Brazil’s crushing debt loads lead to restructuring boom

Bloomberg

Brazil’s economic quagmire, with an ever-growing corruption scandal on top of the longest and deepest recession in at least a century, is producing an unprecedented era of corporate debt restructuring in the
country.
The borrowing binge of Brazilian companies went on during the country’s economic boom earlier this decade has now turned into an albatross as tens of thousands of protesters take to the streets and lawmakers move toward impeachment proceedings against President Dilma Rousseff.
International issuers from the country had $293 billion in bonds outstanding at the end of December, up from $90 billion at the end of 2002, according to the Bank for International Settlements. Access to capital has evaporated, forcing companies from builder OAS SA to commodity trader Ceagro Agricola Ltda. and phone carrier Oi SA to restructure. Debt of airline Gol Linhas Aereas Inteligentes SA and steelmaker Usinas Siderurgicas de Minas Gerais SA is trading at a discount of half the face value or more as investors speculate on which company will be next.
Law firms like Dias Carneiro Advogados are hiring to keep up with the demand for their advisory services — and there’s still not enough to go around. Clients are competing for attention to make sure they will get priority, said Renato Franco, a partner at restructuring consultancy Integra Associados. “In the past, having many clients was a sign of competence. Now it is a negative factor because clients want to make sure you will give them full attention,” Franco said in an interview in Sao Paulo.
Brazilian debt now accounts for 45 percent of Bank of America Corp.’s $137 billion index for distressed emerging-market bonds, compared with less than 10 percent a year ago. Average yields on Brazilian corporate debt have come down from their peak last month of almost 12 percent, but they’re still well above 10 percent, according to JPMorgan Chase & Co.
The economic distress is leading to a boom for firms that specialize in helping debt-laden companies. Dias Carneiro expanded its restructuring and insolvency department by 40 percent in the past 12 months to 52 people — and the practice continues to grow, Joel Luis Thomaz Bastos, a partner at the Sao Paulo-based law firm, said in a phone interview.
“We saw an exponential growth in the number of consultations in December,” he said. “The economy is halted and to resume growth, we are talking about three years — being optimistic.”
The number of bankruptcy protection requests by companies more than tripled to 155 in February from a year earlier, according to data from credit-checking company Serasa Experian.
Brazil’s economic output declined 3.8 percent in 2015 and is forecast to continue shrinking this year. With recovery still far off, the question now is whether companies will be able to emerge successfully from restructuring efforts, said Andre Schwartzman, another partner at Integra Associados.
“You have to structure your company so it can survive in a shrinking economy for two or three years and you need to do your homework and define if the company is viable or not,” Schwartzman said. “Some companies are now like zombies. They are still going on but you know their business is not sustainable.”