(Bloomberg) -- The turmoil that’s sinking the Brazilian real has exposed a glaring vulnerability at some of the country’s biggest companies.
The 21% slump in the currency, which has gained steam this week and begun to engulf other parts of the local market, has made it significantly more expensive for companies to service their debt and cover costs. Rising local interest rates — the central bank just pledged to hike borrowing costs to 14.25% by March — are adding to the pressure.
About half of Brazilian firms in a sample that owe dollar-denominated debt — 33 in total — have average leverage levels above five times gross debt to Ebitda, according to a study by FTI Consulting for Bloomberg News. Out of these, 12 have more than half of the their debt in dollars, FTI said.
Highly levered companies, such as airlines Gol Linhas Aereas Inteligentes SA and Azul SA, are paying significant expenses in dollars while generating most of their revenue in reais. Leveraged companies in the real estate, transportation, and consumer and retail are the most sensitive to exchange rate variations. The study’s criteria included shopping malls within real estate assets, according to FTI.
“The companies that are most sensitive to debt are the companies you want to stay out of,” said Michel Frankfurt, head of Scotiabank’s Brazil brokerage unit. “They are hit twice,” via exchange rate and interest rates, he added.
For companies like Azul and Gol, a weaker real jacks up expenses, including fuel costs tied to the greenback and dollar-denominated lease payments. And the outlook for the currency is murky at best: Investors who sent it to a record low amid worries whether the government will be able to cut spending will have to contend with Donald Trump’s return to the White House, potentially strengthening the dollar.
If the real stays at this level for a prolonged period — or the selloff intensifies further — restructurings will likely rise, said Luciano Lindemann, a senior managing director at FTI Consulting.
The real could decline to 6.70 and 7 reais per dollar, from a current level of around 6.15, according to Morgan Stanley strategist Ioana Zamfir, who pointed to risks stemming from the government’s spending plans.
At 6.50 reais per dollar, average gross leverage in sensitive sectors could rise to 13 times earnings before interest, tax, depreciation and amortization, FTI said. Its analysis accounts for the impacts of currency depreciation alone, and does not consider any natural hedging for earnings in US dollars, which may mitigate the effect of currency devaluation.
Market watchers say extraordinary measures by the central bank, which has stepped up interventions in the past week to stem the currency’s slide, are little more than a temporary fix.
High Rates
Companies are also contending with rising interest rates. Brazil’s central bank hiked rates to 12.25% last week and pledged two more hikes by March — all at a time when other monetary authorities around the world are loosening policy. Brazilian economists expect inflation and borrowing costs to rise through 2027, and traders see rates peaking near 16.25%, which would further weigh on corporate balance sheets.
Some of Brazil’s largest companies are exporters, which could in turn benefit from a stronger dollar. Suzano SA, Vale SA and Minerva SA — which all hold dollar debt — are set to gain from a weaker real as they have more revenues in dollars than expenses, according to a survey by Santander Brasil.
According to Aline Cardoso, head of equity research at Santander Brazil, certain sub-sectors within exports like meatpackers can also gain as beef prices climb globally. Meanwhile, M. Dias Branco SA, Usinas Siderurgicas de Minas Gerais SA and Vivara Participacoes SA have an unfavorable balance between revenue and costs in dollars, the bank said.
Gol, Suzano, Minerva, Vivara and Vale declined to comment, while Azul, M. Dias Branco and Usiminas didn’t reply to a request for comment.
With rates on the rise, companies are set for an especially tough burden, having to redraw plans and hold investments. The nation’s battered equity market may also face continued withdrawals as investors keep pulling money away from stocks.
“We will deal with a higher interest rate scenario in 2025, so equities and cyclical sectors will suffer, said Alexandre Sant’Anna, equity portfolio manager at ARX Capital. “Leveraged sectors will have higher financial expenses and a stronger dollar translates into inflation. That will impact earnings.”
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