-Home Equity Loans or , in Portuguese, CGI (Crédito com Garantia de Imóvel) are poised to grow at least 40% p.a. in Brazil as per Valor Economico.
– A new Michael Lewis book, ‘Flash Boys: A Wall Street Revolt’, apparently about High Frequency Trading will be out March,31st (UK cover below).
-Kierkegaard said: “Anxiety is the dizziness of freedom,” The FT on The Joy Of Stress.
–“We believe the cider category continues to be emerging and growing”
Brazil’s Central Bank’s – March, 2014 Financial Stability Report is out today, and it gives a decent macro picture of the local credit/bank loan market:
-Bottom line – Credits is (slowly) decelerating and local banks are focusing on mortgages. No news or breakdown of how much of this growth is related to government programs (Nossa Casa Nossa Vida) but the Central Bank has issued guidelines/new regulations for the market (more details here).
-Total Credit (total credit inventory in the Brazilian Financial system, excluding local and overseas capital markets) reached BRL $ 2.7 trillion (~ USD $1.1 trillion), 56.5% of GDP with a 14.6% YoY growth
-Credit growth was driven mainly by public-sector banks a 22.6% yoy growth of the credit versus 7.3% yoy growth of privately owned banks
-Both public and privately owned banks continue the movement out of more risk consumer credit lines (overdrafts, autocar loans) and working capital towards mortgages and payroll loans (‘credito consignado) – with public banks now leading the market on autocar loans and working capital lines.
-Consumer Credit represents roughly 46% of total credit – and mortgages (‘credito imobiliario’) are now the largest part of it (27.3%) with a 33.7% YoY growth (and this is where Public and Privately-Owned banks are competing head to head – mortgage growth on Privately-owned banks was 31.5% compared with 34.2% at Public banks).
-As of December, 2013 77% of the mortgage stock were loans granted during 2011-2013 period (pre-slowdown) and the stock still carries a Loan-to-Value of 66.3% (not considering any increases on real estate value), current average LTV (Dec.2013) is 70.1%
-Corporate bank loans are 56% of Total Credit, it continues to slowly lose share to Capital Markets but still represent 63.1% of the ‘Total Indebtedness’ of local corporations.
-Even considering the recent BRL devaluation (that may distort numbers here) – there’s a clear tendency of local Banks towards large corporations (but SMEs still represent 46.8% of total corporate credit) and into foreign trading lines (out of unsecured working capital lines) – reflecting the economic slowdown/credit quality deterioration.
-Aggregated figures on delinquency (and spreads) at the report are usually not very useful but the overall delinquency rate (over 90 days) was 3.0% as of December 2013, 4.4% on the consumer side and 1.8% on the corporate side.
As usual – send me any corrections, comments.
Copan Building, Oscar Niemeyer, São Paulo, Brazil.
-OSX Bond restructuring approved by the board – no haircuts, coupon goes from 9.25% to 13%, a PIK ‘consent fee’ of 2.5% and mandatory pre-payment if OSX-1 or 2 are sold, more here.
-‘There’s an uptick in [restructuring] activity and we expect that to continue through the rest of this year and next’, Brazilian distressed at The Wall Street Journal.
-Real Estate Cos. in the radar of Brazilian Distressed Debt investors,
-McKinsey&Co’s ‘New credit-risk models for the unbanked’
– Start-Up Chile is a program of the Chilean Government that seeks to attract world-class early stage entrepreneurs to start their businesses in Chile. The program provides US$40,000 of equity-free seed capital, and a temporary 1-year visa to develop your project for six months.
I have been ‘mapping’ the local Brazilian Distressed/Special Situations/High-Yield market for some time and will start a small series with specific topics – this is the first post – an introduction.
The intention here is NOT to cover all legal aspects – this is a practical introduction to anyone interested in Brazilian restructurings, distressed debt/special situations (and is probably analyzing now OGX,OSX, Lupatech, and Aralco among others).
