There has been huge interest among international financial sponsors in acquiring Brazilian assets, but the country’s bankruptcy code is preventing deals happening, according to Jório Salgado-Gama, managing director and co-head of Moelis Brazil.
“We have had many financial investors coming to São Paulo in search of buying opportunities given the country’s situation, but it’s very difficult,” he says.
“Once we have explained the regulations, they see that it is a very difficult legal situation and that’s why we haven’t seen many distressed M&A sales.”
Salgado-Gama points to the fact that separating liabilities in divestitures is complex in Brazil. Also, probably the biggest issue is that judges can invalidate any asset sales that occur six months before a company going into judicial review – which is the country’s 2005 bankruptcy protection law.
“You have much more certainty in other jurisdictions,” says Salgado-Gama, who believes revisions to the 2005 code could help spur M&A for companies.
“It is difficult for a foreign investor to buy anything from a company that could be in a [judicial review] situation within the next six months.”
Otávio Guazzelli, managing director and the other co-head of Moelis Brazil, also suggests the law should be changed for privately held businesses – currently there is no limited liability protection and so entrepreneurs can lose everything in the case of bankruptcy.
“We need to be able to give a second chance to the entrepreneur, so that if they go through restructuring they lose their equity, but they protect their personal assets,” says Guazzelli.
“They need to have a chance to restart their life. At the moment they lose everything and it can lead to a situation where they can behave in a kamikaze way because they have no downside – and encouraging more rational behaviour from the owners would also be helpful for the companies involved.”
Moelis opened its Brazil office in Sáo Paulo in 2014 – before the impeachment of former Brazilian president Dilma Rousseff.
Salgado-Gama and Guazzelli joined the firm along with another managing director Erick Alberti from BR Partners. The office was the 15th in the Moelis network – there are now 17 – and it is still the only office in Latin America.
Salgado-Gama says founder Ken Moelis saw advantages in opening up at a time when the economy was floundering.
“Ken has always said that the key factor is to make sure there is a long-term market and then find the right team,” he says.
The office now employs 15 people working purely in investment banking – M&A, equities and restructuring.
Given the poor state of the Brazilian economy, a lot of the firm’s work has centred on corporate restructuring and distressed situations.
The firm has managed to win some of the highest profile mandates – including advising Petrobras in 2015 on its debt strategy when it was unable to get audited accounts signed off, which was threatening to trigger a default.
“We worked with the banks who had exposure to Petrobras – which was $65 billion in total – and we managed to get waivers from all the banks to cover any default situation,” says Alberti.
Moelis is also advising joint owner Vale on the Samarco dam-collapse situation – with Rothschild advising the other joint owner BHP, and mining company Samarco being advised by JPMorgan.
In another landmark Brazilian deal, Moelis is advising Oi on its restructuring and discussions with the telecom’s bondholders. Moelis has secured a R$4 billion commitment from new investors.
“That new money [for the Oi restructuring] is coming through our international platform,” says Alberti, adding that the international dimension helps the bank provide clients with greater flexibility and was one of the key reasons why the team left BR Partners.
“In restructuring, the international network is essential – you need a link to the bondholders for the large credits and the global platform means that we have teams that are able to talk to the largest distressed bondholders in the world.”
Guazzelli says the flow of restructuring deals remains strong. However, he pushes back on the widespread perception that Brazilian companies are over-leveraged.
“There is not too much leverage in the private sector – you don’t have that much credit,” says Guazzelli. “The problem is that credit is expensive, so although the nominal levels of credit aren’t high the cost of serving that debt is high.
“Also, the companies are generating less revenue, but as the economy picks up and Brazilian companies find export markets, [the leverage issue will abate].”
Alberti also says the level of corporate insolvencies is overplayed in Brazil.
“There are currently 30,000 judicial restructurings in Brazil. Meanwhile in Canada – which has an economy that is roughly the same size – there are 150,000,” he explains.
“The problem in Brazil is that credit is a relatively small percentage of GDP and the banking sector is consolidated and, in the short term, there is a structural problem because the government is crowding out [credit to the economy].”
Salgado-Gama says the firm will also be targeting equity mandates as the economy recovers – although he points out that some of the firm’s restructuring deals already include an equity sales component.
“After 2018, if we have a good outcome in the [next presidential] election – with a pro-reform and pro-market winning candidate, then we will start to see a lot of enthusiasm for Brazilian equities,” he says.
However, in the shorter term, Moelis expects to be kept busy with restructuring mandates.