Brazilian companies seeking alternative approaches to restructuring in tough economic conditions
Many Brazilian companies, particularly in sectors such as construction, infrastructure and retail, which depend to a large extent on the internal Brazilian market, are still suffering from the impact of the 2015/16 recession.
Brazil’s gross gomestic product (GDP) in both of these years contracted by 3.5%. The country had not seen a two-year recession since 1930 and this was the worst downturn since the mid-1990s, according to the Brazilian Institute for Statistics and Geography. The economy has not yet recovered as hoped, with annual GDP growth hovering at around 1% in 2017/18 and the outlook for 2019 a meager 0.8%.
Tightening credit markets
Since 2013 inflation had been on the rise and the Brazilian Central Bank rate SELIC went from an already high level of 7.25% in 2013 to 14.25% in 2015. Commercial credit markets dried up and the public sector all but stopped spending funds on investments such as infrastructure or public housing. Interest rates have since been lowered to 6%, but the credit market is still very difficult.
It is no surprise that the economic crisis, now in its fifth year, has taken its toll on a number of companies. According to a research report from FGV, a leading law and business school in Sao Paulo, judicial restructuring procedures doubled from an annual average of 750 (2005-15) to 1,560 for 2016-18. Brazil‘s top five construction companies in 2015 all face judicial reorganisation procedures.
Undergoing judicial restructuring is sometimes the only available solution, but in Brazil this process can be more painful and time consuming than in many other jurisdictions. According to EXAME, a leading Brazilian business magazine, only 6-10% of companies exit judicial restructuring procedures successfully. The debt recovery rate of 16% is low even for Latin America. Chile, for instance, achieves a debt recovery rate of 33%.
Better alternatives available
In most cases there is a better solution available than judicial restructuring procedures when companies face distressed situations.
For example, Brazilian Nexia member PP&C has assisted a construction company since 2016 in successfully managing an extensive non-judicial turnaround programme. The programme has included balance sheet as well as profit and loss statement measures, helping the company to downsize from 6,000 to 2,000 employees. Several major non-core assets, such as participations in privatised federal highways and airport operations, were sold and the proceeds used to reduce the company‘s debt level. The most recent distressed asset sale was finalised in August 2019.
A major part of the debt structure was renegotiated with four leading Brazilian banks, achieving favorable terms for the company and providing sufficient time for management to get it back on track.
PP&C provided a broad range of advice throughout the process, including management consulting, financial advisory, tax consulting and programme management.
Growing demand for turnaournd, restructuring and insolvency (TRI) services
This is just one example of how multi-disciplinary teams from Nexia International firms can successfully assist a company in difficult times. Nexia’s TRI group, which includes Nexia’s leading turnaround and insolvency experts, has established a presence in 26 countries, ranging from Brazil to China and the US to Australia and will continue to expand its worldwide network of highly experienced turnaround professionals.
For more information, contact:
Paulo J. de Carvalho or Rainer Koellgen
PP&C Auditores Independentes, Brazil