Here again, the Copom concluded that keeping interest rates high for longer will not be enough to meet the inflation target. As a result, the chosen strategy was to signal a 50-basis-points hike or a 25-basis-points hike, depending on the inflation rates until there.

In a very important point to consider regarding future signals of monetary policy, the Copom said the perspective of maintaining the Selic rate for a sufficiently long period would not assure, “at this moment,” the convergence of inflation around the target in the relevant horizon.

It has been a while since the Copom used this phrase when talking about future steps – the intention, historically, has been to highlight that any signal is reliant on the evolution of the economic scenario. If the committee considered it better to include the expression “at this moment” now, it probably sees chances of positive evolution of this scenario by August, in a way that allows meeting the target by only keeping the interest rates at the current level, of 13.25% a year.

On the other hand, the Central Bank made a point of reinforcing, as it had already done in May, that the outlook is very uncertain, so it requires caution. When they presented their inflation projections, the policymakers said that uncertainty “has increased since the previous meeting.” Caution, in this case, is related to the risk of setting a higher-than-necessary dose of interest rate.

The debate about the Copom’s decision started with the directors saying they have already done a lot. “It was emphasized that the current monetary tightening cycle was quite intense and timely and that, due to monetary policy lags, much of the expected contractionary effect and its impact on current inflation are still to be seen.”

All things considered, the Copom is moving to stop raising interest rates and to keep them high for a sufficiently long period. It signaled a new hike for August, but it seems to hope that the situation will improve to the point of making an additional hike unnecessary.

Will the Central Bank be able to stop raising the interest rates? The Copom has been signaling the end of the cycle since March, but it was not possible. This time, the policymakers decided to keep raising the rates because the “Copom observed deterioration in both the short-term inflationary dynamics and the longer-term projections.” The reaction function still seems to be in place: if more negative surprises come, the Central Bank will keep raising the interest rates.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Exporters keep $70bn abroad despite high interest rates

Importer-Exporter – PFos

Exporters are choosing to keep hard currency abroad despite higher interest rates in Brazil. The internalization of funds has not materialized more than a year since the beginning of the tightening cycle. A survey by Valor Data based on data by the Foreign Trade Secretariat (Secex) and the Central Bank shows that the 12-month spread between physical exports and the contracted exchange rate is still at all-time high levels.

The data show that the so-called alligator mouth of the foreign exchange rate reached $70 billion by March 18, up 26% compared with the end of 2021. In September, the gap between shipped exports and the contracted commercial exchange rate was at $46.6 billion. In December, the spread totaled $55.6 billion, and in February it stood at $68.2 billion.

“Not necessarily all the funds used by Brazilian exporters are going to come. In the long run, there has to be a gap, since some money is poured into several services of large exporters abroad. So, this spread means less funds brought here,” said Marcello Curvello, the currency manager at ASA Hedge. “But today we see a contracted exchange rate much lower than the shipped one, which is not natural either. The normal thing would be it to run just a little below.”

He prefers to analyze the spread according to the balance of payments of the Central Bank, but says that, under any analysis, the gap remains very high. There are fewer reasons for such spread at the moment since a deleveraging push of large exporters has reached the targets and Brazil’s benchmark interest rate is at the highest level since April 2017, at 11.75% per year, he said.

In October, the Central Bank’s monetary policy director Bruno Serra Fernandes said in a public event that the monetary authority saw a “low commercial foreign exchange contracting in the recent period” that led to an “unusual” and “very relevant” gap in relation to the trade balance. According to him, this was due to the process of paying debts abroad and there was no relevant cash surplus of companies abroad that impacted the dynamics of the exchange rate.

Carlos Calabresi, the chief investment officer of Garde Asset Management, says that the gap, which began to widen in 2019, a move intensified in 2020 and 2021, was initially explained by the companies’ strategy of having cash available abroad in order to streamline flows to honor their debts. “But the exchange rate behaved so badly in the period, the volatility became so great, that companies began to diversify with investments abroad,” he said.

Nuno Martins, the head of structuring and sales at Bank of America (BofA), believes that companies with the largest export volumes maintain dollarized balance sheets and are mostly financed in hard currency, which implies fewer incentives to maintain large reserves in reais. He wonders whether the spread may have increased in recent months because the volume exported has grown with higher commodity prices, but the companies’ obligations in Brazilian currency have not grown in the same pace.

“I don’t think it is an issue related to a structural risk of Brazil, but the fact that companies are set up in such a way that cash management is less related to macro aspects and much more linked to risk management and balance sheet balance,” Mr. Martins said. “A company whose functional currency is the dollar manages its business in this currency. Therefore, it doesn’t make sense to amass reserves in a currency other than the dollar just to take advantage of higher interest rates.”

