A Housing Meltdown Looms in Brazil as Builders Seek Debt Relief

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Not long ago, Brazil’s real-estate market was one of the biggest symbols of the country’s burgeoning economic might.

Now, it’s fallen victim to an ever-deepening recession.

PDG Realty SA, once the largest homebuilder by revenue, hired Rothschild last week to help restructure 5.8 billion reais ($1.6 billion) of debt after second-quarter net sales sank 88 percent. Earlier this month, Rossi Residencial SA, which has 2.5 billion reais in debt, also brought in advisers to “restructure operations and review strategies.” Since 2010, the builder has lost 99 percent of its stock-market value.

The real-estate industry, which is equal to about 10 percent of Brazil’s economy, is emerging as one of the latest casualties of a recession that analysts forecast will be its longest since the 1930s. To make matters worse, interest rates are the highest in almost a decade while inflation is soaring.

“There is no real estate company that survives without sales,” Bruno Mendonca Lima de Carvalho, the head of fixed income at Guide Investimentos SA, said from Sao Paulo. “You can’t import or export apartments. You’re relying solely on domestic activity.”

PDG’s press office didn’t reply to e-mails and a phone call seeking comment on the debt restructuring.

The builder has tried to boost revenue by lowering prices, financing up to 20 percent of some home purchases and even offering to buy back apartments if banks deny financing. Still, it sold just 217 units in the second quarter on a net basis, compared with 1,749 in 2014.

Negative Outlook

On Friday, Moody’s Investors Service cut PDG’s rating three levels to Caa3, citing the possibility of significant losses for bondholders and other lenders. Secured creditors may recover less than 80 percent in a default, according to Moody’s, which kept a negative outlook on the rating.

“The company is facing additional liquidity pressures from a prolonged deterioration in industry dynamics, including weak sales speed, tight financing availability and declining real estate prices,” Moody’s said.

Sao Paulo-based Rossi said in an e-mailed response to questions that second quarter sales improved and that the company’s main focus is to reduce debt. Gross debt fell about 30 percent in the 12 months ended in June, Rossi said.

Home sales in Latin America’s biggest economy tumbled 14 percent in the first half of 2015, according to data from the national real estate institute. Builders cut new projects by 20 percent during that span, while available financing shrank by about a quarter.

Real’s Collapse

That’s a reversal from just two years ago, when real-estate prices in places like Rio de Janeiro and Sao Paulo had surged as much as 230 percent as rising incomes, a soaring real and record-low borrowing costs ignited a wave of home buying.

Brazilians find themselves in drastically different circumstances today. The currency fell 0.4 percent Wednesday as of 3:25 p.m. in New York, extending its loss this year to 26 percent. The jobless rate climbed to a five-year high of 7.5 percent last month.

The central bank boosted its key rate to 14.25 percent in July, making it ever more expensive to finance the purchase of a home.

“It’s a matter of demand, and demand is really weak,” Will Landers, who manages Latin American stocks at BlackRock, said from Princeton, New Jersey. “We may have reached a peak in interest rates, but they should continue to be at these levels for a while. Consumers will stay on the sidelines because debt levels are still high, and employment will get worse.”

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