In studying Brazilian corporate defaults over the past 20 years, S&P Global Ratings has come to several conclusions. Among them: Recent recoveries are much weaker compared to those in Brazil in the early 2000s. In addition, the time for bankruptcies and restructurings to resolve, on average, is far longer than in peer countries, such as Mexico. Distressed exchanges have better recovery rates and faster times to emergence than any other type of recovery.

We studied the data available on 34 Brazilian corporate defaults that took place during the past 20 years. We obtained supporting data for 24 of the 34 cases. Ten are missing because often negotiations on public entities' defaults are private, and companies don't disclose agreements. Of the 24 defaults, eight cases haven't yet emerged from default. As a result, the conclusions about recovery that we make in this study encompass 16 corporate defaults by 13 issuers (three of them defaulted twice) on 44 instruments--unless otherwise noted, we used these 16 corporate defaults to build the charts and tables in this report. The sample size is small and may skew some of the conclusions, but we believe the overall trends and key messages are valid and noteworthy.

Chart 1

Recovery Rates Are Acceptable Compared To Global Standards

The average recovery rates for 1998-2017 are acceptable compared to average global historical rates, with first-lien instruments achieving 84% recovery, second-lien instruments achieving 68%, and senior unsecured debts--which have been defaulted on the most--reaching 55%. The only subordinated bond included in this sample achieved a modest 13% recovery. These recovery rates are fairly similar to global rates during the same time period.

For the purposes of this report, we calculated both nominal and discounted recovery rates. Discounted recoveries are the present values of the nominal recoveries at the time of default, using the coupon rates. So, the longer the time to emergence, the lower the recovery value. We prefer discounted rates because they allow us to better compare bankruptcies of different lengths. (Please see the methodology section at the end of this report.)

Table 1

We've broken down recovery rates by instrument (see table 2). The evidence shows that bank loan recoveries have overperformed bonds at similar seniorities, with the exception of secured loans (second lien). For instance, the average recovery for secured loans (first lien) was 87%, whereas secured bonds (first lien) achieved 73%. The average recovery for unsecured loans was 57%, whereas unsecured bonds reached 61% (domestic) and 46% (international).

Table 2

Recovery Trends Have Been Worsening

Although recovery rates are acceptable compared to global rates, recent recovery trends in Brazil have been markedly poorer than those achieved in the early 2000s. The average recovery of senior unsecured instruments from 2002-2003 was 93%, while the average from 2012-2016 was only 34%, with a clear low point in 2013 when OGX Petróleo e Gás Participações S.A. (OGX; not rated) defaulted on $3.6 billion bonds with zero recovery (see chart 2).

From 2004-2011, when Brazil enjoyed relatively benign economic conditions, only five corporate defaults occurred (these five are among the 10 for which we couldn't get data). The companies that defaulted during this period were TV Globo Ltda. in 2002 (not rated); Grupo Bandeirantes de Comunicação in 2002 (brCCC-/Negative/--); Light Serviços de Electricidade S.A. in 2003 (brA+/Stable/brA-1); Independencia Alimentos S.A. in 2009 (not rated); and IMCOPA - Importação, Exportação e Indústria de Óleos Ltda. in 2009 (not rated). However, since 2011, the average recovery has been below that of the early 2000s for various reasons.

Chart 2

As we would expect, recoveries of distressed exchanges have, on average, been higher than other default types, because exchanges usually involve more friendly terms and are completed faster than restructurings or bankruptcies (see chart 3).

Chart 3

Because a default's root cause is often a combination of factors, it's difficult to identify the reason for one, so we've sorted the reasons for default into three groups (see chart 4). One takeaway from the chart is that when the root causes are systemic, recovery is often significantly below average. Two recent examples in Brazil are the "Lava-Jato" corruption scandal's repercussions on oil service, engineering, and construction companies; and the sugar and ethanol crisis.

Chart 4

Time To Emergence In Brazil Is Significantly Longer Than In Other Latin American Countries

Over the past 20 years, Brazilian bankruptcies took an average of 718 days to be resolved, while restructurings took 461 days and distressed exchanges 264 days. These averages are notably longer than those in other regional jurisdictions such as Mexico, where bankruptcies took an average of 680 days and restructurings 284 days. Plus, once the unresolved cases are settled, the time to emergence in Brazil will be even longer, because of eight unresolved defaults that currently average 785 days (and counting) for restructurings and 1,142 days for bankruptcies (see table 3).