Mr. Calabresi, with Garde, expects a reversal of the phenomenon and notes that data has already improved given the higher interest rate regime. The monthly spread between physical exports and the contracted exchange rate fell to $3.8 billion in February from $5.5 billion in December, and the gap was at $4.7 billion in March until the 18th.

“The interest rate here is too high, the spread with the foreign exchange has gone up too much and the volatility has gone down a lot. We reached 18% of implied volatility from 16%, and inched closer to peers like the South African rand and the Mexican peso, with a volatility of 12% to 14%. You now have a worthwhile regime, while the cost of having dollars abroad increases,” he said.

The high interest spread has attracted foreign investors and is behind the appreciation of the real in recent weeks.

Mr. Calabresi also says that the internalization of funds is likely to contribute to an even greater drop in the foreign exchange rate. Garde, which holds short positions on the dollar, projects that the foreign exchange inflow will end the year at net $20 billion, but Mr. Calabresi says that “the flow to the stock exchange is so strong that we will probably have to revise this figure.” The most recent data from the Central Bank suggest a favorable foreign exchange flow of $9.5 billion this year.

Mr. Curvello, with ASA Investments, foresees a positive exchange flow of $25 billion and says that, in theory, it could be even higher if there were a greater internalization of funds from exporters. This could even contribute to a more substantial drop in the exchange rate, but the asset manager believes that the Brazilian currency will not appreciate much further. According to him, the fund today does not hold a forex spread bet on the real, but operates with a combined position with dollar sales and stock market purchases.

“We went to R$4.75 to the dollar from R$5.70 at the beginning of the year. At R$5.25, we thought it was a good size movement, so it was quite intense. I just think that the interest rate hikes by the Fed [U.S. Federal Reserve] does not match such a favorable scenario for emerging markets, with so much inflows,” he said.

Iana Ferrão, an economist with BTG Pactual, believes that the commercial flow is likely to increase this year due to the substantial increase in the balance of exports shipped because of higher commodities prices, but the gap is unlikely to be substantially reduced. “If we maintain a gap similar to that of 2022, we are talking about a trade flow of $30 billion, which is already much higher than last year,” she said.

BTG Pactual’s current expectation is that the trade balance will end the year positive at $75 billion. “We expect flow to Brazil to remain strong, not only because of commodities, which emerge clearly in the trade channel, but also for the financial channel, which has been the highlight at the beginning of the year.”

Source: Valor International

https://valorinternational.globo.com

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Private-equity firms not afraid of high interest rates

Funding totaled R$46.5bn last year, and several initiatives are now testing investor’s appetite for illiquid classes

09/03/2022

Patrick Cannel, Caio Costa, Guillaume Sagez, with Fors Capital — Foto: Silvia Zamboni/Valor

Patrick Cannel, Caio Costa, Guillaume Sagez, with Fors Capital — Foto: Silvia Zamboni/Valor

The cycle of high-interest rates in Brazil has not been enough to stop private-equity companies. Last year was a busy one, especially in the venture capital segment, as funding totaled R$46.5 billion – out of R$53.8 billion, according to data from Abvcap and KPMG. And this year began with several initiatives testing the investor’s appetite for illiquid classes even as the Selic, Brazil’s benchmark interest rate, is back to double-digit levels.

SPX has unveiled the intention to raise up to R$2.5 billion in its first private-equity fund after taking over Carlyle’s portfolio and team in Brazil. Romero Rodrigues, with Headline Global, now part of XP Asset, envisions a new vehicle to invest in VC newcomers, with plans to hold R$5.5 billion in the sector in five years. Daemon Investimentos will launch a renewable power private-equity investment fund, while Fors Capital and Blustone have sought capital and selected businesses with an impact bias.

Fors Capital, which emerged from the split of Performa Investimentos, one of the first venture capital managers with an emphasis on environmental, social and corporate governance (ESG) in Brazil, intends to raise up to R$500 million for a new fund. Caio Costa, Banco Nomura’s CEO for Brazil in the past four years, has joined the company as a partner.

With a long career in investment banking – including stints in BI&P, Nomura Securities, Deutsche, ING and UBS – the executive took part in the privatization of the electricity and telecommunications industries in Brazil, and since 2018 he had been studying a change to the venture capital segment but wanted a focus on sustainability. “Since the cycles are seven to ten years – raise, invest, divest – it was important to find the right people to set this up,” he said. “We discussed an agreement, a real [corporate] partnership, everyone participates in the exact same proportion.”

