Investors are losing faith in Brazil’s corporate borrowers in the aftermath of Americanas SA’s implosion, defying reassurances that the century-old retailer’s collapse was a one-off with no broader implications.
(Bloomberg) — Investors are losing faith in Brazil’s corporate borrowers in the aftermath of Americanas SA’s implosion, defying reassurances that the century-old retailer’s collapse was a one-off with no broader implications.
Instead, in just the few weeks since the default, power company Light SA, clothing retailer Marisa Lojas SA and travel-agency CVC Brasil have all hired advisers to restructure their debt. Telecom operator Oi SA won a court case to temporarily suspend its obligations, while S&P Global Ratings warned airline Gol could approve a restructuring that’s equivalent to a default.
“There will be a credit squeeze” following the recent events, according to Andre Jakurski, who helped found JGP Asset Management, one of Brazil’s first hedge fund firms. Companies will likely go bust “in torrents,” he warned at an event Wednesday.
Vista Capital, the operator of Brazil’s best-performing hedge fund in the past three years, is also urging caution, saying that the seeds of a “credit crunch” were germinated in Brazil in recent years. Now, with tepid economic growth, stubborn inflation, steep interest rates and diminished corporate confidence following the revelations of alleged fraud at Americanas, those seeds might be on their way to sprouting.
“The result is an inevitable and significant tightening in banks’ lending standards, which can boost and accelerate a credit cycle that already seemed unfavorable,” Vista wrote in an investor letter last week. That means problems “not only for insolvent companies, but possibly for those with liquidity issues as well.”
Americanas filed for bankruptcy protection last month after revealing a 20 billion real ($3.8 billion) gap in its balance sheet related to the way it accounted for money owed to suppliers. The company’s bonds tumbled to pennies on the dollar, the stock plummeted and the nation’s top lenders rushed to book provisions for losses.
Analysts and investors such as William Blair International, Stone Harbor Investment Partners and BI Asset Management called the Americanas issues isolated, not indicative of broader problems in Brazil’s corporate credit market, and urged calm.
They were largely ignored, and now money managers are showing a newfound aversion to borrowers in Latin America’s largest economy.
“These are cautious times,” Octavio de Lazari Jr., the chief executive officer at Banco Bradesco SA, told analysts. “Our clients are telling us they are much more careful.”
Sales of local notes have taken a nosedive in response. Brazilian firms have issued about 15.4 billion reais in domestic bonds this year, a 26% drop from the same period in 2022, according to data compiled by Bloomberg.
An index of local corporate bonds in Brazil has posted a 4.3% loss since Americanas revealed its accounting gap, its worst performance since the early days of the Covid-19 pandemic. Overseas corporate bonds from the country have dropped 2.6% in that span, much worse than the less than 0.1% decline for an index of global emerging-market company debt.
Marcos Schmidt, an associate managing director at Moody’s Investors Service, points out that while corporate debt levels are moderate, a big risk is the higher interest rate environment both at home and abroad.
Sticky US inflation paired with uncertainty over Brazilian President Luiz Inacio Lula da Silva’s spending policies may force the Federal Reserve and Banco Central do Brasil to keep borrowing costs elevated for longer, which could accelerate defaults or restructurings, especially for junk-rated issuers, Schmidt said.
At some point, those with weaker liquidity “will face the choice of continuing as they are or trying to preserve cash and restructure their debt so the company can be sustainable in the long run.”
Ratings companies have identified some vulnerabilities. Airline Azul SA had its grade cut to one of the lowest tiers at Fitch Ratings, which cited a “more restrictive” local credit market in the aftermath of the Americanas’ downfall.
S&P lowered Gol Linhas Aereas Inteligentes SA’s rating to CC from CCC+, saying that the airline’s refinancing plan was a “de facto restructuring.”
Investors could be in for long negotiations with Americanas that are set to kick off soon. Brazilian advisory boutique BR Partners was hired by both Marisa Lojas and CVC to advise them in their debt restructuring talks, while Light is working with Laplace. A smaller, non-publicly-traded firm — Grupo DOK, owner of the Ortope footwear brand — also recently filed for bankruptcy protection in Brazil.
“I did not think Americanas was the beginning of a trend,” said Ray Zucaro, the chief investment officer at RVX Asset Management in Miami. “But perhaps it actually is.”
–With assistance from Barbara Nascimento.
(Updates with JGP quote in third paragraph)
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