brazil capital markets
After a prolonged drought of deals in Brazil’s capital markets, things are starting to look up. But financing costs are still too high for a rally.
By Thierry Ogier
After a long, hot summer, temperatures have finally eased in Faria Lima, the financial district of São Paulo. This has brought some cheer to companies and investment bankers after a spree of traumatic events, such as the large-scale fraud scandal at high-profile retailer Americanas and the financial troubles at the Rio de Janeiro power company Light.
“The Americanas episode has changed the market mood. Everybody has to find ways to cut debt,” says an executive at a local retailer.
Money has become tight for many companies – and out of reach for some. This has pushed an increasing list of companies into financial problems. Bankruptcies shot up 12.3% in the first four months of 2023 from the year-earlier period, according to Serasa, the Brazilian credit bureau.
Household names like women’s fashion and lingerie retailer Marisa and home decoration chain Tok&Stok have been forced into debt restructurings. Several companies suffered downgrades like airline Azul, petrochemical producer Unigel and cement maker InterCement, while telecommunications company Oi entered an unprecedented second judiciary reorganization even after selling assets.
The worsening fortunes have cut dealmaking in the local capital markets. Transactions fell 42% to BRL142 billion ($29.6 billion) in the first five months of the year from the same 2022 period, according to the Brazilian association of capital markets. Debentures accounted for roughly half that decline, while the initial public offering drought that began in late 2021 continued.
This is a big change from 2022 when Brazilian companies were able to roll over debt as part of their liability management exercises.
The question now is when will it get better?
There is a growing sense in the market that maybe the worst has passed.
“There was a great squeeze,” says Felipe Wilberg, head of fixed income and structured projects at Itaú BBA. “It has improved a bit, but the situation is still worse than it used to be.”
Even so, he says a distinction has to be made between the most creditworthy issuers and those that are less so.
“Pre-crisis transactions that came out at the DI [interbank lending rate] plus 1.3% later peaked at 2.5%, and later fell close to 1.6% in June,” Wilberg says regarding the former group. “The second group of companies has not enjoyed such an improvement. Those who used to come out at the DI plus 3% went to 8% and are now down to [a spread of] 5.5% or 6%.”
There have been a few other signs of improvements overall, such as less fund withdrawals from banks and a few follow-on offerings that brought more liquidity to the market.
“All this goes in the right direction,” he says.
Wilberg expects the value of debenture issues to amount to slightly more than BRL100 billion this year, including BRL40 billion in the first half of the year and BRL10 billion per month during the rest of 2023. That’s half of the BRL200 billion in 2022, he says.
In June, Cemig Distribuição, the distribution arm of the Minas Gerais-based power company Cemig Group, raised BRL2 billion in a three-year sustainable bond issuance in the local market at the DI plus 2.05%. The spread was still relatively high, but the company says the demand was strong and the bookrunners did not have to buy the bonds and keep them in their books.
Brazil’s macroeconomic performance has improved thanks to higher-than-expected year-over-year economic growth of 1.9% in the first quarter of 2023 and a decline in inflation. S&P Global changed the outlook on its long-term global scale ratings on Brazil to positive from stable in June. But financial costs are still a major setback for many companies.
Luiza Trajano, chairwoman of the retailer Magazine Luiza, said during a public event that she’d called Roberto Campos Neto, the governor of the Brazilian central bank, more than 20 times to complain about the high level of the Selic monetary policy interest rate, which has been at 13.75% since August 2022. Her appeals were to no avail, she said.
Flavio de Almeida de Araújo, Cemig’s head of corporate finance, says that “as long as the Selic remains at the current level, companies will find it hard to raise funds at low prices.”
When will the base rate decline?
“The trend is that it will come down in the short to medium term,” he says. “We cannot see a return to 2022 financing costs.”
Carolina Chimenti, an analyst at Moody’s Investors Service, still sees the glass as being half empty rather than half full.
“The central bank expects that the base rate will be around 12.5% at the end of the year, which is still quite high. Economic growth is still weak,” she says. “We do not see any catalyst that would improve things quickly.”
“We do not see any catalyst that would improve things quickly.”
– Carolina Chimenti, Moody's
This leaves only a few large and creditworthy companies with ready access to the local capital markets, such as the mining company Vale.
“There was an issuance by Vale [in June] after a lapse without any transaction from Brazilian companies, but it is somewhat different because it is an investment-grade company. Banks have remained selective as they target large companies,” Chimenti says. “The others still face a challenging environment. Issuers still face risks.” LF