(Bloomberg) -- Executives in Latin America’s largest economy are redrawing plans, reprofiling debt and holding back investment as interest rates climb and the currency remains under pressure.
While companies the world over have been contending with higher borrowing costs, Brazilian firms have had an especially tough burden, hit with some of the steepest rates in the world after surviving the pandemic with little government aid. Now rates are going up again after a respite of just over a year.
Some firms started making adjustments toward the end of the second quarter, as traders began pricing in hikes amid Brazil’s worsening inflation outlook. Those changes are accelerating now that the central bank has bucked the global easing trend, signaling more increases to come.
At 10.75%, the benchmark Selic is already well above the 9.25% analysts projected at the beginning of the year — a significant challenge for companies with heavy debt loads. Then there’s Brazil’s currency, which is down 11% this year amid concerns the government’s ambitious spending plans will prevent it from hitting its budget targets.
It’s a difficult dynamic for companies like airlines that have expenses in dollars but earn their revenue in reais. Brazil’s struggling retail sector is also at risk, along with health-care and the mainstay agriculture industry.
“The scenario is challenging, with rates over 10% when we were flirting with projections at 8% or 9%” said Leonardo Ono, a portfolio manager at Legacy Group Capital LLC, a hedge fund with 20 billion reais ($3.7 billion) in assets under management. “We will see more companies doing liability management, and we will see some bankruptcy filings.”
The average default risk for Brazilian companies has hit 6.27%, according to an FTI Consulting study for Valor newspaper. That’s the highest level in data going back to 2016.
Air carrier Azul SA, which is in talks to merge with rival Gol Linhas Aereas Inteligentes SA, is looking at options to rework its debt after its results were hammered by a weaker real.
In retail, popular chain Grupo Casas Bahia SA struck a deal with creditors amid an overdue shakeout earlier this year. Companies in the sector “are more disciplined,” said Ricardo Carvalho, head of Brazilian corporates at Fitch Ratings. However “the rate increase is making us watch them more closely.”
Instead, it’s health care that could see the most movement in months to come. Many firms in the sector are now paring back after going on buying sprees when rates were low.
Diagnosticos da America SA is selling non-core assets and focusing on reducing debt, according to a person familiar with the matter, who added that mergers and acquisitions are now off the table. The company has said it’s in advanced talks to sell its insurance brokerage and consultancy unit, Dasa Empresas.
Kora Saude Participações SA and Oncoclinicas do Brasil Servicos Medicos SA are tidying their balance sheets as well. Kora’s chief financial officer told analysts in August the company made a “major change” to its debt profile last year, conducting liability management exercises. Kora has also started talks with local bondholders for a waiver due to an expected breach of its debt terms, according to people familiar with the matter.
Oncoclinicas, meanwhile, issued 190 million reais in local notes after its second quarter earnings showed cash flow pressures. The move is meant to reinforce its cash position as part of its liability management strategy, according to company filings.
A lot of these companies still need to do their homework, reduce cash burn and sell assets, Carvalho said, adding the health sector is the one that worries him most. Azul, Casas Bahia, Dasa, Kora and Oncoclinicas all declined to comment.
Agribusiness has also come under pressure. Contending with high rates and falling commodity prices, two companies sought protection from creditors in the past two weeks.
While the issuance of local notes — known as debentures — reached an all-time high in the first half of 2024, equity sales were down 64% from a year earlier, according to Brazil’s capital markets association. Initial public offerings, meanwhile, have all but vanished amid higher rates as investors shun stocks in favor of fixed income instruments.
Despite expectations for offerings to resume this year, Brazil hasn’t seen an IPO since 2021 and there’s little immediate hope for that to change. “I’m not seeing an IPO wave returning in the beginning of 2025,” said Denis Morante, founder of Fortezza Partners.
The combination of rising rates and high leverage is also prompting companies to pare back on investments and preserve cash in a country where many firms issue floating-rate debt.
Cosan SA will probably avoid using cash to establish new business lines, having passed on becoming a strategic investor in Latin America’s largest water utility earlier this year, according to people familiar with the matter. The conglomerate, owned by billionaire Rubens Ometto, is mulling an asset sale to pay down debt, the people added. Cosan declined to comment.
Steelmaker Gerdau SA is waiting for better conditions before moving ahead with expansion projects, according to people familiar with the matter. That includes a new 1.75 billion reais rolling mill and expanding its forestry base in southeastern Brazil. Gerdau said, however, it will maintain all investments in its pipeline.
“The immediate impact is to postpone any project that is not urgent and only do what is necessary,” said Daniel Laudisio, a partner at law firm Cescon Barrieu, which advises companies on capital markets transactions. “Companies may work with foreign investors in non-core asset sales as an alternative to reduce leverage,” he added, flagging falling US rates as an incentive to do so.
--With assistance from Mariana Durao and Giovanna Serafim.
(Updates with comment from Laudisio on foreign investors in final paragraph. A previous version corrected the spelling of his last name.)
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