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F&A | Ruy Moura’s Breakfast Reading


It has always surprised me that Brazil’s gargantuan and complex business ecosystem   seems unable to produce something along the lines of Dealb%k — an exemplary use of that in-the-moment blog format that keeps readers checking in periodically throughout the day, rather than simply reading it once through and lining the parakeet page with the leftovers.

The business pages of the major Brazilian dailies are heavy on macroeconmic trends, market movements, and the like — stuff you can cover sitting on your ass in front of a Bloomberg Box —  but very light on hard business stories with real protagonists and consequences: Company X overcomes Problem A to accomplish Objective 1.1, or Bank C offers Subsidiary Z to Company Y for X gazillions.

Only the largest economic groups and deals get such coverage, which is not much use to the venture cap, hedge fund or M&A guys who fish a smaller pond — and whose activities are newsworthy themselves, to boot.

So, then, a Brazilian Dealb%k?

The plain old Blogspot Fusões & Aquisições is a step in the right direction, although I  wish it would publish a masthead and take itself seriously as a journalistic source.

Its principal analyst — its only analyst, it seems — appears to be Ruy Moura, founder of Acquisitions Consultora Empresarial Ltda.

Moura’s daily clipping file has climbed to the top of my breakfast reading list, along with the planning ministry’s clipping of various media sources, broken down by topic and searchable.

I think there is a substantial editorial market for the Dealb%k style of coverage.

The only potential competitor I can think of in the Brazilian editorial market is Relatório Reservado, a one-page tip sheet circulating daily to a private circle of subscribers and relying heavily on market rumors.

Exame magazine has a deal flow blog that is useful to check in on as well.

This is the sort of story I find myself missing:  Continue reading


ANEEL Presents the 20% Solution


ANEEL formally announces its new regulatory regime for energy pricing.

Pundits say that it will prove to be a highly popular policy if it can deliver the promised results. A good part of the coverage of the local press coverage is mind-numbingly negative on those prospects.

See also

On January 24, Brasil Econômico op-eds that alarmist buzz about the risk of rationing is mostly baseless.  But let us return to that later. The ANEEL anouncement from Friday:

During an extraordinary session held January 24, ANEEL approved new electricity pricing tables that will reduce the cost of electrical energy to users.  The average savings to the end user will be 20.2%. Residential users will see their electricity bills reduced by at least 18% (see table, below). For industrial users of high tension lines, the discount will approach 32%. The new price structure is in effect as of today, January 25.

The reductions are the result of Law No. 12,783/2013 — it provides for the immediate renewal and renegotiation of transmission and generation concessions expiring in 2017 — as well as Provisional Measures 591/2012 and Decree 605/2013.

The two executive mandates create a special tax allocated to a reserve account — the Energy Development Account  (CDE)

created by Law 10,438/2002 with the objective of developing energy in the states and improving the competitive capacity of various alternative forms of energy, as well as to universalize the provision of electrical energy in Brazil.

The funds managed by the CDE flow from the annual payments by concessionaires for the use of public property, as well as fines assessed by ANEEL. Since 2003, the quota is paid by all energy resellers doing business with the end user. In other words, part of the  CDE comes out of the taxpayer’s poakets.

The idea is that the refusal of most of the largest electricity generators and transmitters to take part in the plan is to be offset with funds from the CDE.

MP 605/2013 assigns the  CDE two additional tasks. One is to compensate for discounts in usage rights to the distribution system and in cost to the end user. The other is to compensate for the refusal of some energy generation concessionaires to accept the deferral proposed in the Law of the Energy Sector in exchange for price reductions. 

In a workmanlike overview of the situation, Globo noted:

In December 2012, Mines and Energy secretary Márcio Zimmermann went so far as to state that it would be imipossible to reduce rates as deeply as initially announced due to the refusal of certain energy companies to embrace the deal.

The Sign of Four


The terms of the deal were refused by Cesp (São Paulo), Cemig (Minas Gerais), Copel (Paraná) and Celg (Goiás). All four are state-owned firms in states governed by the  opposition PSDB.

