New bankruptcy law of Brazil is a risk to corporate recoveries: Fitch Ratings
The new bankruptcy law of Brazil could lower recovery prospects for the debt of speculative-grade Latin American corporates and incentivise distressed issuers to negotiate pre-packaged arrangements in lieu of in-court restructurings, says Fitch Ratings.
The method of reorganisation does not have rating implications but, due to the veto of a provision in the law related to contingent liabilities on asset sales, asset values could be negatively affected or buyers discouraged from bidding, which could adversely affect debt recovery.
President Jair Bolsonaro signed the new bankruptcy code into law on 24 December 2020 but vetoed numerous provisions including one that allowed asset sales under in-court restructurings to be sold free and clear of contingent liabilities; including for environmental, regulatory, tax, labor and anti-corruption claims. The law becomes effective on 23 January 2021 but the Brazilian Congress may decide to override the veto on asset sales, among others, with a decision expected by early March 2021, according to the Ministry of Economy.
Fitch assigns Recovery Ratings on non-financial corporates with Issuer Default Ratings (IDRs) of ‘B+’ or below because default risk is high and the recovery prospect of debt obligations, should companies restructure, is important to investors. Approximately 22%, or 55, of the 246 Latin American corporate issuers in Fitch’s portfolio with IDRs in the categories of ‘B+’ or below as of December 2020 have Recovery Ratings. Of these 55 companies, 13 are domiciled in Brazil.
The corporate default trend in Latin America increased over the past two decades, with Brazil accounting for approximately 35% of all defaults. The uptrend in defaults was due to highly volatile commodity prices, political unrest, trade agreement uncertainty and Brazil’s severe 36-month recession spanning 2014–2016. Capital market access and the ability to refinance maturing debt can also be drivers of default. However, the number of cross-border Latin American corporate issuers with Foreign Currency IDRs of ‘CCC+’ and below increased to 34 at the end of December from 28 a year earlier, suggesting capital market access has held up despite the effects of the pandemic.
Fitch’s 2021 Sector Outlook for Latin American corporates is improving with general expectations of moderately lower yoy leverage as revenue recovers from the effects of the coronavirus pandemic. However, the degree of economic rebound in Brazil is a key watch item for the region in 2021. Fitch’s 2020 and 2021 GDP forecasts for Brazil reflect 4.6% contraction and 3.1% growth, respectively.
