The Brazilian economy continues to struggle, having been the second worst-performing world economy in 2015. Brazil is facing two key problems. The country’s political crisis continues, with President Rousseff remaining at risk of a new impeachment process. The linked “Lava Jato” corruption scandal affecting Petrobras and many of Brazil’s leading companies has stalled many projects in the offshore and construction industries. In addition, inflation in Brazil rose to over 10 per cent. in 2015 and the Brazilian Real reached a record low against the US Dollar in recent weeks.
These woes add extra burdens for the oil and gas industry, already weakened by oil falling to sub-US$30 a barrel. However, it is not just the oil and gas industry that has been affected. Other parts of the energy and construction sector, especially shipyards, and other sectors such as retail and real estate, are also suffering.
However, there remain opportunities in Brazil: for foreign investors looking at distressed M&A assets; for debt restructuring and the development of a non-performing loans market to follow similar activity in Europe; and in new energy projects in alternative sectors, principally in wind and solar.
Recent developments include:
Local content rules, or in other words the requirement for Brazilian companies and services to be employed in projects in Brazil, often increase the cost of oil and gas investments in Brazil. The “Lava Jato” scandal means that many of the local companies that would usually fulfil the “local content” requirement on transactions are not able to participate in future projects. Therefore, after much speculation, on 18 January 2016, the Brazilian government launched the PEDEFOR programme to look at improving supply chain competitiveness by easing local content rules, with proposals expected within 90 days. If major changes are made, this will open up new opportunities for international investors and companies. We will be circulating a more detailed update on this development shortly.
Tax or Stimulus?
Many countries have chosen to cut taxes imposed on the oil industry to support output: the UK cut both the Petroleum Revenue Tax and supplementary charge in 2015. However, Brazil cannot decide whether to support the industry with stimulus measures or make up for revenues lost elsewhere by more heavily taxing its “golden goose” industry. At the beginning of January 2016, the state of Rio imposed new taxes on oil production, hoping to raise US$450m to plug budget deficits. Meanwhile the federal Energy Minister has announced that the government is considering stimulus plans.
A key block on international financing investment in Brazil, especially in local infrastructure projects, is the instability of the currency and the lack of availability of long-term hedging products. With the intention of counteracting these effects, the new Minister of Finance, Nelson Barbosa, has recently announced the intention of the Banco Central do Brasil, the principal monetary authority, to launch programmes to provide hedging assistance to Brazilian companies.
However, this may do little to assist international companies and lenders. The market has been reluctant to provide hedging where the risk cannot be accurately priced, and the ongoing political and economic issues must make it difficult to rely on any schemes introduced. There must also be a question mark as to whether they will provide sufficient certainty to satisfy the international markets.
As this is the case, multilateral agencies are likely to continue to need to bridge the funding gap, working alongside BNDES (the Brazilian development bank).
With a number of Brazil’s largest companies in judicial recuperation, and others – including Sete Brasil – on the edge, the Brazilian restructuring process remains put to the test. Positive developments include the apparently successful inclusion of foreign investors in the recuperation plan of the construction company, OAS, which plan was approved by the court in the past few days. Also of particular note have been decisions in the last 12 months concerning the effect of Brazilian insolvency proceedings on international arbitration and a further decision confirming that non-Brazilian financial investment vehicles can be subject to Brazilian insolvency proceedings. As Brazil has not implemented the UNCITRAL Model Law on Insolvency, the cross-border ramifications of Brazilian insolvencies will remain uncertain. CMS has experience in dealing with the cross-border elements of Brazilian restructuring, including among others, Malaysia, Singapore, Norway, the UK and the Netherlands, all key jurisdictions.