Brazil: Corporate default fear drives impeachment

By:
Rob Dwyer
Published on:

Markets rally on Rousseff’s woes; corporations pressure politicians.

The decision by the Brazilian congress to send president Dilma Rousseff’s impeachment process to the senate led to a partial financial correction, with the Ibovespa falling by 0.63% the day after the government lost its attempt to have the process thrown out in April.

160 x 186 Brazil Rally

People rally in support of
president Dilma Rousseff
 

However, that small fall had followed a huge rally in Brazilian financial assets in 2016 as the possibility of impeachment grew, with the Ibovespa rising by 37% since January 26 and the real rising by 11% against the dollar since the start of this year.

National and international media are focused on the various political intrigues behind the impeachment process and Rousseff’s claims that it amounts to a constitutional coup, but participants in the financial markets say that the key driver of impeachment is being largely ignored.

Bankers tell Euromoney that the owners of the Brazil’s large companies and financial institutions are the main force behind the move. Politicians – financed legally and illegally (the huge scale of the latter is being uncovered by operation Lavo Jato) by corporate donations – have come under pressure from owners of companies and financial institutions to find a way to remove Rousseff as a means to arrest the country’s economic collapse. This year is widely expected to be a second consecutive one with a decline of GDP close to 4%.

One of the most important and unappreciated factors behind the impeachment process has been the growing cost of finance and refinancing risk. According to data provider Dealogic, in 2012 Brazilian corporates and financial institutions raised $46.8 billion in the international markets – a much cheaper source of finance than local banks or capital markets. By contrast, so far there has not been a single such deal in 2016, while for the whole of 2015 the total raised in the international markets was just $7.2 billion.

Desperation

The lack of deals reflects both the increase in the risk premium international investors would charge Brazilian issuers due to the current political volatility – a rate they are unwilling to pay. Instead they are waiting, in many cases in an increasing state of desperation as debt refinancing risks increase, for a political solution.

The local value of that debt raised in 2012 has also increased as the value of the Brazilian currency has crashed (although there has been a rally from the lowest levels of around R$4 to the dollar a couple of months ago to around R$3.60 today). Meanwhile, bankers report that they are rolling over debt facilities locally to keep their own credit portfolios healthy, but with the local cost of corporate debt at around 20%, the same bankers also report that the situation is unsustainable.

That has led to problems: 5,500 companies sought bankruptcy protection in 2015 – the most since 2008. Recent data shows that just 1% of those companies that seek protection emerge from bankruptcy in Brazil. The situation is deteriorating fast from even these levels: recent research from Boa Vista SCPC found that in the first quarter of this year requests for bankruptcy protection were 165.7% higher than in the first quarter of 2015.

Without economic recovery, bankers say that more, and bigger, companies will go bust. And the banks’ non-performing loans, which have remained impressively low and stable into the second year of a serious recession, will spike.

BNP Paribas has picked up on the phenomenon of corporate defaults, which it says is being "missed". In a report dated April 7 the bank states: "Corporate non-performing loans have already increased to new historical highs. The recession is sapping companies’ revenues and thus depleting their cash position, at the same time that a gripping credit crunch has tightened financial conditions. Some firms can survive a short-term and shallow one-year recession, but withstanding a deep and prolonged two-year downturn is proving considerably harder."

BNPP says "a few foreign banks have exited the local market" further tightening lending conditions. So far, local banks have been willing to roll over debt that is maturing but, at around 20%, it is expensive funding for local companies, especially as they are operating in a deepening recession. The local banks’ strategy has kept NPLs in reasonable check (at 3.07% for the system in Q4 2015); without a return to growth this could rise – and provisioning has already increased.