About Jefferson Alvares

Jefferson Alvares is an LL.M. in international finance from Harvard University and an LL.B. from University of Sao Paulo. He is also chief counsel for international and monetary affairs and resolution regimes at the Central Bank of Brazil.

Why won’t Petrobras be able to renegotiate its colossal debt? (Bruno Meyerhof Salama)


Why won’t Petrobras be able to renegotiate its colossal debt?

Bruno Meyerhof Salamaprofessor_bruno_salama22_0

Professor, FGV Direito SP

Petrobras most likely won’t be able renegotiate its massive debt with banks. And much of the problem can be attributed to a fact that tends to go unnoticed: in Brazil there is no bankruptcy regime applicable to state-owned companies.

Petrobras’ US $127.5 billion debt as of September 2015 is virtually unpayable. It is one of the largest corporate debts anywhere in the world. Banks hold approximately half of it and the other half is with bondholders. Considering the cash that Petrobras had on hand at that time, and its EBITDA (a proxy for a company’s operating profitability in the previous 12 months), the company would need about four years to pay off its debt if it were able to direct all its cash into creditor’s pockets.

This may not seem like a complete disaster. But this EBITDA is being partly generated by subsidies from the Brazilian taxpayer (gas is currently overpriced in Brazil so as to boost Petrobras profitability). Moreover, Petrobras still has huge commitments to its pre-salt endeavor, as the investment bill is still US $20 billion in 2016 alone, even after several cuts.  Furthermore, the official figures do not take into consideration Petrobras’ operational leases that could practically double the size of the debt – a fact that currently everyone prefers to ignore, including rating agencies. Unsurprisingly, Petrobras is now trying to sell everything it possibly can.

So, what is a bank to do when faced with a large borrower in this situation? Let’s forget for a moment that we are dealing with Petrobras and consider a more general case. If a debtor is experiencing such difficulty, there are basically three options for the creditor bank. The first option is to initiate collection proceedings. Here, the practical outcome is to force the debtor into bankruptcy. Financing contracts of large companies often contain cross-default clauses.  Late payment of one contract leads to accelerated  maturity of the others. The bank thus collects debts through bankruptcy and is paid in part. The balance has to be written off.

Writeoffs reduce profitability and signal weakness, and both are dangerous in times of economic downturns.  Therefore, instead of collecting the debt, the second option is to roll it over, that is, to exchange the old for fresh debt. Rolling over gives time for the borrower to get its financial house in order (by reducing current expenditures, selling assets, renegotiating with customers and waiting for resumption of market prices). And rolling over debt can also be good for the creditor bank, which maintains a chance of fully recovering its credit.

A third option is to renegotiate the debt by reducing principal, interest, or lengthening the lending periods. For the lender, this strategy makes sense when the expected value of the renegotiated amount is greater than the expected value of credits in the course of bankruptcy proceedings.

So then: will Petrobras be able to rollover or renegotiate its massive debt with its current creditors? Most likely the answer is no. Normally creditors fear pushing debtors into insolvency, for fear of incurring losses in the course of bankruptcy. Not with Petrobras. Here’s why.

Under Brazilian Bankruptcy Law, a state-owned company (such as Petrobras) cannot file for bankruptcy. True, there are some subtleties at play here. Under article 173 of the Brazilian Constitution, state-owned companies are said to be subject to the same legal framework as private companies with respect to civil, commercial, labor and tax rights and obligations. In light of that, some argue, the Bankruptcy Law should also apply to state-owned companies, even if the law itself expressly says otherwise. But since this argument has never been tested in court, counting on it is a plunge into an uncertainty even deeper than the pre-salt itself…

Recently, Petrobras was saved by the bell – or, rather, by the support from the China Development Bank, which loaned US $10 billion as part of a deal that secured future supplies. It helped Petrobras’ buy time, but more money from China will be necessary if oil prices fail to recover quickly.

And what if Chinese money doesn’t arrive? In that case, when the creditor banks come to beat down Petrobras’ door, there won’t be much of an alternative for the Brazilian Treasury government, other than capitalizing and rescuing the company. Defaulting would generate a sequence of dangerous effects; and privatization remains anathema to the federal government. Knowing this, there is no reason for creditors to rollover or to renegotiate anything yet. If Brazil had adequate legislation, perhaps the result would be different.


Argentina’s deal with the holdouts is a mixed blessing (Mario Blejer)

0be943c9-d94f-46e8-a752-4d76a62586be“In the absence of a multilateral framework, what is convenient for an individual country could have negative consequences for the international system as a whole. […] Standard bankruptcy procedures treat creditors equitably, minimising economic damage by resolving things fast. In this case, inequality among creditors caused maximum economic harm. It underlines the need for a sovereign debt restructuring mechanism.”

Read Mario Blejer’s full article at http://on.ft.com/1M3GwWE

Fellowship opportunity at FGV Direito Rio

photoFGV Direito Rio, a leading law school in Rio de Janeiro, Brazil, is offering a six-month fellowship to doctoral candidates and post-doctoral researchers working on areas related to any of its research centers, including the Law & Economics Research Center. Fellows benefit from stipend amounts of 35,000 reais ($ 9,000) or 45,000 reais ($ 11,500) for doctoral candidates or post-doc researchers, respectively.

