Bloomberg reports that executives in Brazil, Latin America’s biggest economy, have to deal with rising rates of interest and depreciating currencies, which force many to change their financial strategy.
Businesses are now focusing on re-filing of debts, cutting investments and finding new ways to navigate a tightening economy.
Brazilian businesses are particularly hard hit by the rising cost of borrowing, which is exacerbated due to the high interest rate and the lack of government assistance during the epidemic.
Brazil’s Central Bank has raised rates once again after a short period of stability lasting just over one year.
Many firms have taken preemptive measures, some as early as second quarter when traders started forecasting rate increases.
As inflation continues to worsen, the central bank has signalled that it will continue raising rates.
Currency devaluation and interest rate issues
Selic benchmark rate is now 10.75% (rather than the initial prediction of 9.25% for this year).
Rates are high, and this is a major problem for companies with heavy debt.
Brazil’s real currency has also depreciated 11% in the past year.
Devaluation is a reflection of growing concern that ambitious government spending plans may make it hard to achieve budget targets.
The airlines, for example, have expenses that are in US Dollars but revenues in Reis.
Brazil’s retail industry, health care sector and agribusiness also feel the pressure.
Leonardo Ono is a Portfolio Manager at Legacy Group Capital LLC. He said:
We are now facing a challenging scenario, as rates have risen to over 10%, when previously we had projected at 8%-9 %… We will also see more businesses implementing liability management and bankruptcy filings.
FTI Consulting conducted a study that revealed the default rate for Brazilian firms has increased to 6.27 percent, which is the highest recorded level since 2016.
The rising costs of borrowing, and the increasing uncertainty in financial markets are directly responsible for this increased risk.
Airlines, retail and healthcare are all under stress
Azul SA, a Brazilian airline company, is facing problems due to the real’s weakening.
Airline is in talks to merge with Gol Linhas Aereas Inteligentes SA, a rival airline. It is also exploring ways to restructure debt.
The retail sector has also been under the spotlight. Grupo Casas Báhia S.A. had struck an agreement with its creditors to resolve financial issues earlier this year.
Fitch Ratings’ Ricardo Carvalho is the head of Brazilian Corporates. He noted that while the companies within the retail sector are “more disciplined”, recent increases in rates have caused concern about the financial stability of these firms.
The healthcare industry, which has been expanding aggressively in low-rate times, may be the one to see most changes over the next few months.
Diagnosticos da America SA, for instance, sells non-core assets to reduce debt.
Bloomberg cites sources that the company has advanced discussions to sell Dasa Empresas – its brokerage and consulting unit specializing in insurance – as part of its restructuring.
Kora Saude Participacoes SA (a healthcare firm) and Oncoclinicas do Brasil Servicos Medicos SA (a healthcare company) are also working on cleaning up their financial statements.
Kora Saude initiated recent discussions with bondholders in anticipation of a breach to its debt terms. Oncoclinicas also issued local notes valued at 190,000,000 reais as a way to improve its liquidity.
Carvalho noted that the health sector was the area that most worried him. Many companies still needed to cut down on cash flow and liquidate assets in order to stay viable.
Cost increases impact Agribusiness, capital markets and more
Brazil’s agricultural sector also faces severe challenges.
Two companies from the industry have sought protection against creditors due to high interest rates, and falling commodity prices.
Brazil’s current economic situation has a far-reaching effect on the agribusiness sector.
The issuance of local bonds, also known as debentures on the capital market, has reached a record high during the first half 2024.
According to Brazil’s association of capital markets, the number of equity transactions has plummeted by 64% in comparison to last year.
Due to an unfavorable environment, there have been few initial public offerings since 2021.
Denis Morante is the founder of Fortezza Partners. He said, “I don’t see an IPO boom returning at the start of 2025.”
Prioritize debt management and reduce investments for companies
In response to a challenging economic environment, many Brazilian firms are scaling back their investment plans in order to preserve cash.
The trend can be seen in firms who rely heavily on floating rate debt. Rising rates have increased the borrowing costs of these companies.
Cosan SA is a billionaire Rubens OMeto-owned conglomerate that has chosen to not use cash for the establishment of new business lines.
In the first half of this year, the firm passed up the chance to be a strategic shareholder in Latin America’s largest water utility. Financial stability was given priority over growth.
Sources familiar with the situation say that Cosan may also consider selling assets in order to reduce its debt.
Gerdau SA, another steelmaker in the region, is also waiting for more favorable economic conditions before committing to expansion plans.
Gerdau planned to expand its forestry operations in the southeast of Brazil and build a 1,75 billion-reais-worth rolling mill. These projects have now been put on hold.
The company confirmed it would maintain its current pipeline of investments.
Daniel Lausidio is a partner in Cescon Barrieu. The law firm advises companies on capital market transactions.
Postpone all projects that are not urgent. Only do the necessary.
The Invezz published the article Brazilian Companies Face Mounting Challenges as Rate Hikes and Currency Pressures Intensify.
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