“It is surprising to see, last month, how many persons were … sustaining baseless disinformation over the level of our hyrdoelectric reserves and the entrely normal activation of the thermoelectric plants. As you would expect, these predictions failed to pan out. Brazil has not failed to produce a single kilowatt that it needed, and now, during the rainy season, the thermo plants will no longer have to bear the load,” said President Dilma.


The principal changes that will allow lower prices were:

  1. Reallocating the energy quotas of generators that renew  concessions early, at an average price of R$ 32.81 MWh.
  2. Reduction of transmission costs.
  3. Reduction of the sector’s tax burden.
  4. Removal of subsidies from the price table, with direct support of the federal treasury

Reductions and adjustments

The effect of this reduction is structural in nature. That is to say, it will promote a permanent change in the price structure of the industry, in that it will permanently do away with figuring costs into the pricing tables in the past.

Different Rates. ANEEL will establish a different rate structure for every energy distributor, based on the specific characteristics of each.  Lower energy prices should guarantee quality energy supply; it should also ensure that service providers receive sufficient revenues to cover their costs and to invest in the maintenance and expansion of the energy sytem.

Meet Your Meter Reader

Because meters are read at times that vary from one distributor to another, the full effect on the consumer’s monthly bill will not manifest itself until the first full billing cycle after the new price structures are implemented.

That is to say, during the first month under the new pricing scheme, depending on the expiration date of the previous contract, part of the user base will be billed under the old scheme and another part under the new,

With the new price table taking effect on January 24, for example, a customer whose bill is dated February  10 be billed half of the old price and half of the new. As of February 25, all users will see the benefits reflected in their bills.

Types of consumer. Other factors may lead to changes in energy prices, such as the terms of energy supply contracts. “Captive” residential and low-income consumers — those with no choice in the selection of a distributor — will all pay the single price negotiated by the concessionaire.

Variations in prices will also occur based on the level of tension provided to the end user, defined as the tension available in the distribution system, varying from 110V to more than 2,300 volts This variation divides consumers into two groups: Group A (≥ 2,300 volts) and Group B (≤ 2,300 volts). Group B comprises residential or low-income customers, among others.

Group A consumers pay predefined prices for energy and for peak and off-peak usage of the network. “Free market” consumers have different characteristics, in that they can trade for energy with other suppliers, under special conditions.

Learn more. ANEEL  has published a a number of documents and content on its Web that explain how your energy bill is calculated, how the concessional renewals and price reviews work, as well as tips on the most economical way to use electricity.

The table below shows the savings to customers of the various low-tension service providers.

AES SUL 23,62%
AMPLA 18,00%
BOA VISTA 18,14%
CAIUA 18,08%
CEA 18,04%
CEAL 18,00%
CEB 18,11%
CEEE 18,13%
CELESC 18,48%
CELG 18,00%
CELPA 18,83%
CELPE 18,04%
CELTINS 18,20%
CEMAR 18,00%
CEMAT 19,29%
CEMIG 18,14%
CEPISA 18,00%
CERON 18,00%
CERR 18,04%
CFLM 20,92%
CFLO 18,00%
CHESP 18,01%
CJE 18,34%
CLFSC 19,66%
CNEE 19,69%
COCEL 18,41%
COELBA 18,96%
COELCE 18,05%
COPEL 18,12%
COSERN 18,00%
CPEE 23,38%
CSPE 18,01%
DEMEI 18,36%
DMED 18,08%
EBO 18,00%
EDEVP 18,16%
EEB 18,65%
EFLUL 18,17%
ELEKTRO 18,47%
ELFJC 18,04%
ELFSM 18,97%
EMG 18,14%
ENERSUL 18,24%
ENF 18,07%
EPB 18,01%
ESCELSA 18,01%
ESE 18,00%
FORCEL 18,01%
IGUACU 18,11%
LIGHT 18,10%
RGE 22,00%
SULGIPE 18,33%
UHENPAL 25,94%

Risk Shopping | Brazilian Cases in Point


Source: Folha de S.Paulo.

Risk evaluation agencies assigned high ratings and low risk to several Brazilian banks that recently failed.

