Corporate defaults are high, but still far from the 2015-16 crisis – 07/19/2023 – Market

A survey carried out by SWM (Solution Wealth Management), BTG Pactual’s office, shows that, although the default rate of companies is at a high level, the situation is still far from that observed in the 2015 and 2016 crisis in Brazil.

With the basic interest rate (Selic) high, currently at 13.75% per year, from 2021 to now Brazil has been facing a period of growth in corporate defaults, according to the survey, which crossed data from Serasa, the Central Bank and risk rating agencies S&P, Moody’s and Fitch.

Even so, the situation is much better than what Brazil experienced between 2015 and 2016.

In May of this year, the average default rate of companies reached 2.5%, while in May 2016 it was 3.2%. At its peak, in May 2017, it reached 4%.

The number of requests for judicial recovery is also far from that registered in that period: the cumulative 12-month moving average of the number of requests was 83 in May 2023 against 138 in May 2016. At its peak, it reached 156 requests in the months of October and November 2016.

Following the high level of corporate indebtedness, there was a sharp increase in the downgrading of credit ratings by Brazilian companies in 2023.

Until May of this year, 77 Brazilian companies had their ratings downgraded (downgrade) by risk rating agencies, while only 11 companies saw their credit ratings improve (upgrade). Last year, there were 19 downgrades, against 31 upgrades, while in 2021 there were 74 upgrades for 24 downgrades.

Despite the sharp increase in companies with downgraded credit ratings, 2016 was much worse, when there were 311 downgrades to 29 upgrades.

“The increase in corporate defaults and downgrades is the result of higher interest rates and greater household indebtedness, but we are at a distant level from 2015-16”, says Odilon Costa, responsible for SWM’s fixed income desk and who commanded the survey.

According to the survey, companies are managing to maintain themselves with lower leverage, that is, with a lower ratio of net debt to operating income.

This factor, together with longer-term and more diversified debt, limited the negative effect of the macroeconomic scenario. On the other hand, companies had to resort to measures that made the credit market more conservative.

OUTLOOK

For analyst Odilon Costa, the slowdown in inflation and the Brazilian GDP (Gross Domestic Product) —apart from the agribusiness sector— has created a more benign environment for reducing the Selic rate, especially if there is an evolution in economic policy guidelines, such as the advancement of tax reform and the new fiscal framework in Congress.

Even so, Costa analyzes that the credit scenario is still very challenging, especially for companies in more cyclical sectors and those that are more indebted.