Brazil’s economy continues to be adversely affected by the Lava Jato (Car Wash scandal) and, now, by the decision of the lower house of Congress on 17 April 2016 to impeach President Dilma Rousseff. The Ministry of Finance’s own figures indicate that there will be no improvement in the economy until 2017, with a return to ‘normal’ interest and inflation only in 2019.
This, combined with low commodity prices and a contraction in the availability of working capital, means that a growing number of Brazilian corporate debtors are in loan default. It is reported that companies are making requests of Brazilian banks to re-negotiate at least R$100bn distressed debt. Brazil’s central bank’s data, released earlier in April 2016, indicates a 30 per cent. increase in re-negotiated loans and a 50 per cent. increase in restructured credit.
As a result, banks in Brazil are reviewing their loan portofolios and the number of non-performing loans (NPLs) offered for sale is increasing.
Brazil’s secondary debt market is relatively undeveloped, with one of the leading state-controlled banks - Banco do Brasil - not yet participating in the market. Nonetheless, in the last year, there has been an acceleration in the sale of NPL portfolios in Brazil. Initially this trend was led by international banks (such as Santander and Citi) selling large portfolios of highly distressed assets with very large discounts to face value. This example is now being followed by local private banks.
The Brazilian NPL market has been very active in 2015 and 2016. For example, Itau Unibanco sold a R$2.2billion NPL portfolio to the Brazilian fund, Jive Investments (backed by Cerberus) at the end of January 2016, with the discount to face value suggested to be around 97 per cent. The portfolio of around 2 thousand separate connections included some debts that had been non-current for almost four years. This was the first sale of a significant credit portfolio by a large private Brazilian bank.
The distinguishing feature of the NPL market in Brazil to date is that most of the NPLs being offered in the market are highly distressed and have been non-performing for many years. Many of the NPL portfolios can be equated with consumer debt portfolios where the aim of the acquiring fund is to achieve value through an effective and cost-efficient collection strategy. This contrasts with the position in Europe and the US, where corporate NPL acquisitions are driven by analysis of the value of the underlying assets. There is not yet a trend, as seen in the US and Europe, of selling NPLs at an earlier stage in a debtor’s default, where warning indicators may be present but the debtor has not yet entered restructuring discussions. So far, there is no ‘loan to own’ strategic market in Brazil. In part, this is due to the generally perceived failure of Brazil’s insolvency regime, where only a tiny percentage (suggested to be around 1 per cent.) of judicially-supervised restructurings are considered successful and proprietary rights have less weight than in other jurisdictions.