Analysis: Lula, Bolsonaro and market look to cure Brazil consumer debt hangover

BRD Groupe Societe Generale SA

17/10/2022 14:04

By Tatiana Bautzer
       SAO PAULO, Oct 17 (Reuters) - Both candidates in
Brazil's presidential runoff election this month have offered
relief for unpaid debts weighing on family finances and hurting
economic growth.
    But economists and bankers say their solutions are minor
band-aids compared to the impact of overextended consumers on
Brazil's economy – and lenders themselves are finding new ways
to renegotiate delinquent debts and lift that overhang from
credit markets.
    With nearly 70 million Brazilians blacklisted by credit
agency Serasa, owing 290 billion reais ($54.4 billion), debt
relief is smart politics in a closely fought presidential
campaign, ahead of an Oct. 30 runoff vote. Once a customer is
behind on any loan or payment, creditors can request
restrictions on their credit profile if efforts to get payment
failed.
    Leftist former President Luiz Inacio Lula da Silva, who
narrowly led the first-round vote, is proposing
government-backed renegotiation of consumer debts. Advisers say
he would focus first on 95 billion reais of unpaid bills
accumulated by families earning up to 3,600 reais ($676) per
month. Later steps would focus on incentives to restructure bank
debt, for this population.
    Looking to steal his thunder, right-wing incumbent Jair
Bolsonaro announced a program offering a sharp discount on bank
debts. But the scope is far more modest, applying to some 4
million borrowers from state bank Caixa Economica Federal, which
estimated about 1 billion reais of restructuring.
    "It will not change much," said Eduardo Martins, partner at
consumer credit restructuring firm MGC Crediativos, which
estimates Brazil's total volume of non-performing loans around 1
trillion reais, including bank debt, retail credit, telecom
bills and utilities.
    Martins was also skeptical of how easily Lula could get
lenders to the negotiating table: "Any plan should take into
consideration that 60% of the debt was already sold onto other
investors, so incentives given to banks would be useless." 
    Brazil's secondary market for non-performing loans has grown
dramatically in recent years, as the central bank has changed
how it requires that lenders' provision for losses and asset
managers have grown more interested in the segment.
    They have also had more to work with, as a downturn during
the pandemic, followed by high inflation and aggressive interest
rate hikes have begun to push up delinquency rates and put more
families on Serasa's blacklist.
    Fabio Mentone, formerly an executive at bank deposit
guarantor FGC, said restructuring consumer debt is important,
but will have limited effect if Brazil cannot improve the
underlying economic conditions, including high inflation,
unemployment and borrowing costs.
    "If you just solve the credit problem now but interest rates
stay high, you will have the same problem in a short period of
time," he said. 
    MARKETS KEEP BUSY
    For its part, the private sector is already divvying up and
discounting the bulge of bad credit portfolios with specialized
firms offering discounts of more than 90% for the older credit
in arrears. The original creditors, which frequently write off
the debts entirely, are wary of offering such terms directly to
borrowers for fear that other clients stop paying.
    Restructuring firm Pantalica Partners estimates that about
115 billion reais in non-performing loans have been sold on
Brazil's secondary market this year alone - up nearly five-fold
from 2019.
    Most of the volume is related to loan portfolio sales by
Brazil's largest retail banks, utilities and retailers. Around 
37 billion are sales of defaulted corporate debt of single
companies, such as bonds. 
    Among the largest acquirers of portfolios this year are
asset managers and credit management companies such as Jive,
SPC, Cerberus, BRD, Quimera and Quadra. Intrum, one of Europe's
largest credit managers, also opened a subsidiary in Brazil in
2020. Higher interest rates are expected to increase delinquency
in loans and grow the total pool of distressed assets.
     The largest banks also own credit management companies to
restructure overdue debt, such as Recovery (owned by Itau
Unibanco Holding SA  ITUB4.SA ), Return (Banco Santander Brasil
 SANB3.SA ) and RCB Investimentos (controlled by Banco Bradesco
SA). 
    Since the pandemic, many overburdened borrowers have been
using dedicated websites to pay their debts off at a discount
without needing to negotiate with representatives of the
creditors. All companies specialized in credit recovery such as
Crediativos, have their websites with offerings to borrowers.
     Of total debt renegotiations in Crediativos since the
pandemic, for example, around 70% have been made through the
website. A smaller portion of clients use call centers.
    Most of the debts that lead Serasa to "blacklist" Brazilian
consumers are relatively small - the average value at Serasa is
1,215 reais ($228) and are usually not refinanced, but paid off
with a steep one-time discount.  Delinquencies in larger loans
such as mortgages is dealt with in a different way, since these
loans usually have collateral.
    One large non-performing loan auction is slated to be held
in the coming weeks by Emgea, a non-financial company controlled
by Caixa Economica Federal that owns around 60 billion reais in
credit with individuals and companies, usually with some
collateral. Most of the credit is long overdue, with some in
arrears for more than 20 years. The sale is unrelated to the
Caixa program announced for small borrowers by Bolsonaro. 
    Samuel Oliveira, founder at advisory firm Northstone, said
large international investors in distressed credit are looking
at Emgea assets and increasing purchases of Brazilian
portfolios. Unlike previous cycles of high interest rates,
Brazilian families have higher debt. Debt levels reached records
in August, with around 80% of families using credit, according
to industry data. Debt volume also increased. Mortgages, for
example, that represented 4% of GDP in 2010, reached 10% of GDP
last year. 
($1 = 5.3284 reais)
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Brazil 2022 General Elections    https://tmsnrt.rs/3E9NLf5
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 (Reporting by Tatiana Bautzer
Editing by Brad Haynes and Nick Zieminski)
 ((tatiana.bautzer@tr.com; Tel: +55-11-5644-7756; Mob:
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