brazil: local bond markets
When a big retailer fell into bankruptcy after botching its numbers, Brazil’s local bond market reeled. More corporate restructurings may be in store that could dampen investors’ confidence even more.
By Thierry Ogier
Brazil’s financial markets started this year with a double whammy. A failed coup attempt shocked investors on January 8, and then only three days later a high-profile retail chain, Americanas, unexpectedly disclosed a BRL20 billion ($3.8 billion) “accounting inconsistency” in its balance sheet and debts of more than BRL40 billion.
The Americanas affair sent shock waves through the local financial markets, and they have yet to let up. A handful of other leading companies subsequently sought legal protection from their creditors, swelling concerns about a rise in bankruptcies. The casualties include telecom giant Oi, fashion retailer Marisa Lojas and travel company CVC. Power company Light has hired an advisor to restructure its business.
“There is undoubtedly a concern. The environment has become more restrictive,” says Ulisses Nehmi, CEO of Sparta, a Brazilian investment firm.
Alexandre Castanheira, head of debt capital markets at Citibank in São Paulo, says the Americanas debacle triggered an outflow from the fixed income market, pushing up spreads for issuers by around 100 basis points compared with the end of last year. Investors are buying shorter-maturity bonds to reduce their exposure to risk, he adds.
This has made it hard for companies to sell new debt.
“We had quite a robust pipeline for this year, but prices were not compatible with what we had two months ago,” Nehmi says. “Following the Americanas event, there were stronger doubts regarding various other issuers and credit issues on the local markets. This has triggered a repricing trend and contributed to a sense of unease among investors.”
The new environment has led issuers and investors to look for safer alternatives, including the longer-term international bond market at least for some.
“You have to look at the international market, where you have maturities of 10 years,” says Castanheira.
Investors still have an appetite for Brazilian energy and infrastructure bonds, as well as those related to environmental, social and corporate governance, he adds. Nevertheless, Castanheira reckons that the Americanas crisis may have caused domestic issuers to miss a window of opportunity to launch bonds in the international market in January, when expectations of a faster-than-expected drop on global interest rates led to a rally of deals.
No matter how shocking the Americanas scandal may be, the debt crisis may have deeper roots that explain the new round of corporate restructuring.
“The market is still recovering from the Americanas events. They have served as a catalyst of a trend that we were already expecting, as several companies were indebted and had problems to generate cash,” says Citibank’s Castanheira. “Americanas is a single and gigantic case, but there were signs that last year’s credit market was far too strong, and this was not to be repeated this year.”
Issuance of debentures reached a record BRL271 billion last year, up from BRL250 billion in 2021 and BRL121 billion the year before, according to Anbima, the Brazilian association of capital markets. But Castanheira says there were already signs of a slowdown in the local bond market in the last quarter of the year, as underwriters had to keep some debt in their books.
Warley Pimentel, co-CEO at Starboard, a Brazilian restructuring company, says the crisis may have deeper roots than the Americanas affair.
After analyzing corporate balance sheets, his firm concluded that a total of BRL700 billion worth of debt will have to be renegotiated.
“More than half of listed companies will have to be restructured,” he says.
“More than half of listed companies will have to be restructured.”
– Warley Pimentel
This assumption stems from what he calls a phenomenon of “artificial standstill” due to the pandemic. “Creditors helped postpone restructuring-related issues,” he says. “This debate did not occur in 2020 and in 2021… In 2022, the capital markets were full of vigor as a lot of fundraising transactions were going on. But 80% of companies are now worth less than they were when they launched their IPOs at the time. Most of them failed to deliver on their business plans. Now comes the time for adjustment in the next two years.”
Pimentel argues that the current situation is the result of “wrong forecasts,” although he reckons there is no systemic risk to the financial sector.
Douglas Bassi, a managing partner at Virtus BR Partners, a Brazilian financial advisor, says the extent of the corporate debt crisis will largely depend on the macroeconomic environment.
So far, it’s not looking too good. The economy contracted 0.2% in the fourth quarter of 2022 compared with the third quarter. Economists are forecasting only 1% growth for this year, making it the slowest in Latin America except for a minor contraction in Chile, according to World Bank estimates.
“After Americanas, several banks were affected in terms of provisions, as well as a lot of market investors,” Bassi says. “The issue is whether you will have a scenario of economic recovery by the end of the year to see if credit volume in judicial recoveries will be significant or not. Everything depends on the creditors’ will to renegotiate and how critical the state of companies will be.” LF