Banco BVA, for example, received a BBB rating from ratings agency LF Rating four days before suffering a Central Bank intervention on October 19.

Austin Rating assigned  BVA a BBB+ less than two months before its collapse.

The same occurred with  Cruzeiro do Sul, liquidated in September with R$ 3.1 billion in debt, and  Panamericano, which underwent a federal intervention on November 9, 2010.


Esteemed customer: you will be able to access funds in your StarCash account until December 13, 2012. Starting December 28, 2012, control will pass to Banco Bonsuceso, which will deal with new cards, card replacements, and so on

Risk ratings affect companies in one of two ways. On one hand, investors use the ratings as a guide to potential investment. Some funds invest exclusively in paper declared risk-free .

On the other hand, financiers evaluate risk using these ratings: the lower the rating, the more expensive it is to borrow money.

With the blessing of the ratings agencies, pension funds such as Petros, Brazil’s second largest, is able to invest in riskier fixed income paper, stamped “safe” by the agencies.  Petros had R$ 80 million in three funds with ties to BVA and invested in the bank’s bonds.

Shopping for Ratings

A practice still allowed by the market aggravated the problem: the so-called “shopping mall of ratings.”Companies needing positive ratings request a preliminary report from a given agency. If the rating is low, they try again with another agency, and so on until receiving the rating desired.

Since it is not yet required to make public these preliminary findings, the investor never suspects that the company has a bad credit rating.

To counter the negative effeects of this practice, the Brazilian SEC — the CVM — will as of January 2013 require the publication of preliminary ratings reports on the Web site of the rating agency

“This new CVM rule should mitigate the «ratings shopping center»  deve mitigar esse shopping de ratings,” says Rafael Guedes, CEO of Fitch Ratings Brasil.

“In Brazil, every agency has its own criteria, and there are major discrepancies,”say Sergio Garibian, ratings director, Standard & Poor’s, Latin America.

In February 2006, Cruzeiro do Sul exited its contract with Fitch, which had assigned it a rating of BB+(bra),  with “elevlalted risk of default.” The same year, the bank signed with Moody’s, which assigned it Baa1 for long-term deposits, and then three months later raised it toA3. Both are considered indicative of investment grade.

Responding to these contradictions, federal deputy Eduardo da Fonte (PP-PE) presented a bill that would make agencies responsible for “damages caused by intentional or negligent conduct in arriving at risk ratings.

“It is not norml for some agencies to classify a bank as low-risk and then watch it go out of business a few days later,” Fonte says. “Either the bank coopted the agency or else the agency is not qualified to rate anyone.”

Erivelto Rodrigues, CEO Austin Rating, says the “shopping mall of ratings” only occur in structures such as FIDCs — investment funds in rights to future receivables.”I don’t believe this happens with companies and banks,” he said.

Para Paulo Rabelo de Castro, CEO of SR Rating, which classified none of the banks in question, “strict regulation is required at a moment when the government is trying to stimulate the market for debentures.”

Brazil’s largest pension fund, Previ only accepts ratings from three agenices: S&P, Moody’sand  Fitch. Funcef, meanwhile, buys private debt instruments that are evaluated by at least one ratings agency, it matters not which.

Funcef was holding notes from both  PanAmericano and Cruzeiro do Sul. In the  Cruzeiro case, it received its entire investment back thanks to a special guarantee clause.

The Risk Mall 101

I can hardly claim to be an expert on the subject, but a study byVasiliki Skreta and Laura Veldkamp — «Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation» seems like a good place to start. The abstract:

Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings — observe multiple ratings and disclose only the most favorable — before auctioning their assets.

When assets are simple, agencies’ ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges.

Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset’s true quality.

Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.

The lede:

Most market observers attribute the recent credit crunch to a confluence of factors: excess leverage, underestimation of risk, opacity, lax screening by mortgage originators, improperly estimated correlation between bundled assets, market-distorting regulations, a rise in the popularity of new asset classes whose risks were diffcult to evaluate, as well as credit rating agency conflicts of interest.

This paper investigates the misrating of structured credit products, widely cited as one contributor to the crisis. Our main objective is to critically examine two arguments about why ratings problems arose and to show how combining the two could produce a ratings bias that imperfectly informed investors would not anticipate.

