With Brazilian Shoppers Just Browsing, Mall Bond Slump Deepens

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Diana Freitas, a 27-year-old sales clerk at the Internacional Shopping mall in suburban Sao Paulo, says her commissions have dropped so much she’s looking for a new job.

“People continue to come in, but they don’t spend,” said Freitas, who works at a women’s clothing store. “Everyone is afraid of what might come next, so it’s better to save money. My boss already told me that if things don’t improve later this year, shutting down will be the only option.”

Freitas’s grim assessment portends more pain for General Shopping Brasil SA, the Brazilian mall operator that owns Internacional Shopping. Last month it reported record losses as a recession stifles consumer spending, which has caused its borrowing costs to soar toward all-time highs. The company’s $250 million of notes now yield 12.65 percent, approaching distressed levels, as a slump in the Brazilian currency drives up the cost of paying its dollar-denominated debt.

“This is a 100 percent Brazilian economy-related story,” said Patrik Kauffmann, who helps manage $11.2 billion at Solitaire Aquila in Zurich. “Even though Brazil is one of the biggest consumer markets in the world, momentum is not good.”

Analysts predict Latin America’s largest economy is heading for its deepest recession in 25 years, and households are more indebted than ever. Brazil’s retail sales unexpectedly declined 0.4 percent in April after a revised 1 percent drop in March. April’s numbers were weaker than all but one estimate from 33 economists surveyed by Bloomberg.

Currency Weakness

General Shopping’s press office declined to comment on the decline in the bond prices or its leverage levels.

The company, which makes money from the rent it charges to mall shops, said in its most recent earnings results on May 15 that the currency depreciation was the biggest drag on its results, adding that it hedges two years of debt payments against foreign-exchange swings.

Fifty-five percent of its debt is denominated in dollars.

Brazil’s real has lost 14 percent this year, the most among 16 major currencies. It will weaken a further 7.3 percent by the end of this year, estimates compiled by Bloomberg show.

The currency declined 0.8 percent to 3.0843 per dollar as of 1:29 p.m. in New York.

General Shopping’s ratio of net debt to earnings before tax, depreciation and amortization -- a measure of indebtedness -- reached a record 11 times in March, according to Bradesco SA.

Credit Rating

As the mall operator’s debt load climbed, Brazilians increased their borrowing too, damping their ability to continue spending as consumer prices rise by the most in 12 years. Household debt jumped to a 10-year high of 44.3 percent of income in April, central bank data show.

The combination of a weaker currency and a faltering economy puts pressure on the company’s creditworthiness, according to Jose Vertiz, an analyst at Fitch Ratings, which put General Shopping’s BB- grade on negative outlook in October.

To improve its leverage ratios, the company sold a stake in a mall in Sao Paulo for 141.1 million reais in April, after raising 300 million reais from asset sales last year.

“They have to continue working to sell some assets and reduce the high leverage,” Vertiz said from New York.

While challenges for the company are considerable, it still is worth holding the bonds, according to Daniel Delabio, a money manager at Explorador Capital Management in Sao Paulo.

“They pay quite a premium, considering the risk, in comparison to other Brazilian issuers,” Delabio said.

Perpetual Bonds

Yields on the perpetual notes sold in 2010 jumped 1.3 percentage point this year, more than three times the average increase for Brazilian companies, as the price fell to 79.35 cents on the dollar. The company has the option to call the bonds for 100 cents in November.

At the mall in Guarulhos, just outside Sao Paulo, the lack of customers meant Freitas had plenty of time to consider her employment prospects.

“I have colleagues here at the mall who are also concerned about their jobs,” she said. “It’s been a bad year and nobody expects for sales to improve a lot soon.”

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