If recent history is any guide, corporate divergences often split teams, a sore point in an industry where human capital is worth as much as money. Fors itself has faced changes in the original team. The first cleantech fund, with R$175 million, was created in 2013 by Guillaume Sagez, a Frenchman living in Brazil, alongside Eduardo Grytz, who joined Carlos Miranda’s BR Opportunities to found X-8 Investments in 2019. Patrick Cannel arrived in 2015 and now with Mr. Costa, the three make up this new stage under the Fors Capital brand.

The new structure is already born with three invested assets, Mr. Sagez said. The target return is around 25% per year, a multiple of 3 to 5 times throughout the investment. The focus is on the “growth” segment, entering series C and D rounds onwards, in companies with revenues between R$50 million and R$500 million. Mr. Costa added that he prefers “B2B” businesses that directly serve the consumer, in sectors linked to agribusiness, energy, logistics, health and financial products.

In the portfolio are Unicoba (Led lighting), Contech (solutions for the pulp and paper industry) and Globalyeast (biotechnology). The firm left Intelipost (freight management through technology), Tecverde (efficient construction) and Mandaê (logistics), the latter sold to Nuvemshop, an e-commerce unicorn.

Another asset manager that proposes to make impact investments and is trying to raise up to R$100 million is Blustone, founded by Colombian-American Marlon Ramirez – who co-founded Azul Linhas Aéreas, Azul Cargo and Azul Viagens. Next to him is Carlos Lopes, who worked at Pátria Investimentos between 2014 and 2020 and has also been vice president of Standard Bank in Brazil, had a stint at TowerBrook Capital (spin-off of George Soros’s asset-management firm) and was an analyst at Goldman Sachs.

Mr. Ramirez is based in Miami, while Mr. Lopes is looking for deals in Brazil. The goal is to make investments in Latin American companies at different stages, from seed capital to series A and B rounds, taking part in the several stages of growth of the selected companies. The firm has just closed an investment in the freight platform Goflux, a kind of “Uber” of cargo transport, which operates in the agribusiness chain, including multinational shippers.

Blustone has already invested in the Mexican logistics company Cubbo and in the Brazilian Canal Dstak, a wholesale application.

The idea is to raise the first tranche by the third quarter and then reach R$300 million in a secondary offering. In the prospecting effort are both U.S.-based institutional investors and clients served by wealth managers and funds of funds in Brazil, who like to get in on the initial rounds.

The goal is to have a pulverized portfolio with 25 to 30 companies in different sectors of logistics and commerce in Brazil and other Latin American countries, such as Mexico, Colombia and Chile. “This class of ‘growth capital’ showed the best returns in the last 10 years,” Mr. Lopes said. The Blustone fund targets a return of 25% per year.

Mr. Ramirez says that the ESG bias enters the evaluation of the investments as the technology has the potential to bring efficiency to the business. He cites the reduction of carbon emissions in the logistics chain and the cheapening of products in the wholesale-retail flow, a segment that usually employs women who are heads of families and that is dominated by large online marketplaces.

“Startups, because they are growing, don’t focus on creating ESG processes. But some can be adopted on a daily basis, following the World Bank standards, such as issues related to diversity and sustainability,” Mr. Ramirez said. On the advisory board, Blustone is supported by Tariq Fancy, founder of the Rumie Initiative and former sustainable investing CIO at BlackRock.

The newest target of investments, Goflux, was founded by Rodrigo Gonçalvez, an entrepreneur who made a career in the logistics sector, including stints at Log-in, Vale and Algar Agro. He seeks a round of R$15 million after having received, in a previous stage, support from Banco Rendimento and SP Ventures, which is focused on startups in the agricultural segment.

One objective with the proceeds is to strengthen the financial operation, one of the biggest difficulties in the cargo transport chain, Mr. Gonçalvez said. “Traditional banks don’t look so favorably on the sector. They consider it risky and have little knowledge about it. In addition, with the pandemic, credit availability got worse.”

With more than R$2.5 billion in freight transacted through the platform last year and expectations of reaching R$6.5 billion by 2022, Mr. Golçalvez says that Goflux is able to have a unique view of credit risk and can offer funds to carriers even before a receivable is created tied to the payment of the service.

The company also intends to offer factoring of receivables and digital custody of documentation such as invoices, transportation contracts and inventory. The funding comes from some financial partners, but a credit-receivable fund (FIDC) is already in the final stages to supply this capital demand.

Source: Valor International

https://valorinternational.globo.com
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