The impact of interest rates on credit and the consequences for companies

While the expectation around the fiscal package to be approved by the National Congress is prolonged, the high interest rate for a long period already affects the volume of money in circulation and spreads the shadows of a credit crisis in the economy, generating losses in companies in a sequential manner. It is worth remembering that even if the interest rate starts to fall in May, it is estimated that the impact of the new interest rates on credit will take around nine months.

There is already a red alert about the increasing difficulty for companies to roll over their debts and finance their activities. Banks have already begun to review their positions taken in the companies and to request additional guarantees for new loans.

The difficulties in the credit area already cause concern on the demand side, in the search for money financed by companies. However, after the Americanas case exploded, the fears spread to the supply side of financing. Many banks were creditors of Americanas and other companies that face difficulties to pay their debts. Banks now have to make provisions for bad debts, impacting their balance sheets, with lower profits and thus becoming more reluctant to grant credit.

Currently, there is what is called a risk of credit market contraction, because the slowdown in economic activity and the monetary tightening are factors that contain the demand for credit. In these moments of credit crisis, what Minister Delfim Neto usually calls collective drowning due to excess liquidity occurs. Banks and lenders stop lending and seek greater credit liquidity. Companies paralyze investments, due to the lack of credit, and seek survival by increasing the liquidity of their revenues. Workers, afraid of losing their jobs, stop buying to protect and preserve the liquidity of their resources. The investor, becomes more conservative and increases his liquidity. Moral of the story, collective drowning due to excess market liquidity. Thus, a potential sequential effect of corporate bankruptcy could deteriorate the credit market on the supply side.

There are already many cases of companies with problems honoring their debts. Oi, with a debt of R$ 29.75 billion, with 14 banks; Lojas Marisa with a debt of R$ 550 million, has implemented an impacting change in its administration; Via (Casas Bahia), another retailer in debt renegotiation, with R$ 3 billion in short-term debt; Light, the energy distributor in Rio de Janeiro, has already hired a law firm specialized in judicial recovery; Azul had its risk rating downgraded by Fitch, due to the difficulty in rolling over its debt; Gol has already announced a debt refinancing plan that was considered by Standard & Poors as similar to a partial default; and Cervejaria Petrópolis has just announced its judicial recovery, with debts in excess of R$ 4 billion.

Consultants are already predicting a drop in the volume of credit of 2.8% in relation to previous figures and analysts are unanimous in pointing out that a credit crisis, if not circumvented, could bring down the projections for economic improvement, leading to the end of the year in recession.

Add to this the international banking crisis, with the collapse of Silicon Valley Bank (SVB) in the United States and Credit Suisse. These two cases are an indication that cracks in the global financial system are widening and that these initial signs will have indirect effects on the venture world. As in a domino effect, the contractionary measure directly impacts the debt/credit ratio. Companies, especially in certain sectors, cannot survive with such high interest rates and the concomitant end to easy credit.

As we are in the early stages of the contraction phase of this cycle and the number of leveraged companies is large, it is likely that the failure of these banks and companies will be followed by other problems on an even larger scale. In other words, there will be forced sales of assets at very low prices - which should further affect lending -; capital dilution; merger and acquisition activity; negative impacts on the markets and the economy, and eventually, the easing of banking regulators to prevent the problem from becoming a threat to the financial system.

With this scenario and the Brazilian Central Bank acting in an autistic way and out of context of the facts, the question that remains is: at what cost is such a high interest rate being maintained? There is a high risk that the consequences of the banking crisis abroad will deteriorate, forcing the FED (the American central bank) to increase the American real interest rate to very high levels. Consequently, the difficulty of investments in Brazil and of reducing the local interest rate increases. This will cause this cycle of negative impact on corporate credit to feed itself, leading more companies to paralyze investments and job creation.