Table 3

In our sample, 2003, 2013, and 2016 are outlier years. In 2003, Brazilian power distributor CESP-Companhia Energetica de São Paulo (BB-/Stable/--) underwent a distressed exchange that was resolved in 60 days, significantly lowering the average time to emergence for that year. But in 2013, OGX's default and abnormally long time to emergence greatly increased the average in that year. The relatively short defaults of Gol Linhas Aereas Inteligentes (two days; B-/Positive/--) and U.S.J. Açucar e Alcool S/A (seven days; CCC+/Stable/--) kept the average time for 2016 low. Both 2016 cases were distressed exchanges, further supporting the idea that companies usually complete exchanges faster.

Chart 5

Defaults Are Concentrated In Agribusiness, Utilities, and Cable Broadcasting

Some sectors have a concentration of defaults because they suffered systemic crises that affected multiple issuers. For example, the agribusiness/consumer sector has had the most defaults because several sugarcane processors defaulted in 2014 and 2015 due to a severe decline in sugar prices combined with adverse climate conditions. Defaults in the oil services sector were mostly prompted by repercussions from the "Lava Jato" investigation, primarily its effect on Petroleo Brasileiro S.A. - Petrobras (BB-/Stable/--), the main offtaker of companies in those sectors. Building material and homebuilding companies also went through a severe crisis in 2014-2016 due to demand weakness, motivating most of the default cases in that group.

Chart 6

The data shows that some sectors like utilities, cable and broadcasting, and forest and building products/homebuilders posted higher-than-average recoveries, while sectors like capital goods, energy and natural resources, and engineering and oil services had very low recoveries (see table 4). These recoveries largely result from the commodity price collapse that hurt the business of many energy and natural resources players and their value chains.

Table 4

Brazil Seeks To Improve Its Insolvency Regime

In late 2017, the Temer Administration proposed a bill to modify Brazil's insolvency regime, aiming to provide more flexibility to companies and creditors to speed-up the process, improve recovery prospects, and protect jobs and other stakeholders' needs. The proposed changes will allow creditors to start extrajudicial negotiations before a judge intervenes, so by the time the insolvent offers its restructuring plan, most of the deal has already been agreed upon. The judge would then open a 30-day window for objections, after which they approve the plan in absence of objections.

Time will tell if the amended law helps boost recoveries. We commented on a summary of the current version of the law in our report, "Debt Recovery For Creditors And The Law Of Insolvency In Brazil," published Oct. 27, 2014.

A Worsening Recovery Trend In Brazil, But Proposed New Law May Help

Over the past two decades, Brazilian defaults have had similar recovery rates to average global rates, but the rates have recently been trending downwards for various reasons, including a struggling economy, corruption cases, and climatic events. Brazil also has a longer time to emergence when compared with those of other Latin American countries, perhaps due to a legal framework that didn't contribute much to speed along restructurings. Its defaults have been concentrated in the agribusiness, utilities, and cable broadcasting sectors, in some cases because of crises that affected multiple companies. The current administration has proposed to amend Brazil's insolvency regime, but it remains to be seen whether the new law will reverse the recovery trend.

Table 5

Methodology

Recoveries

We define recoveries as the ultimate recovery rates following emergence from three types of default: bankruptcy filings, distressed exchanges, and non-bankruptcy restructurings. Unless specified otherwise, we look at recoveries at the instrument level. Recoveries are the value that creditors receive on defaulted debt. Companies that have defaulted and moved into bankruptcy will usually either emerge from the bankruptcy or will be liquidated. On emergence from bankruptcy, creditors often receive a cash settlement, new instruments (possibly debt or equity), assets or proceeds from the sale of assets, or some combination.

We prefer discounted rates in this study because they allow us to better compare bankruptcies of different lengths. For example, the nominal rate on a distressed exchange could be the same as that on a bankruptcy case that takes two years. However, investors in the bankruptcy case are significantly worse off because they could lose significant time value while waiting for the final settlement. On the other hand, a distressed exchange could take only a day. In a historical study, discounted recovery rates offer the major benefit of making different time periods more comparable by preventing any major bias that could occur if time between default and emergence differs greatly. S&P Global Ratings provides recovery ratings that map to nominal values. This is appropriate because it lets investors choose their own discount rates when making decisions based on their nominal estimates.