A couple of data points:
–Total credit expanded over 500% in the last 10 years – as of January, 2014 it reached 56.1% of GDP – BRL $2.7 trillion (~USD $1 trillion),
-As of June,2013 – the 4 largest local banks held 74% of all credit,
-From April,2013 to March, 2014 the base local overnight rate (Selic) has climbed 300 bps to 10.75% p.a.
The ‘New Brazilian Bankruptcy Law’ (Law. 11101 dated February 9th, 2005) provides three procedures to address failing companies: (i) ‘Recuperação Extra-Judicial’ or out-of-court reorganization – a rarely used simplified procedure that does not includes ‘automatic stay’ or Trustee supervision, (ii) ‘Recuperação Judicial’ or Judicial Reorganization – that emulates Chapter 11 of the U.S. Bankruptcy Code and (iii)‘Falência’ or Liquidation – similar to Chapter 7 of the U.S. Bankruptcy Code.
State-owned entities and financial services companies (including Banks and Insurance companies) are NOT covered by the ‘New Brazilian Bankruptcy Law’.Local banks usually go from Central Bank intervention, followed by ‘Liquidacao Extrajudicial’ (out-of-court liquidation) also coordinated by the Brazilian Central Bank (a recent case here).
Brazilian Bankruptcy regulation was ‘inspired’ by US Bankruptcy law – but unlike the U.S. Bankruptcy Code’s Chapter 15 – there is no mention of foreign creditors on the Law – the track record of local courts decisions on the issue (as per the recent cases of Independencia and OGX) does not indicate a clear path to include (or not) overseas subsidiaries/foreign investors in the Brazilian Bankruptcy case.
Below is a simplified schedule of a local Bankruptcy case (click to enlarge) and a couple of comments on the process:
•Recuperacao Judicial (‘RJ’) can only be filed by the Debtor and the Petition has to be filed in the Company’s main place of business and overseen by local court/judge – regardless of previous experience – with the possible exception of Rio and São Paulo that has two bankruptcy courts, most Brazilian civil courts have very limited familiarity with corporate lending/finance – what can lead to unusual outcomes .
•ACCs, ACEs (foreign trade lines) and ‘Alienacao Fiduciaria’ – credit backed by receivables etc. emulating the legal structure of a chattel mortgage – are not subject to the ‘automatic stay’ under ‘Recuperação Judicial’ (as per Art.49 §3 of the Law and with recent backing by a decision of the Superior Court of Justice). More about this in a specific post.
•A ‘major development’ of the (not so new now) Law was to put a cap on Labour claims (but priority over Secured Claims, continue) – please see below (click for enlarged version) – a simplified guide to the Order of Claims in a Brazilian bankruptcy case. Tax and Fiscal Claims still have seniority over Unsecured Claims.
•DIP financing is not usual in Brazil and somehow ‘untested’ – that is probably why in the OGX case – creditors decided to use foreign trade lines – to add another line of safety to their claims. Prepackaged bankruptcies are virtually non-existent.
• Fast liquidation proceedings (‘Falência’) are also not common, especially in high-profile medium/large bankruptcy cases – even in the most obvious cases, liquidations are usually postponed for as long as possible (in this case – the RJ/chapter 11 period dragged for over 5 years) – this obviously benefits the Debtor/Controlling shareholders and ‘forces’ creditors to accept a Plan of Reorganization that could be marginally better than waiting (a couple of years) for the outcome of a liquidation.
•Claims in foreign currency are automatically converted into local currency in the case of liquidation (‘Falência’) – creating immediate devaluation risk.
•The practical implications of the ‘New Brazilian Bankruptcy Law’ are being tested on a daily basis (the final outcome of the OGX/OSX case will certainly shape future cases, as it is already influencing cases like Aralco) – and potential changes to the law can happen within the discussions of the new ‘Codigo Civil” in 2014/2015.
As per usual, any corrections, feedbacks and comments are appreciated. To be continued in further posts.
Lockmann.org 