Brazil focus: keeping the faithful [AUDIO]

Jun 02, 2016
<p>How did Brazil&rsquo;s IROs hold&nbsp;on to investors during&nbsp;the economic downturn?</p><p><em>This article is now available to subscribers as an audio recording too &ndash; please see <a href="#audio">below the "At a glance" section</a> for the playback option.</em></p>

At a glance

The situation
Brazil’s economic and political shortfalls mean companies are struggling to either retain foreign investment or attract new money. Investors have reacted to the situation by reassigning investments to other markets.

Hand holding
Brazilian companies have responded by disclosing more information than usual in a bid to maintain investors’ support. Some are highlighting their best-practice approach to governance to stand out from the crowd.

Getting it out there
IROs are working hard to maintain existing roadshow frequency and investigate new locations. International investors are particularly sought after as they tend to take a longer-term view than local funds.

Brazil officially entered a recession in September 2015. At the time commentators described the macroeconomic situation as a ‘perfect storm’ that affected much of Latin America, from Peru to Argentina, with dropping exports and currency rates among its symptoms in Brazil. The raging Petrobras scandal – which saw the state-controlled energy company lose more than $2 bn amid accusations that executives were bribing government officials and receiving millions in kickbacks themselves – and the growing unpopularity of president Dilma Rousseff’s regime only exacerbated the country’s economic outlook.

One inevitable consequence of the downturn was a fall in investor appetite for the region. According to Ipreo data, the top 10 institutional shareholders in Brazilian companies have cut their holdings by 37 percent since 2010, and by 34 percent since 2013. Big names that have pulled significant money out of the country include Norges Bank, BlackRock and Vanguard.

Though this has not been good news for any of Brazil’s issuers, it has meant the best IR teams are finding new and innovative ways of attracting investment. ‘What we’re seeing now is that companies are admitting they can only control what they can control – the economic and political situation is what it is,’ explains Nuno da Silva, managing director and head of Latin America for BNY Mellon’s depositary receipts business.

Da Silva notes that not only have equity prices dropped, but asset managers have also decided to reassign their capital to different companies and regions. Larger institutional investors have also lost money in their portfolios because of redemptions.

The situation is more complicated for issuers, which are finding that the multifaceted nature of Brazil’s crisis is affecting their balance sheets in different ways. Guilherme Setubal Souza e Silva is IR manager at Duratex, one of the largest industrial wood panel and metal fittings producers in the southern hemisphere, and says the effect on his firm was plain to see.

‘Due to the current economic scenario, sales decreased by around 10 percent in 2015,’ he explains. ‘We were affected by the GDP slowdown, a lack of credit and a very low level of consumer confidence. The majority of questions I field from investors are about the wider situation and what might be a turning point for Duratex.’

As a result, IR teams are finding they are having to gather and disclose even more information than usual. Carlos Lazar, head of IR at educational firm Kroton, says that for every challenge his company faces, investors want to know how it might affect operations. ‘They are asking about top-line growth and, of course, our losses, dropouts, prices and intakes,’ he reveals.

Having more information prepared before speaking to the investment community is vital, Lazar says. ‘It provides some comfort to the market and lets our stakeholders know how the situation is affecting our operations compared with those of our peers,’ he continues. ‘Even in the same sector, the downturn affects different organizations in different ways.’

Silva keeps senior management within touching distance of Duratex’s shareholders, achieved via weekly meetings with the C-suite to ensure all parties are up to speed, as well as special meetings with the firm’s largest shareholders.

New measures

Da Silva notes that potential shareholders are increasingly differentiating between firms they think are attractive from a governance or long-term strategy viewpoint, and those that are not. ‘Good ESG is no longer just ‘a cool thing’ to have,’ he explains. ‘It’s becoming more of a mainstream investment discipline. After some high-profile failures recently, it’s become increasingly clear that good ESG practice can have a significant impact on the value of a company.’

The best way to be ready for these types of investors, says Lazar, is to ask them what information they would like more of. Good IR is a matter of constant refinement, but listening to what existing shareholders want can operate as a short-cut. ‘This is particularly important at the moment because we are competing with not only issuers all over the world, [but also with] others in Brazil,’ Lazar adds.

As a result, Lazar’s investor day was given something of a somber facelift: the entire event was spent talking about targets the company was working toward in order to reduce the impact of the economic pressures working against it.

Keeping the IR team’s travel schedule jam-packed has also helped. ‘We have been involved in the same level of events activity as last year, and we try to participate as much as possible in conferences, attending at least one conference a month, so our agenda is really full,’ Lazar says.

Looking abroad

The company’s IR team is also traveling further afield this year. ‘I’m planning to go to Toronto for the first time this year to visit some new potential leads,’ Lazar reveals, before adding that Europe is another focus. ‘International investors are there and have the appetite for Brazilian companies. It’s just a matter of planning, going and showing them the right information.’

One of the advantages of an increased international investor contingent is that they tend to have a longer view than their local counterparts, making long-term acquisitions rather than short-term speculative buys. This is vital for most firms but even more so for those in Brazil that may lack the liquidity and capital they need to expand, grow or even survive.

Da Silva says companies may be seeing fewer appropriate or hungry investors at conferences than they are used to. ‘They’re hearing that Brazil is not such an exciting story right now,’ he explains. Sell-side firms are having to prioritize who they’re inviting, too, so they may invite only institutions that have traditionally been the top of their list – often to the detriment of other, important, long-only investors.

All of this reinforces the point that companies need to stand out from the crowd to catch the attention of institutional investors and position themselves for when confidence returns. ‘Firms that do this effectively will be better positioned to attract investment when institutions commit their money to Brazil,’ says Da Silva.

He adds that this approach is exemplified by the IROs who have seen it all before. ‘If you speak to experienced Brazilian IROs who have been there since the 1990s, that’s exactly what they did back then: they sent their best team members who spoke the best English to the US to meet the investors that had the capital they needed,’ he says. ‘It’s back to the old days.’

This article appeared in the Summer 2016 issue of IR Magazine

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