In Brazil’s Bad Year, These Corporate Borrowers Were Hardest Hit

December 31, 2015

  • For corporate bondholders, 2015 was the worst in a decade
  • Latin America’s bigget economy lurched from crisis to crisis

For Brazil, 2015 was never going to be a banner year. But even the pessimists were surprised by how bad it actually turned out to be.

Latin America’s largest economy was hit by crisis after crisis: A colossal corruption scandal. The worst recession in a quarter century. A growing fiscal deficit. The arrest of a billionaire banker. A mining catastrophe. The start of presidential impeachment proceedings. Political paralysis. And, finally, the loss of its coveted investment grade.

“I can’t remember a year this bad since I started working in the market back in 1996,” said Rodrigo Borges, the 43-year-old chief investment officer for fixed income at Franklin Templeton in Sao Paulo. “I can’t give a prognosis for next year — of course it will be a bad one in terms of growth — but so much of what’s going on now is unprecedented.”

The unrelenting bad news turned 2015 into the worst year for Brazil’s corporate bondholders in more than a decade, with JPMorgan Chase & Co.’s index for the nation’s corporate notes slumping about 16 percent. Ratings firms doled out about 240 downgrades, excluding financial companies — and only 33 upgrades. And out of the 25 bonds with the lowest returns on the 1000-member Bloomberg USD Emerging Market Corporate Bond Index, more than half were from Brazil.

Government debt also suffered: A gauge of sovereign notes measured by JPMorgan has tumbled 13 percent, the most since 1998. The cost of insuring the nation’s debt using credit-default swaps approached an 11-year high this month, signaling the perception of risk is almost three times that for Mexico.

Here’s a snapshot of some of the worst bombshells to hit Brazil this year, how they affected corporate debt and what to expect in 2016:

The Corruption Scandal

  • What’s happening: Federal prosecutors say builders paid bribes to executives and politicians to win lucrative contracts from Petroleo Brasileiro SA. The state-run oil producer lost as much as 29 billion reais ($7.3 billion) from the rigged contracts, according to Brazil’s audit court.
  • Who’s been hit: OAS SA, Grupo Schahin and Galvao Engenharia SA are among companies that filed for bankruptcy protection after being locked out of credit markets or losing business because of allegations in the so-called Carwash case. Grupo BTG Pactual SA and Odebrecht saw their then-chief executive officers jailed amid the probe, sending bonds tumbling.
  • What to watch in 2016: Petrobras has $24 billion of repayments coming due over 24 months, and plans to raise as much as $20 billion in 2016. Marcelo Odebrecht, the now former Odebrecht chief, is still in jail, while Andre Esteves, one of the founders of BTG Pactual, has been sent to house arrest. Both have denied any wrongdoing through lawyers.


The Commodities Plunge

  • What’s happening: The commodities super-cycle has gone bust, sending some of Brazil’s biggest exports plunging. Sugar hit the lowest level since 2008 earlier this year, while iron ore is hovering at about $40 per metric ton– down 43 percent year to date.
  • Who’s been hit: Sugar and ethanol producer Tonon Bioenergia SA filed for bankruptcy protection in December, just five months after restructuring its overseas bonds. Competitor GVO is still trying to reach an agreement on a standstill and extend maturities for 250 million reais in loans with banks. Ceagro Agricola Ltda., a commodity trader, surprised investors by skipping an interest payment on its bonds in May.
  • What to watch in 2016: Even after making bond payments this year, USJ Acucar e Alcool SA, the lone sugar mill with dollar bonds with its payments up to date, is still having a hard time convincing investors it won’t join the swelling ranks of Brazil’s defaulted sugar companies. The company’s $275 million of notes due 2019 have declined 46 percent this year, trading at just 38 cents on the dollar.

The Mining Disaster

  • What’s happening: A spill at the Samarco mine on Nov. 5 buried a village in Minas Gerais state, leaving about 20 people dead or missing and spewed billions of gallons of sludge into the Rio Doce river, doing untold damage to wildlife and interrupting drinking-water supplies.
  • Who’s been hit: Samarco and Vale SA have both seen their bonds tumble after the disaster.
  • What to watch in 2016: Vale, which co-owns Samarco with BHP Billiton Ltd., is looking at a potential multibillion-dollar payout and lost production.

The Currency Collapse

  • What’s happening: The real’s 32 percent plunge this year is making it more expensive for local companies to pay down $170 billion in dollar debt they accumulated during the boom years of the past decade.
  • Who’s been hit: Mall operator General Shopping skipped a coupon payment in September after being overwhelmed by its dollar debt. Airline Gol Linhas Aereas Inteligentes SA has seen notes plunge to a record as the recession slows demand and dollar costs climb.
  • What to watch in 2016: The currency is forecast to fall to 4.15 per dollar by the end of 2016, making dollar debt ever more expensive. The economy is forecast to contract 2.5 percent in a second year of recession — and the slump could be even bigger, according to Fitch Ratings.