Executives in Brazil, Latin America’s largest economy, are grappling with rising interest rates and a depreciating currency, forcing many to revise their financial strategies, according to a report by Bloomberg.
Companies are now focused on reprofiling debt, cutting back on investments, and finding ways to navigate the tightening economic environment.
While businesses worldwide are dealing with increased borrowing costs, Brazilian firms are facing particularly harsh conditions, exacerbated by one of the highest interest rates globally and minimal government support during the pandemic.
Brazil’s central bank has increased rates again, following a brief period of stability that lasted just over a year.
This has prompted many firms to take preemptive action, with some initiating financial adjustments as early as the second quarter of the year when traders began forecasting rate hikes.
The acceleration of these efforts comes as inflation worsens and the central bank signals more rate increases to come.
Interest rate challenges and currency devaluation
The benchmark Selic rate currently sits at 10.75%, far exceeding the 9.25% initially predicted for this year.
The elevated rates pose a significant challenge, particularly for heavily indebted companies.
Compounding the issue is Brazil’s currency, the real, which has depreciated by 11% this year.
The devaluation reflects growing concerns that the government’s ambitious spending plans will make it difficult to meet budget targets.
This dynamic is especially detrimental for businesses with expenses in US dollars but revenue in reais, such as airlines.
Brazil’s retail sector, healthcare industry, and agribusiness are also feeling the strain.
Leonardo Ono, a portfolio manager at Legacy Group Capital LLC said in the report:
The scenario is challenging, with rates over 10% when we were flirting with projections at 8% or 9%…We will see more companies doing liability management, and we will see some bankruptcy filings.
A study by FTI Consulting revealed that the average default risk for Brazilian companies has risen to 6.27%, the highest level recorded since 2016.
This heightened risk is a direct consequence of the rising cost of borrowing and increasing financial uncertainty.
Sectors under pressure: airlines, retail, and healthcare
Brazil’s airline industry is one of the most affected by the economic challenges, with companies like Azul SA facing difficulties due to the weakening real.
The airline is currently in discussions to merge with rival Gol Linhas Aereas Inteligentes SA and is exploring options to restructure its debt.
Similarly, the retail sector is under scrutiny, with Grupo Casas Bahia SA having struck a deal with creditors earlier in the year to address its financial challenges.
Ricardo Carvalho, head of Brazilian corporates at Fitch Ratings, observed that companies in the retail sector “are more disciplined” but that the recent rate increases have raised concerns about their financial health.
While many have adopted more cautious strategies, the healthcare sector may see the most significant changes in the coming months, as companies that expanded aggressively during low-rate periods are now forced to scale back.
Diagnosticos da America SA (Dasa), for example, is selling non-core assets and focusing on reducing debt.
According to sources cited by Bloomberg, the company is in advanced talks to sell its insurance brokerage and consultancy unit, Dasa Empresas, as part of its restructuring efforts.
Other healthcare firms, such as Kora Saude Participações SA and Oncoclinicas do Brasil Servicos Medicos SA, are similarly working to tidy their balance sheets.
Kora Saude recently initiated discussions with local bondholders for a waiver, anticipating a breach of its debt terms, while Oncoclinicas issued local notes worth 190 million reais to strengthen its cash position.
“The health sector is the one that worries me the most,” Carvalho said, noting that many companies in the sector still need to reduce cash burn and sell assets to remain viable.
Agribusiness and capital markets hit by rising costs
Brazil’s agribusiness sector is also facing severe challenges.
With high interest rates and declining commodity prices, two companies in the sector sought creditor protection in recent weeks.
The financial pressures on agribusiness firms highlight the far-reaching impact of Brazil’s economic conditions.
In capital markets, the issuance of local notes, known as debentures, reached an all-time high in the first half of 2024.
However, equity sales have plummeted, dropping 64% compared to the previous year, according to Brazil’s capital markets association.
Initial public offerings (IPOs) have also been scarce, with no IPOs occurring since 2021 due to the unfavorable market environment.
“I’m not seeing an IPO wave returning in the beginning of 2025,” said Denis Morante, founder of Fortezza Partners.
Companies scale back investments and prioritize debt management
Many Brazilian companies are responding to the challenging economic landscape by scaling back investment plans and focusing on preserving cash.
This trend is evident among firms that rely on floating-rate debt, where rising rates have significantly increased their borrowing costs.
Cosan SA, a conglomerate owned by billionaire Rubens Ometto, has opted to avoid using cash to establish new business lines.
Earlier this year, the company passed on the opportunity to become a strategic investor in Latin America’s largest water utility, prioritizing financial stability over expansion.
Cosan is also considering selling assets to pay down debt, according to sources familiar with the matter.
Steelmaker Gerdau SA is similarly holding off on expansion projects, awaiting more favorable conditions.
Gerdau had planned to build a new 1.75 billion reais rolling mill and expand its forestry base in southeastern Brazil, but these projects are now on hold.
However, the company has confirmed that it will maintain all investments already in its pipeline.
Daniel Lausidio, a partner at Cescon Barrieu, a law firm advising companies on capital markets transactions, said:
The immediate impact is to postpone any project that is not urgent and only do what is necessary.
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