Interim recoveries

Specifically for Brazilian recovery analysis and the dataset, we use the concept of "interim recovery." This occurs when the defaulted instrument is converted to, or exchanged for, a new instrument with a new maturity date. If there is no reliable trading price, we assume that this new instrument is valued at par. This is one of the key differences between the methodology of the European study and that of the studies conducted in the U.S. The U.S. secondary debt market is more transparent in many cases, and secondary trading prices are more readily available. In general, if no trading price is available, the case would normally be excluded from the U.S. data set. The other key difference between the U.S. and European methodologies is in the valuation of equity, as we discuss in further detail below.

Ultimate recovery

Ultimate recovery is the value of the settlement a lender receives by holding an instrument through its emergence from default. The recovery is the amount received in the settlement divided by the principal default amount. Within our LossStats database, three recovery valuation methods (trading price at emergence, settlement pricing, and liquidity event pricing; see "Equity valuation" below) are used to calculate ultimate recovery.

Default types: Distressed exchanges versus non-bankruptcy restructurings

Our criteria define a distressed exchange offer as a situation whereby some or all of an issue is either repurchased for an amount of cash or replaced with another instrument (see "General Criteria: Understanding Standard & Poor's Rating Definitions," June 3, 2009). It is an exchange for one or another issue, whereas a non-bankruptcy restructuring can encompass a mixture of elements in the exchange.

Senior unsecured debt

We classify instruments as senior unsecured when the legal documentation describes them as such.

Subordinated debt

We classify the following debt instruments as subordinated: (i) convertible bonds; (ii) lower-priority ranking bank debt; and (iii) unsecured bonds that are not classified as senior in their documentation.

For all but the unsecured bank debt, which is not common in the U.S., the classification of these instruments is the same in Europe and the U.S.

Equity valuation

In Brazil, new equity received as a result of a restructuring or distressed exchange is assumed to have zero value, unless a transparent and liquid trading price is available. For many U.S. insolvencies, by comparison, the equity will have either a reliable trading price or a court-agreed value.

• Trading price at emergence. We can determine the recovery value of an instrument by using the trading price or market value of the prepetition debt instruments upon emergence from bankruptcy. Of the three methodologies, this is generally the most readily available because most debt instruments continue to trade during bankruptcy proceedings.
• Settlement pricing. The settlement pricing includes the earliest public market values of the new instruments that a debtholder receives in exchange for the prepetition instruments. It's similar to the trading price method, except that it's applied to the new (settlement) instrument instead of the old (prepetition) instrument.
• Liquidity-event pricing. The liquidity event price is the final cash value of the new instruments or cash from the sale of assets that the lender acquires in exchange for the prepetition instrument.

Actual debt outstanding

Actual debt outstanding reflects the prepetition debt claim of the debt instrument(s) or class of debt. We note that bankruptcy documents vary in terms of detailing prepetition principal outstanding and the prepetition interest outstanding. As a result, the actual debt outstanding amounts in our study are an estimated amount. In a majority of cases, this amount consists of actual prepetition principal and interest, while in other cases it reflects only actual prepetition principal outstanding.

Interest rates

We define the effective interest rate as the prepetition rate at the time the last coupon was paid. For fixed-coupon instruments, this is the fixed rate; and for floating-rate instruments, it's the floating rate used at the time of default. We also record nominal recovery rates, which are the non-discounted values received at settlement.

Related Criteria And Research

Related Criteria

• Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016

Related Research

• Recovery Study (U.S.): Quantitative Easing, Low Yields, And Distressed Exchanges Have Boosted Bond Recoveries Since 2010, Dec. 14, 2017
• 2016 Annual Study Of European Corporate Recoveries: The Highest Recovery Rate Since 2007, June 12, 2017
• Update On Mexican Corporate Empirical And Recovery Rating Performance, July 12, 2016
• Debt Recovery For Creditors And The Law Of Insolvency In Brazil, Oct. 27, 2014