One argument focuses on asset issuers who shop for the highest ratings. The New York Times explains: The banks pay only if [the ratings agency] delivers the desired rating . . . If Moody’s and a client bank don’t see eye-to-eye, the bank can either tweak the numbers or try its luck with a competitor like S&P, a process known as ratings shopping.

A final thought: the Sadia and Aracruz derivatives crises of 2007 — exchange rate swaps — seem to illustrate the same logic. Risky assets kept off the books until the roller coaster came to a full stop..

In reality, the two largest agencies, Moody’s and S&P, account for 80 percent of market share. When a structured credit product is issued, the issuer typically proposes a structure to an agency and asks it for a \shadow rating.” This rating is private information between the agency and the issuer, unless the issuer pays the agency to make the rating offcial and publicize it. In the model, an asset issuer can purchase and make public one or two signals about the payoff of an asset. We call these signals “ratings.” After choosing the number of ratings to observe and which ones to make public, the issuer holds an auction for his assets. After each investor submits a menu of price-quantity pairs, the asset issuer sets the highest market-clearing price for his asset, and all investors pay that price per share.

Riding Palocci: Ratfinking the Minister of Money

Many have commented that the first 100 days of the current government here have been relatively free of scandal, but in fact one has been building for quite some time now. It is less noticeable because it deals with macroeconomic stability rather than children born out of wedlock.

It would take some time to prepare, but there has been a barrage of headlines about the possibility that inflation will supersede the targets set by the Central Bank and Treasury.

In more consumer-oriented publications, charts showing the rising price of staples ad consumer goods are ginned up. A typical headline directed at the middle class might be, “cars more expensive here than in Korea.” The lead headline in Valor for the past two weeks has been a negative, speculative macroeconomic factoid. This is moral panic journalism, and an intense campaign of it.

The government responds with bland explanations of which the gist is there is nothing to worry about,.which, though reassuring, are, well, mostly bland.

And now to personalized the scandal.

Every scandal needs a folk devil, and the current Treasury Minister is the Chosen One for this scandal — after beating a similar scandal year ago when he was mayor of Ribeiraão Preto and prosecuted for embezzlement. He was found innocent when they finally got around to trying him, 7 years later, during which time the opposition press treated him as convicted criminal, of course.

Still, if the Treasury secretary is not trustworthy, then moral panic over economic uncertainty seems more probable. This is how these people think.

Between a stint in the Lula government and now, Antonio Palocci ran a modest consultancy which had no contracts with the government.

Now that he is back in the government, the company has been dissolved, but before its dissolution, it allegedly did rather well. As the headline in the Folha screamed, “Palocci’s wealth increases 200-fold!”

The government is blocking hearings on the matter, which has already been considered and closed by the executive ethics commission. The man’s explanations seem reasonable to me.

Above, while other senior opposition leaders have minimized the affair — who wants to commit political suicide in a state whose boat is being lifted by the same tide? — former vice-governor Alberto Goldman “wrote on his blog that Palocci got rich by illegitimate means,” namely “influence peddling,” according to the always spicy BC, above.

The Estado de S. Paulo,. meanwhile, runs the weakest and most obvious of the ratfinks with a headline reporting that Palocci’s dealings “triggered alarms at COAF” — this is an automated money-laundering detection system at Treasury. Federal police investigated, as they routinely do, and found that the alarm was a false positive.

Even so, the headline leaves you with the impression that the minister is engaged in shady deals.

What I remember most about Goldman, by the way, was the picket he held on the Av. Paulista protesting the arrest of Eliane Tranchesi, the owner of the Daslu luxury boutique. The Chinese smuggling mob has nothing on this woman, and here is this guy screaming that if the tax & fraud laws were actually enforced, the economy would go to hell in a handbasket.

These sorts of scripted media scandals always strike me as a sort of Cartesian soap opera: Let us doubt everything, even the indubitable!

Still, it is painful to watch the declining DEM-PFL wax moralistic even as their rising star, the former federal district governor, appears headed for prison for misconduct he engaged in on Candid Camera.

