The effects of high interest rates continue to strangle the financial health of Brazilian companies. Credit became easier during the pandemic, and they took out a large volume of loans. Many were unable to pay off this debt due to the sudden rise in interest rates. The number of companies resorting to the courts to gain time, get their house in order and preserve their businesses grows every month, having peaked in October.

Last month, 162 companies filed for bankruptcy protection, according to data from Serasa Experian, obtained exclusively by Estadão. The result is 51.4% higher than that of the same period in 2022. It is also the highest monthly mark in more than four years, since July 2019, when 176 companies filed for bankruptcy protection. In addition, last month's performance was the worst for all Octobers in the historical series, which began in 2005, when the bankruptcy protection law came into effect.

Despite the slight decline in the basic interest rate in recent months – currently at 12.25% per year –, the high level makes it difficult to renegotiate overdue debts and is the main reason, according to experts, for companies to succumb. And the outlook, they agree, is that the number of companies undergoing judicial recovery will continue to increase until the middle of next year.

Due to falling inflation, unemployment and the positive surprise in the Gross Domestic Product (GDP) performance, the economic scenario has improved. However, the financial situation remains complicated for a group of companies. In addition to heavyweights such as Oi – which is undergoing its second judicial recovery – and Americanas, companies familiar to Brazilians have also sought legal protection in recent months. Among them are 123 Milhas, MaxMilhas, M.Officer, Grupo Petrópolis (owner of the Itaipava beer brand) and SouthRock, the operator of Starbucks in Brazil, for example. In September, there were 3,872 companies in judicial recovery in the country. Brazil has a total of 2.16 million small, medium and large private companies, according to the consulting firm RGF Associados, which specializes in restructuring. In other words, one in every 500 companies was in this situation, in rounded numbers.

The number of insolvent individuals was calculated by the consultancy based on active CNPJs (Legal Entity Registry) listed with the Federal Revenue Service. Individual microentrepreneurs (MEIs), microenterprises and Non-Governmental Organizations (NGOs) were excluded from the account.

In the year to October, data from Serasa shows that 1,128 companies filed for bankruptcy protection, 61.8% more than in the same period in 2022. In October, the growth rate of requests (51.4%) was lower than the year-to-date. “In any case, it is an extremely high number”, says Luiz Rabi, economist at Serasa Experian and responsible for the statistics. He projects around 1,400 recoveries for the year, a figure that is unlikely to surpass the 2016 record of 1,863 requests.

Íntegra Associados partner Renato Franco explains that the high volume of judicial recoveries we see today is a reflection of the pandemic and the facilities created by the government and banks, such as the postponement of debt maturities. The solution only postponed the problem, as the debts fell due at a time when interest rates were high. “Today, there is an aftermath of the pandemic. There are several companies in line to file for judicial recovery,” says Franco.

Time lag

The current peak in corporate insolvency reflects the increase in accumulated defaults in the past. Rabi says that the process that led to the growth in the number of companies undergoing judicial recovery this year began in the fourth quarter of 2021.

At that time, he recalls, both individual and corporate defaults began to increase. And at the beginning of this year, this accumulation of non-payment of debts led a large number of companies to insolvency. “Judicial recovery is the last carriage to move, when the train starts moving”, compares the economist. Therefore, today, despite the economic scenario being better, the statistics of corporate insolvency continue to worsen. In Rabi’s opinion, the volume of judicial recovery should remain high until the middle of next year. “There is a long way to go before it stabilizes”, he says, noting that the annual growth rate of requests is in the range of 60%. “We will see more companies entering judicial recovery at least until the first half of 2024”, predicts Rodrigo Gallegos, partner at the consulting firm RGF. The reason is that the small drop in the Selic rate, from 13.75% to 12.25%, did not bring relief to companies.

He recalls the damage that Americanas' bankruptcy filing caused to the financial system. “At the beginning of the year, it was a perfect storm: sky-high interest rates, retailers scaring banks in ways they couldn't have imagined, and a change in government.”

Gallegos says that banks continue to be very restrictive in releasing credit, although they have resumed conversations with companies to approve resources, albeit punctually.
Gabriela Martines, a partner in the Corporate Restructuring area at TozziniFreire Advogados, agrees with the consultant. She notes that institutions are opening up renegotiations, but are much more alert to fraud, especially after the Americanas episode.

“Banks want to be sure of the numbers and values, and they seek to have guarantees,” he says. “Americanas was a company that everyone trusted a lot, so much so that no one demanded guarantees, and what happened happened.”

According to the latest Credit Report from the Central Bank, in September, the granting of credit for advance payment of credit card bills for companies increased by 4.4% in 12 months and 8.6% in the year. In the credit line for working capital with a term of less than one year, there was an increase of 8.2% in 12 months and 5.1% in one year in concessions.

“We are now seeing bank defaults starting to fall and some credit concessions starting to react,” says Rabi, considering that this movement is just beginning, but should continue.

Minors feel more

Smaller companies have faced more financial difficulties and sought legal protection to maintain their businesses. From January to October, almost 65% of the 1,128 judicial recoveries were requested by small companies, followed by medium-sized (25%) and large (10%), according to data from Serasa.

Sectors that depend on the domestic market and are impacted by high interest rates, such as services and commerce, accounted for the largest volume of judicial recovery requests this year: 72.5%, from January to October. The industry's share was 18.6%, followed by the primary sector, which includes agriculture, livestock and mining, with 8.9% of the requests.

Climate risk

In addition to all the setbacks faced by companies in general, Camila Crespi, an associate lawyer at Luchesi Advogados, a law firm specializing in the agribusiness sector, sees the risk of the number of requests for judicial recovery increasing among agricultural producers. From January until now, the firm has been monitoring more than 15 requests for judicial recovery of agribusiness companies.

“There could be a significant increase in requests for judicial recovery from producers in the South region,” says the lawyer. The South has been hit by heavy rains and has had three years of crop failures.

In addition to the adverse weather conditions, Camila says that grain producers in the Midwest have been facing an imbalance between rising costs and falling prices. This has caused many to postpone selling grains in the hope of higher prices. “Many producers are failing to meet sales contracts, and we have seen a state of insolvency, which is a red flag, a pre-judicial recovery act,” she warns.

Reproduction source: State