49% Haircut May Be Best These Brazil Mall Investors Can Hope For

  • General Shopping overwhelmed as dollar debt costs surge
  • Company skips payment on one bond, offers discount on another

Brazil’s collapsing currency has claimed its first victim: General Shopping Brasil SA bonds.

The mall operator is offering to buy back as much as $50 million worth of its senior debt for a fraction of the face value: 51 cents on the dollar if bondholders accept by Sept. 29 and 48 cents if they wait two weeks longer. While the deal comes with a heavy loss, many money managers are recommending investors take it because the Sao Paulo-based company may be heading for a bankruptcy filing. Already, General Shopping skipped a coupon payment due Sept. 20 on $150 million of subordinated bonds.

General Shopping isn’t the first company in trouble as Brazil’s economy heads for its longest recession since the Great Depression. But other defaults this year -- including Ceagro Agricola Ltda and OAS SA-- were linked to collapsing commodities prices or a sweeping corruption scandal that strangled financing and cut off business. General Shopping is facing a different problem: With the local currency collapsing and all its revenue in reais, the company is overwhelmed by its dollar debt.

“Whenever there is a large depreciation in the currencies, there are corporations that suffer big losses,” said Jorge Piedrahita, chief executive officer of broker-dealer Torino Capital in New York. “Corporates that have large dollar debt look riskier. Defaults will increase.”

Real Sinks

As Brazil’s real tumbled 33 percent this year, the most among the world’s most-traded currencies, General Shopping’s $250 million of senior notes declined 53 percent, to 42.875 cents on the dollar Sept. 15, the day before the buy-back offer. The bonds have bounced to 52 cents since then, indicating investors see the tender as positive. The real dropped 0.7 percent to 3.9721 per dollar at 10:08 a.m. on Monday in Sao Paulo.

General Shopping’s revenue is exclusively in reais, while about 66 percent of its debt is in dollars. As the real crumbled, the company’s total net debt swelled to 9.4 times its earnings before interest, taxes, depreciation and amortization as of June 30, according to Fitch. The ratings company forecasts General Shopping’s leverage will reach 11 times by the end of this month, while the ratio for peers should hover around 4.5 times.

‘Harsh Haircut’

The company announced on Sept. 16 the cash tender to buy a fifth of its outstanding senior bonds and said the deal depends on a planned common-share offering and asset sales. That followed a Sept. 8 announcement it would defer coupon payments on its $150 million of subordinated bonds. The company said in a statement that the deferral doesn’t constitute a default. General Shopping’s press office didn’t reply to requests for additional comment.

General Shopping had no other option as credit lines dry up in Brazil and the recession deepens, preventing the mall operator from passing on higher dollar-debt costs to customers, according to Bulltick LLC, an asset-management and investment-banking firm.

“While this is a harsh haircut, they couldn’t avoid the unavoidable, and this looks like a decent enough deal if you consider what is happening to Brazilian corporates,” said Klaus Spielkamp, Miami-based head of fixed income at Bulltick. “The buyback with such a large discount has the same effect of a restructuring without its stigma.”

‘Brazil’s Style’

Fitch Ratings said in an Aug. 17 report that General Shopping is among Brazilian businesses most at risk from the real’s swoon, estimating that every 10 percent drop boosts the company’s debt-to-earnings ratio by a factor of one. Petroleo Brasileiro SA, the world’s most-indebted junk-rated borrower; utility Centrais Eletricas Brasileiras SA and airline Gol Linhas Aereas Inteligentes SA are also at risk, Fitch said. Petrobras and Gol declined to comment while Eletrobras said its revenue in dollars offsets debt in that currency.

Still, investors are concerned General Shopping is treating its perpetual bonds as flexible sources of capital, according to Carlos Gribel, the head of fixed income in Miami at Andbanc Brokerage.

“It feels like they purposely waited for the market’s panic reaction to the coupon nonpayment to obscenely propose the buyback,” said Gribel, who is recommending clients hold onto the notes. “This is starting to become Brazil’s style. We’ve seen enough examples of Brazilians deliberately forcing a haircut.”

Ratings Cut

Fitch downgraded the ratings Sept. 14 on the senior notes to B-/RR2, a special classification that implies bondholders could expect to recover between 71 percent and 90 percent of the current principal and related interest in a default. That’s more than General Shopping is offering in the buyback. Fitch also lowered the rating on the subordinated notes to CCC-/RR5, implying a recovery of 11 percent to 30 percent. The outlook on both is negative.

While General Shopping bought itself some time by launching the tender and skipping the interest payment, it still needs a comprehensive plan to avoid filing for bankruptcy protection, Torino Capital’s Piedrahita said.

“This will not really solve anything,” he said. “It doesn’t look like the scenario will improve for them anytime soon.”

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