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

Author of the article: SAO PAULO — 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…
Lula, Bolsonaro and market look to cure Brazil consumer debt hangover

Author of the article:

SAO PAULO — 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.

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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), Return (Banco Santander Brasil ) 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)

(Reporting by Tatiana Bautzer Editing by Brad Haynes and Nick Zieminski)

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