Panic, Doubt, Disbelief: The Market Tries to Absorb the Chaos in Americanas
During a meeting with the market which still left many doubts hanging over, Sergio Real tried to explain how Americana had found itself struggling with a deficit of around R$20 billion on its balance sheet.
The explanations kicked off a dark day in Faria Lima, as international and domestic investors rattled, banks weighed the impact of the disclosure on their portfolios and the US drama marred the rest of the retail trade.
Ryall has repeatedly said he will make the report “possible” after just 9 days as the company’s CEO. He said he started at Americana trying to understand what drives cash generation for the company. Quickly, he and CFO Andre Kofer identified discrepancies in the accounting for certain items that represented “significant distortions”.
While Real were still talking, Americanas’ inaugural bid on B3 kicked off with the stock falling 50% – a fall that quickly increased to 70% and then 90%.
When the stock began trading around 2:40 p.m., it was down almost 80%. According to Real, to finance its growth – particularly in the digital operation – Americana provided payments to suppliers by incurring debt with banks – a common market operation, known as “drawn risk”.
In this type of transaction, the bank buys the company’s debt from the supplier at a discount. After a specified period, the company must pay the bank.
These transactions are banking in nature, as Americana has to pay the bank, not the supplier, but according to the riyals, which Americana has not recorded as a bank debt, but in the account of the supplier.
The financial costs of these debts were also not recognized as financial expenses in the income statement, but were debited from the supplier’s account, artificially inflating the profit.
According to the riyal, it is the company that has paid all the financial costs, and therefore there is no monetary impact. This practice has been adopted by the company for years. “I don’t know if it’s 7, 8, 10. But it’s definitely not 2 and 3,” Real said.
Brazilian accounting rules do not prevent a business from accounting in this way, although there are CVM guidelines for transactions of this type that count as debits. Real estimates that the impact on the result of this accounting over time is 20 billion reais – but this figure has yet to be confirmed by an external audit.
By republishing balance sheets and recording “credit drawdowns” as debt, Americana’s capital structure will be affected, with a decrease in equity and a significant increase in leverage – which, in XP accounts, will increase from 1.7 times to 8 times EBITDA. The riyal said on the call that the business will need capital, and it won’t be “millions, but billions.”
Yesterday, the market estimated that Americana would reach 3 billion reais in EBITDA this year, carrying a net debt of 15 billion reais. During today’s call, Real said the company’s EBITDA is expected to be around 1.5 billion reais and the market believes debt could double.
When asked if the reference shareholders – Jorge Paulo Lehmann, Carlos Alberto Secubera and Marcel Telles – remained “financially” committed to the process, because no minority shareholder would agree to inject more money into the company , Real said they should support the deal. “They are committed to being part of the solution as long as capitalization leads to more consistent results,” he said.
“It’s a total lack of control,” said one analyst. “When you put everything in one account, without separating what is a resource and what is funding that account…Even the banks didn’t have a view of the risk being taken, so they kept giving money to the None of them would have given so much money if necessary.” He knew these 20 billion Brazilian reais.
For one executive, the banks “did not do their homework, but gave unlimited credit because until very recently the company was controlled by the three richest men in the country”.
The riyal said Americana has liquidity and will not face short-term difficulties unless banks decide to accelerate debt or reduce credit – today’s cash generation is not enough to pay debt interest. More than 90% of Americana’s debt has no covenants, he said.
The way the issue was conveyed – from yesterday’s physical reality to today’s conference call – has infuriated market participants. Riyal spoke to investors during a meeting on BTG Pactual, which was streamed via Zoom but is limited to just 1,000 attendees. At one point, more than 3,500 people were on hold on Zoom trying to access the call, to no avail. Americana has over 146,000 individual contributors.
The lecture also began streaming on YouTube, but the signal cut off after 17 minutes. “Does Real leave a company and start giving material non-public information about what it deems appropriate?” asked a manager.
Given that the revelation of the issue was made without confirmed figures, many managers say that Real and Coover thought first of protecting themselves from liability, rather than the immediate effects of the announcement. A corporate lawyer agrees: “FR is the worst I have ever seen, nine days is not enough to understand anything.
Either he already knew, or he knew and didn’t understand, or he didn’t understand until now and was quick and irresponsible to announce what happened.
For many managers, Americanas’ EBITDA never really spoke to its cash flow. A source said: ‘This contradiction goes back a long time and was questioned and arrogantly dismissed by the previous administration. “Madrid had to speak to six analysts and went straight to the account that was still in question.”
Another director said, “This probably explains the company’s continued need for capital raising over the years.” “This whole situation must have been exacerbated by high interest rates,” which made pedaling difficult and exposed the problem. One analyst said he was skeptical whether other retailers were adopting the same practice – which is now weighing on the entire industry on the stock market.
“They should go public and explain how they calculate the credit withdrawal,” the analyst said. For him, until it becomes clear what this risk is in the market, banking and retail stocks will continue to fall. “It only happens at Americana because they have a banker as CEO,” said one of the directors.
After the call with the market, Real recorded an 11-minute video – available on the Americanas IR website – in which he gave some figures, including “a total debt of 30 to 35 billion reais”. Again, the managers were confused.
In its third quarter balance sheet, the company reported R$16.5 billion in loans and financing, R$4.3 billion in bonds and – and adding another R$5 billion from suppliers – a total debt of R$25.8 billion. “Between five and ten billion Brazilian reais are missing to give the debt figure he mentioned,” he said.
Real started the call by saying that risk-free structuring was a problem across the Brazilian market and mentioned that retailer Centro suffered from the same problem in the 1990s.
He urged investors to pay attention to what he said, not “how they felt”. Ryall also said he doesn’t see a toxic culture at the company, “but it lacks transparency and controls.”
“The level of transparency and the willingness of management itself to want to talk about issues and challenges hasn’t been as fluid through the organization as it should have been,” he said.
Ryall said Americana “should be able to operate with a lower level of capital and working capital than the current level.” According to him, this reduction could vary between 50% and 60%, which would generate savings of around R$2 billion for the company.