BBVA Paper on Resolution Regimes in Latin America

AAEAAQAAAAAAAAD6AAAAJDExNGQ4Y2MzLWI2MTUtNDIyMC1iNDUwLTgyMWZhODVlY2ViYwThe research arm of BBVA, the Spanish bank, has just released a comparative study on resolution regimes in Latin America, assessing the extent to which they comply with the Key Attributes of Effective Resolution Regimes for Financial Institutions.

“Latin America has ample experience in dealing with banking and financial crises, for example during the 1980s and 1990s. As a result of this, the laws of many countries in the region comprise detailed resolution regimes whose main goal is to deal with banking failures in an orderly way, preserving financial stability and avoiding bank runs. As opposed to Europe and the USA, Latin America has barely been affected by the recent financial crisis. As such, countries from this region do not feel the rush to implement regulatory reforms in this field. Currently, the majority of the resolution frameworks are very advanced although they are not fully aligned with the KAs.”

The Key Attributes were agreed after the financial crisis with a view to empowering the regulators to rehabilitate or wind down failing banks without using government resources.

Read the full article at www.bbvaresearch.com/en/publicaciones/resolution-regimes-in-latin-america/

Clearing house push created unforeseen systemic risks

GetContentCapital controls and a prospective shortage of eligible collateral due to quantitative easing threaten to lower dealer liquidity, with potential consequences for the regulation of securities and derivatives central counterparties (CCP), writes John Dizard in the FT.

“The reformers among [the US officialdom] had been convinced that forcing banks to move uncollateralised, trust-me, bilateral swaps transactions into collateralised, marketable instruments traded on CCP platforms would do much to end systemic risk.

Now they are beginning to see that there are some unforeseen consequences to their attempt to shift risks from taxpayer-underwritten banks to ‘the market’.”

Read the full article at http://on.ft.com/1WSqwHC



Renzi’s short-term fix to the banking challenge in Italy

dbacd017-1709-4c94-8e6b-15e770bbb1fcItaly’s decision to issue guarantees to assist banks in selling their portfolios of bad loans shows the political limits of bail-in, a regulatory tool intended to transfer the risks of banking from taxpayers to the creditors and shareholders of banks, argues the FT’s editorial.

“Italy’s financial system produces too many bankers and not enough credit, Matteo Renzi has long argued. The deal the Italian prime minister has reached this week with the European Commission, over government guarantees to assist banks in selling their portfolios of bad loans, while far from perfect, could eventually help to address both problems. However, even if this helps to calm markets and defuse acombustible political situation, it will be no substitute for broader reforms to a fragmented and inefficient sector.”

Read the full story at http://on.ft.com/1OPVuxh


Recent developments in Brazilian financial regulation

neiNei Schilling Zelmanovitsnei, a partner at Brazilian law firm Machado Meyer, reviews the changes to financial sector regulation in Brazil since the financial crisis. He focuses on the implementation of the Basel 3 capital standards, anti-money laundering rules, and suitability requirements. The piece was published in the latest issue of Global Banking & Financial Policy Review.

Read the full article here.

Banking can learn from insurance on systemic risk

0ca3a49e-f02b-4ea7-8a10-0039e5789a30Insurers are shrinking their balance sheets and divesting business to escape systemically important status, and so should banks, argues Patrick Jenkins in the FT.

“When Italy’s Generali managed to get itself off the global list of systemically important insurance companies in November, there were cheers in Trieste.

Removal from the nine-strong list of insurers, deemed systemically important financial institutions (Sifis), meant a huge administrative problem evaporated. So did the prospect of tougher Sifi capital requirements from 2019. Generali’s secret had been to shrink and simplify its business. First it sold its US life reinsurance business to France’s Scor. Then it sold Swiss private bank BSI to Brazil’s now troubled BTG Pactual.

The moves convinced regulators at the Financial Stability Board that Generali was no longer a global Sifi (replacing it with another European insurer, Aegon).
Read the full article at http://on.ft.com/1K6wra5


Debates on Blockchain eclipse talk of Basel III at Davos

bb769da3-320f-4a69-8b19-d12eae7bfde3.imgDiscussions on how to regulate fintechs may come to dominate next year’s World Economic Forum, reports the FT.

“The new battleground for the financial world is the issue of whether the new entrants will be subject to the same regulatory controls as incumbent banks — or whether these radical changes are simply concealing a new explosion of risk under the guise of ‘innovation.'”

Read the full story at http://on.ft.com/1ZPa0h0

Novo Banco’s selective bail-in a test to the EU’s new resolution regime

b34ac93a-e64b-4881-9c68-a7f053f0d039.imgBank of Portugal’s selective transfer of bonds from Novo Banco back to Banco Espírito Santo is the first test to the “no creditor worse off” rule under EU’s new bank recovery and resolution regime. It remains to be seen whether this measure was a one-off now that the Single Resolution Board has taken over from national resolution authorities.

“Portugal’s central bank has offered to partly compensate Novo Banco bondholders who lost money when their securities were transferred to a “bad bank” last month in a bid to ease tensions with the government and furious international investors.”

Read the full story at http://on.ft.com/1QeVabG