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Corporate bankruptcy filings rise despite strong GDP growth | Business
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Corporate bankruptcy filings rise despite strong GDP growth | Business

Corporate bankruptcy filings in Brazil surged in 2024, marking the second consecutive year of increases despite positive surprises in the country’s gross domestic product (GDP) over the past two years. Experts expect this trend to persist in 2025 as rising interest rates and exchange rates weigh on companies’ financial health.

According to data from credit bureau Serasa Experian shared with Valor, 2,085 bankruptcy filings had been filed by November 2024, compared to 1,303 during the same period in 2023 and 756 in 2022. This represents a 60% increase in filings through November, following a 68.7% rise in 2023.

“The pace of filings this year is faster,” noted Camila Abdelmalack, an economist at Serasa. “From January to November 2023, there was an average of 118 monthly filings. Now, that number has risen to 190,” she said.

One factor driving the increase is the rise in business formation in recent years, Ms. Abdelmalack explained. “Looking specifically at small-sized companies, we see a lot of necessity-driven entrepreneurship, which intensified during the pandemic. That has now resulted in more bankruptcy filings, even though economic activity remains strong.”

Serasa’s data shows that filings by micro and small businesses rose about 76% through November, compared to 28% for medium-sized companies and 29% for large corporations.

Many companies waited to assess their viability after the pandemic shock, said Giuliano Colombo, a restructuring partner at Pinheiro Neto Advogados. “Depending on when their ‘grace period’ began, the effects are being felt now, in 2023 and 2024,” he noted.

According to Cristiano Oliveira, chief economist at Banco Pine, some misuse of the bankruptcy tool also occurred. “In certain cases, companies leveraged this instrument to secure more favorable conditions in negotiations that wouldn’t necessarily have required bankruptcy protection,” he said.

However, Mr. Oliveira believes such practices are tapering off, and the current wave of filings is more related to financial tightening. “Companies are now experiencing issues related to cash flow and debt profiles, leading to an increase in ‘genuine’ bankruptcy cases,” he added.

Mr. Colombo emphasized that the use of bankruptcy protection is tied to the functioning of Brazil’s capital markets. “The more challenging and restricted the credit market becomes for funding or refinancing projects, the greater the need for indebted companies to find a forced solution to restructure their obligations,” he explained.

GDP growth operates on a different cycle than interest rates and exchange rates, Mr. Colombo pointed out. “GDP growth doesn’t necessarily reflect the current challenges businesses are facing,” he said.

The outlook for 2025 is not promising. “All indications suggest that 2025 will be similarly difficult due to the broader political and economic environment,” Mr. Colombo warned.

Ms. Abdelmalack agreed, pointing to rising interest rates as a key factor. “Since last quarter, we’ve observed a cycle of rate hikes. As a result, the cost of credit is increasing, which will likely hurt companies’ financial health,” she explained.

Bankruptcy protection often serves as a pre-insolvency stage, Ms. Abdelmalack noted. By September 2024, 6.9 million businesses were delinquent, accounting for 32.7% of all companies, according to Serasa’s data.

“Delinquency acts as a leading indicator,” Ms. Abdelmalack said. With Brazil’s Central Bank signaling interest rates of at least 14.25%, and market rates hovering around 15%, the rising cost of credit is expected to drive up delinquency rates, which will eventually lead to more bankruptcy filings in 2025.

Smaller businesses, with less access to credit, will need to renegotiate and extend their debts at much higher rates, Ms. Abdelmalack warned. “If the government is borrowing at 14%-15% per year, imagine the rates companies are facing,” Mr. Colombo pointed out.

Inflationary pressures in 2025 will further squeeze businesses, increasing operational costs, Ms. Abdelmalack added. “Profit margins are already tightening, and depending on the company’s industry, rising exchange rate costs could also have an impact. These factors could intensify challenges in 2025,” she noted.

If Brazil’s interest rate outlook doesn’t improve, Ms. Abdelmalack said the country will likely see a continued rise in bankruptcy filings next year.

Structural reforms required to alleviate the situation have either stalled or when advanced by the government, have been “suboptimal and poorly received, with clear implications for market perceptions of Brazil’s viability,” Mr. Colombo said. “I expect 2025 to be a year of significant corporate restructuring in various forms,” he predicted, adding that Brazil’s business culture often reacts only when creditors exert pressure rather than taking preventive measures.

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