March 18, 2014 6:38 p.m.
Brazil weathered its largest-ever bankruptcy filing late last year, but there may be more to come for the embattled South American nation.
As its economy weakens and investor confidence flags, a number of firms that loaded up on debt during the nation’s boom years are poised to follow companies controlled by Brazilian tycoon Eike Batista into bankruptcy protection, according to investors who specialize in distressed debt, bankers and restructuring professionals.
To be sure, nothing on the scale of Mr. Batista’s corporate collapse is expected.
Brazil’s economy grew just 2.3% in 2013, compared with 7.5% in 2010. The country also has struggled with persistently high inflation, which has forced its central bank to raise interest rates.
Ethanol and mining companies are among those trying to stay afloat as the Brazilian economy tries to climb out of its slump.
“With commodity prices coming down in certain sectors and the economy slowing, there’s an uptick in [restructuring] activity and we expect that to continue through the rest of this year and next,” said Richard Cooper, a partner at Cleary Gottlieb Steen & Hamilton LLP who focuses on domestic and international restructurings, particularly in Latin America.
Local companies in distress have been more open to seeking court protection since Brazil in 2005 changed its judicial recovery law to allow companies to restructure rather than liquidate. Since then, the number of companies seeking judicial recovery, Brazil’s version of Chapter 11 bankruptcy protection, has climbed almost every year. In 2013, 874 companies sought court protection in Brazil, up from 252 in 2006, the law’s first full year, according to numbers compiled by credit data provider Serasa Experian. Meanwhile, liquidation requests have fallen by half, to fewer than 2,000 last year from more than 4,000 in 2006 as more companies opt to restructure under the judicial recovery law.
Brazil’s sugar ethanol producers, in particular, have been under stress in recent months as the government keeps a lid on gasoline prices, pushing ethanol prices down. Turnaround consulting firm Alvarez & Marsal said the agricultural sector, represented mainly by ethanol firms, accounts for roughly 20% of its restructuring clients in Brazil.
“The government is gaining votes at the expense of…mainly the ethanol sector,” said Joel Thomaz Bastos, an attorney with Dias, Arystóbulo, Flores, Sanches e Thomaz Bastos in São Paulo. Brazilian government officials didn’t respond to requests for comment.
Mr. Bastos represents midsize sugar and ethanol producer Aralco SA Açúcar & Álcool, which filed for bankruptcy protection in Brazil at the end of February with 1.8 billion reais ($776 million) in debt.
Aralco sold $250 million in debt last spring, locking in good rates just before investors rushed to sell off Brazilian government bonds amid fears that the country’s credit rating could be downgraded. Less than a year later, some of the company’s bonds are trading at around eight cents on the dollar.
Another company facing difficulties is Virgolino de Oliveira SA, which purchases, cultivates and crushes sugar cane for the production of sugar and ethanol. Though the company, known as GVO, recently paid interest on one of its bonds, it wouldn’t be able to issue new international bonds if it wanted to, because investor appetite has waned, Carlos Otto Laure, the company’s chief financial officer said.
GVO owes about $600 million to creditors in Brazil, the U.S., Europe and Asia, and debt financing from a private investor would be an option, Mr. Laure said. Some of its bonds are trading at around 55 cents on the dollar, and restructuring advisers say they are following the company closely. Mr. Laure, however, said GVO isn’t planning to file for bankruptcy protection.
Some Brazilian mining companies have also been hit hard in the past few years as commodity and labor costs rise and credit tightens, Mr. Cooper said.
Distressed gold mining firms Jaguar Mining Inc. and Mirabela Nickel Ltd. are working with creditors to restructure their debts. While Mirabela is restructuring its debt in Australia, the company said in a regulatory filing that a court-supervised process in Brazil also will be necessary. Troubled Brazilian companies must still contend with uncertainty surrounding the country’s restructuring law. Even after two key pieces of Mr. Batista’s giant empire, OGX Petróleo e Gás Participações SA (now known as Óleo e Gás Participações SA) and shipbuilder OSX Brasil SA, filed for bankruptcy protection in the fall of 2013, some companies still fear the stigma of the process, restructuring advisers said. “In the U.S., the whole bankruptcy protection process is more mature and companies are more comfortable seeking protection earlier on,” said Marcos Spieler, managing director at the Brazilian unit of investment bank Rothschild Inc.
And though the judicial recovery law that allows companies to restructure has been in place for nine years, the Batista filings have been its first major test. OGX, for example, is still working to implement the restructuring deal it reached with creditors in December, a person familiar with the matter said.