Bankruptcy filings surge in May

Requests for judicial reorganization (bankruptcy protection) rose 68.6% from April to May, and bankruptcy filings increased by 30%, according to Boa Vista. It is too early to attribute these numbers to the Covid-19 pandemic, but debt restructuring specialists, credit bureaus, and banks see signs of an escalation that could lead Brazil to a record number of business failures.

The consulting firm Pantalica Partners estimates that at least 3,000 companies will file for bankruptcy protection if a 6% drop in GDP is confirmed this year. This number is far higher than the record 1,863 companies that sought creditor protection in court during the 2016 recession. “An average company in Brazil has enough cash to last 60 days of operation. That time has already passed [since the beginning of the pandemic],” says Salvatore Milanese, a partner at the consulting firm.

As a mitigating factor, there is an effort by financial institutions and suppliers to extend payment deadlines. The Selic rate at a historic low of 3% per year – a level very different from what was seen in past crises – is another factor that should contribute to keeping some renegotiations with creditors out of court.

The initial wave mainly affected companies that were already struggling, given the meager economic growth of recent years. However, the signs of the coronavirus crisis are noticeable in the prevalence of small businesses (94.8%) and the service sector (55.6%) in the bankruptcy filings collected by Boa Vista – precisely the segments where the shutdown of activity had the most immediate impact.

"The service sector was already having more difficulty recovering even before the pandemic," says Flávio Calife, chief economist at Boa Vista.

According to him, the May figures may reflect some impact of the crisis, but this impact will only become more visible from now on. Compared to the same month last year, there was a drop in bankruptcy filings (-91.9%) and judicial reorganization requests (-40.3%). There are two reasons for this: the backlog of requests due to social isolation measures and the time lag between the crisis hitting and the entrepreneur taking a more drastic step. "Nobody makes a decision like that overnight," says Calife.

This is also the view of Luiz Rabi, chief economist at Serasa Experian. According to him, delinquency indicators are beginning to show signs of deterioration, but requests for debt recovery are being held back and should accelerate in the second half of the year. "From an economic point of view, the damage has already been done, and a lot of it. This will become apparent in a few months," he says.

In mid-April, credit bureaus extended the grace period for reporting defaulters to credit bureaus from 10 to 45 days, as a way to encourage renegotiations between the parties.

Banks, in turn, opened the possibility of extending credit contracts for clients who were up-to-date with their payments. The grace period ranges from 60 to 180 days, depending on the transaction, the client, and the financial institution. According to the Brazilian Federation of Banks (Febraban), 9.7 million transactions, with a total outstanding balance of R$ 550.1 billion, were renegotiated from the beginning of March until May 22nd.

“The banks have made a commendable effort, but it won’t be enough,” says Milanese of Pantalica. “It doesn’t eliminate the risks.”

The possibility of the Central Bank (BC) buying private securities is an initiative that goes in the right direction, but, according to the consultant, it will have a limited effect on improving the lives of most companies. Small companies do not access the capital market in Brazil, and the promissory notes they issue currently find low acceptance – something that should change in the coming years with the new electronic securities regulations. According to Rabi, from Serasa Experian, two-thirds of corporate debt in Brazil is of commercial origin, not banking origin.

According to Thomas Felsberg, from the law firm Felsberg Advogados, the purchase of bonds by the Central Bank will be restricted to larger companies, but could have a broader positive effect. "It could prevent the chain reaction that occurs when a large company enters bankruptcy protection," he states.

Executives from banks and credit card companies interviewed by Valor say they haven't yet noticed an increase in the number of bankruptcy filings. However, they predict an acceleration in the last months of the year, when the quarantine is expected to end and contract renegotiation deadlines expire. "It will certainly happen. It's a matter of time," says an executive from the wholesale division of a large financial institution.

A source from another bank says that the bankruptcy filings that have appeared so far refer to companies that were already in difficulty before the pandemic and are concentrated in companies with annual revenue below R$ 1 billion. If the trend persists, it will be a different scenario from what was seen in 2016. At that time, the crisis and the Lava Jato corruption scandal led a number of multi-billion dollar companies to seek protection in court.

The experience of a few years ago should also influence the new processes. According to an executive in the wholesale banking sector of a large bank, this time there tends to be a greater willingness on the part of financial institutions to renegotiate debts outside of the judicial sphere. "Those processes from 2015-2016 didn't save anyone," he observes.

Adding to this change is the fact that the Selic rate is at 3% per year, which makes it much more viable for creditors and debtors to renegotiate contracts. This applies not only to banks. The new interest rate environment has brought to the scene investors more willing to take risks, including in private credit. "The moment is critical, but the conditions have changed. We are sitting down with more asset managers to talk," says this executive.

Ricardo Knoepfelmacher, a partner at RK Partners, a firm specializing in corporate restructuring, says that large companies are requesting contract extensions before resorting to "stronger" measures. However, he believes that, overall, requests for judicial reorganization will increase significantly in the future.

“There will be an explosion of cases in the Judiciary,” adds Felsberg. According to the lawyer, bill 1.397/2020, which automatically suspends judicial executions against companies during the crisis, is an attempt to prevent a collapse of the courts. The text, authored by Congressman Hugo Leal (PSD-RJ), has passed the Chamber of Deputies and will still be considered by the Senate.

Source: Valor Econômico