A new crisis is expected to undermine ongoing restructuring efforts.

A new crisis is expected to undermine ongoing restructuring efforts.

The consulting firm Alvarez & Marsal assesses that the unprecedented economic impact of the coronavirus crisis has the potential to generate a new wave of judicial and extrajudicial reorganizations at levels similar to those observed in Brazil between 2015 and 2017, when large groups suffered the consequences of Lava Jato.

Leonardo Coelho, managing partner of Alvarez & Marsal, states that many companies were emerging from a four- or five-year crisis, finalizing debt restructuring and, with rare exceptions, resuming operations, but still without a very strong cash flow. This challenging situation therefore arrives at a time when they still needed to catch their breath to take off. Instead, they will face a scenario of economic paralysis, with the interruption of the flow of people impacting the entire production chain.

“In a scenario like this, companies will need both new short-term money and extended payment terms,” says Coelho. “Many, even those who have done their homework, will suffer.” According to the executive, the measures already announced by the government were important, but not yet sufficient because the current crisis calls for a different approach than the traditional one of adjusting interest rates and banks' reserve requirements. “Industry is already organizing itself, requesting government forgiveness for tax payments. And many retailers are seeking legal advice for preventive habeas corpus to avoid paying taxes, including on payroll,” he states.

Coelho points out that retail segments tend to be the most drastically affected, due to the combination of lack of foot traffic, possible shortages of some products, particularly those imported from China, and unemployment. "A drastic combination, never seen before," he says. Yesterday, announcements of shopping mall closures also began.

According to him, some stores have already seen a reduction in sales of around 60% to 85% over the last weekend – in the clothing sector, the percentage reached between 80% and 90%.

“Even if there is an agreement to suspend corporate debt payments for the next 120 days, it doesn't solve the problem. Some segments are already at such low sales levels that they won't be able to maintain minimum levels of activity because that's not possible with only 10% or 15% of the originally planned sales,” he says. In addition to credit, the suspension of taxes would be relevant to maintain salary payments and would contain a wave of brutal layoffs, although cuts in industry and retail are certain, according to him, because “nobody can withstand three or four months of stopped activity.”

Within the retail sector, some businesses will experience stress due to excess demand: food, supermarkets, cleaning supplies, and logistics for essential goods.

“These sectors will be overwhelmed for the next four months and will serve as some relief to fill some of the workforce that will be laid off. But these are four sectors, compared to the entire economy. That's why I say the situation is too drastic to be dealt with using traditional prescriptions,” he stated.

According to the executive, companies with a leverage ratio greater than 3 times their EBITDA already deserve attention and more careful financial management, given the current difficulties. "The plan up until a month ago was to generate cash flow based on an expected increase in GDP, which is not likely to materialize."

Another sector of concern is agribusiness, particularly the sugar and ethanol industry, which has been heavily affected by the exchange rate. Grains and proteins also tend to be impacted, but more directly by a reduction in consumption, eventually. In addition, any business related to tourism has also been paralyzed by the crisis.

Coelho also highlighted that, given the government's delay in recognizing the seriousness of the situation this crisis will bring to businesses, there is a great deal of activity from sectoral entities to align initiatives and seek coordinated solutions.

"There is collective goodwill in the productive sector, including the major banks, who are aware of the seriousness of the situation," he says.

In one respect, the way out of the crisis may be different from the previous one. Given the recent announcements, the world will see even lower interest rates, including in Brazil, a scenario that could make access to credit cheaper for businesses.

“But for credit to actually be available, the situation needs to be at least minimally under control. Today, we are not experiencing a situation of risk assessment, but rather one of generalized uncertainty, which leads to the paralysis of economic entities,” says Coelho.

Author

By Ana Paula Ragazzi — From São Paulo

Source

Value|Globo