Tuesday, 13 January 2009

Credit Crunch, Brazil Commodity Producers and Defaults: The Case of Arantes

In September last year, Finance Minister Guido Mantega, a sort of a financial markets Criswell (remember the character of the Ed Wood movie known for his bizarre predictions?) said for the last time that Brazilian companies would remain insulated from the impact of the global credit crunch. Unfortunately I don't have that exact quote with me at the moment. Well, Mr. Criswell, Bingo! companies in your nation are struggling to refinance their debts.

Since mid-June, credit ratings agencies have downgraded the credit outlook on almost two dozen Brazilian companies, mainly commodity producers and banks specialised in middle-market and consumer lending. Commodity producers are struggling with the worst price rout in three decades. Although cash holdings among Brazilian commodity producers seemed to be a few months ago in relatively good shape, the fact that borrowing costs surged in the past ten months meant they had to use more of their cash to meet debt payments. Commodity and food companies were said to be restructuring millions of dollars in loans and bonds. Since November, several ethanol producers were forced to invoke judicial recovery filings in Brazil, the equivalent to Chapter 11 bankruptcy filings in the U.S.

The case of Arantes is the latest in this long list of credit market casualties. Arantes filed for bankruptcy recovery last week. According to Fitch, which downgraded Arantes ratings to D from CC (default), the company failed to meet interest payments $150 million of senior unsecured notes due 2013. The instalment was about $8 million. Fitch says ''Arantes' filing is a result of the company's inability torollover short term lines of credit, as well as financialobligations created by reported derivative loses of about 230 million reais.''

The bottomline is, many more companies will likely have to invoke this figure to avert running out of cash. The losses to bondholders will be immense, not only because of the default but the tendency by Brazilian courts to proects bad borrowers and hurt creditors. What is Mr. Mantega going to do to reinforce confidence that these events don't happen again? Nothing. In his mind, there is no room for contract respect, and the longer the period for judicial recovery, the bigger the chance the companies will keep workers on their headcount and all that bla bla bla.

1 comment:

  1. Hi,

    This is good. You should add more tables and more detailed information about companies. We had with my father some Cosan shares, but we are selling them. Do you think things will get uglier for other commodity companies?