Early loan repayments adding costs to Brazil firms, advisers say

Wed Jun 11, 2014 12:47pm EDT

SAO PAULO, June 11 (Reuters) - Brazilian sugar and ethanol, industrial and electricity companies are incurring extra expenses when repaying loans, hampering efforts to reduce debt as borrowing costs near the highest level in more than two years.

When borrowers repay a loan before maturity, they pay a surcharge equal to 2 percent or 3 percent of the value of the debt, according to a survey by financial consulting firm Mark 2 Market. Borrowers' lack of knowledge of how banking contracts work usually works against them, fanning debt-servicing costs, the survey found.

With lending rates rapidly rising in the wake of the central bank's effort to slow inflation, many companies in those sectors are moving to cut debt. Firms are increasingly hiring independent advisers known as boutiques that can help minimize costs associated with refinancing and fight for better repayment terms with lenders.

"Sometimes businessmen don't understand the real dimension of the problem," said Eleazar de Carvalho Filho, a partner for Virtus BR Partners, a São Paulo-based boutique that works on mergers and debt renegotiation deals. "Our role is to help fix things and say what other sides don't want to hear."

Wealthy Brazilian investors such as retail tycoon Abilio Diniz as well as small- and mid-sized firms are increasingly tapping boutiques to oversee some deals and help find potential investment opportunities. Worried about potential conflicts of interest with banks that act as both lenders and advisers, more companies are turning to boutiques to help with cross-border takeovers and debt restructurings.

According to Rodrigo Amato, a partner at the São Paulo-based Mark 2 Market, independent advisers can also help sugar and ethanol, power and industrial companies cut costs. "Making use of knowledge, you can try to bring down surcharges or even annul them," he said.

The effort comes as many companies try to weather the impact of rising borrowing costs on their balance sheets, especially in 2014, when Brazil's economy is expected to underperform for a fourth straight year.

Almost half the companies listed on the benchmark Bovespa stock index reported cutting net debt, or total debt minus cash, in the past three quarters, even after inflation-adjusted revenue slipped and the exchange rate weakened, according to Thomson Reuters data.

The benchmark Selic interest rate is currently at 11 percent, up from a record low of 7.25 percent in May last year. Spreads, or the difference between what banks charge on a loan and their cost of funding, are currently nearing the highest in three years.

The Mark 2 Market survey polled 18 companies in those sectors, with the value of average renegotiated loans estimated at about 5 million reais ($2.3 million). ($1 = 2.22 Brazilian reais) (Reporting by Guillermo Parra-Bernal and Aluísio Alves; Editing by Jeffrey Benkoe)

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