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Brazil’s Crushing Debt Loads Are Leading to a Restructuring Boom

Fabiola Moura

Brazil’s economic quagmire, with an ever-growing corruption scandal on top of the longest and deepest recession in at least a century, is producing an unprecedented era of corporate debt restructuring in the country.

The borrowing binge Brazilian companies went on during the country’s economic boom earlier this decade has now turned into an albatross as tens of thousands of protesters take to the streets and lawmakers move toward impeachment proceedings against President Dilma Rousseff.

International issuers from the country had $293 billion in bonds outstanding at the end of December, up from $90 billion at the end of 2002, according to the Bank for International Settlements. Access to capital has evaporated, forcing companies frombuilder OAS SA to commodity trader Ceagro Agricola Ltda. and phone carrier Oi SA to restructure. Debt of airline Gol Linhas Aereas Inteligentes SA and steelmaker Usinas Siderurgicas de Minas Gerais SA is trading at a discount of half the face value or more as investors speculate on which company will be next.

Law firms like Dias Carneiro Advogados are hiring to keep up with the demand for their advisory services — and there’s still not enough to go around. Clients are competing for attention to make sure they will get priority, said Renato Franco, a partner at restructuring consultancy Integra Associados.

“In the past, having many clients was a sign of competence. Now it is a negative factor because clients want to make sure you will give them full attention,” Franco said in an interview in Sao Paulo.

Brazilian debt now accounts for 45 percent of Bank of America Corp.’s $137 billion index for distressed emerging-market bonds, compared with less than 10 percent a year ago. Average yields on Brazilian corporate debt have come down from their peak last month of almost 12 percent, but they’re still well above 10 percent, according to JPMorgan Chase & Co.

And the tenuous political situation — including the nomination of former president Luiz Inacio Lula da Silva as a minister Wednesday — continues to rattle investors. On Wednesday, the federal judge leading Brazil’s largest corruption probe released phone recordings of Rousseff and Lula discussing his cabinet appointment. The conversation increased speculation that Rousseff offered the job to shield him from the corruption probe, leading to a new round of large protests in Brasilia and Sao Paulo that extended into Thursday morning.

The economic distress is leading to a boom for firms that specialize in helping debt-laden companies. Dias Carneiro expanded its restructuring and insolvency department by 40 percent in the past 12 months to 52 people — and the practice continues to grow, Joel Luis Thomaz Bastos, a partner at the Sao Paulo-based law firm, said in a phone interview.

“We saw an exponential growth in the number of consultations in December,” he said. “The economy is halted and to resume growth, we are talking about three years — being optimistic.”

The number of bankruptcy protection requests by companies more than tripled to 155 in February from a year earlier, according to data from credit-checking company Serasa Experian.

 

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Brazil’s economic output declined 3.8 percent in 2015 and is forecast to continue shrinking this year. With recovery still far off, the question now is whether companies will be able to emerge successfully from restructuring efforts, said Andre Schwartzman, another partner at Integra Associados.

“You have to structure your company so it can survive in a shrinking economy for two or three years and you need to do your homework and define if the company is viable or not,” Schwartzman said. “Some companies are now like zombies. They are still going on but you know their business is not sustainable.”

Oi’s potential restructuring is one of the most closely watched because of its sheer size and its complexity. The landline and mobile-phone operator is working with PJT Partners to help with its $15 billion pile of debt. The carrier’s business isn’t sustainable in the long term if it remains subject to regulations that require the company to focus investment on the declining market of landline phones, said Pedro Bianchi, specialist in debt restructuring and a partner at law firm Felsberg Advogados.

In a statement Wednesday, Oi said it’s evaluating all options to improve its liquidity and debt profile.

Construction company OAS won approval in December for its restructuring plan, agreeing to sell its stake in airport operator Invepar to help pay creditors. Prosecutors accused executives from OAS and other construction companies of paying bribes in exchange for contracts with state-run oil company Petroleo Brasileiro SA. In November 2014, police jailed some of the industry’s most powerful executives.

Ceagro, the Brazilian commodity trader that missed an interest payment last year, was in talks with banks over filing for bankruptcy protection, Bloomberg News reported late last month. The Campinas-based company ran into trouble when prices slumped for the corn and soy it trades, just as the tumbling real was making it more expensive to import fertilizer and pesticides to supply to producers.

Brazil’s political developments are making it tougher for companies that still haven’t seen “a light at the end of the tunnel” to make confident decisions on how to redefine their businesses in restructuring, Integra’s Franco said.

“If you are a company and you are searching for the other shore of the river you have to cross, it is as if you were standing by the English Channel on a foggy morning,” Franco said.

Fonte: Bloomberg em 17.3.2016.

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