I found it interesting that BC would mention it: The Minister has hired the FSB publicity agency to handle his crisis communications. It does list a campaign it did for the corporate image of Sabesp, the state-run water and sewage giant that also lists on the Bovespa &  in New York.

Brazil is essentially run by publicists.

The group apparently knows what it is doing, and when to keep its client’s confidence:

Para preservar nossos clientes, a FSB não disponibiliza os casos de gerenciamento de crise no site. Entre em contato caso queira conhecer nossa experiência nessa área.

ECAD | Razing The Royalties Machine

Above: Scandal at ECAD — the Brazilian ASCAP! Cruelty to the beloved Creative Commons! A reform of authorial rights legislation that would prevent the labels from keeping everything! Falling out with prominent leftist intellectual Emir Sader, who is disinvited from heading the Rui Barbosa Institute!  Since the media blitz began here — Bring Me the Head of the Minister of Culture — I have been trying to get to the bottom of certain vague accusations against the Brazilia ASCAP, ECAD, which collects and  distributes royalties, handling a modest amount of funds in the low hundreds of millions per year. All I have found is a single case in which ECAD distributed money in error to a fraudster who gamed its IT system, reported after the fact by a journalist who simply leaked what someone else told them. The organization says it detected the fraud, has already charged the man criminally and is suing to get the money back. Even so, the episode is being used to leverage the proposition “the Minister of Culture consorts with corrupt or incompetent lobbying organizations!” This is bullshit, I think. Today, for example, in the Estadão, we read that a parliamentary commission of inquiry is moving forward with respect to ECAD. Absolutely the only concrete reason for ordering the expensive and time-consuming probe is the single documented case of someone defrauding the distro system. It is as if Congress, espying a single sparrow in the snow, launched a probe of why spring was so cold this year. You enthusiasts of informal logic know what I mean: One case does not constitute a trend or patterm. I smell a media-driven ratfuck — the first of the season. But audit reports by ECAD are too adequate, by far, to raise the spectre of systematic fraud based on a single case, for one thing. So I have to admit it: I am rooting for Ana Buarque. I like her music, too. Continue reading

Your Morning Mingau | Deloitte Is Semi-Andersoned Over Panamericano

The BCB, Brasília. Out-Death Stars even the sinister FIESP tower on the Av.Paulista.

Here are the headlines at this Sambodian hour.

The Estadao reports that sources inside the Brazilian Central Bank consider Deloitte Touche to have suffered an Enron-scale attention deficit disorder in the case of the Banco Panamericano and the phantom R$4.5 billion it carried on its books for a remarkably long period of time..

Continue reading

Bancoop Prosecutor: “ABA Rule 3.6 My Ass!”

"The House Fell In on the Treasurer of the PT: The man who will handle the campaign finances of Dilma is pointed out as the pivotal figure in a swindle that embezzled millions and fed the campaign coffers of Lula in 2002" Nasty.

Caiu a casa … do “patrocinador” da Veja: Partisan bloggers, responding to the Veja magazine cover story linking the campaign treasurer of their candidate to dirty dealings, note that the online edition is sponsored by the state government of São Paulo.

See my previous post.

It turns out that Bancoop really was more than a little screwed up, as the petistas themselves explain.

The striking thing is the extent of blogging on the Veja exposé on the supposed corruption of the campaign manager for the party of the situation.

To give you a rough idea, a search at 7:00 p.m. tonight on blogsearch.google.com.br turned up

  1. my post in English, which no one here can really read all that well, and then
  2. page upon page upon page upon page of blogging results reinforcing the notion that the Veja article is resounding proof of corruption in the PT.

On maybe the seventh or eighth page, a lonely voice of dissent from a partisan blog, which is actually fairly forthcoming about the fact that Bancoop was perhaps not the best-managed real estate venture ever.

First, however, the post refers to a screenshot showing that the page is sponsored by official advertising paid for by the state of São Paulo — whose governor of the Opposition will oppose Dilma of the Situation in October.

State advertising endorsing the cover story. The irony is genuine, but kind of boring and predictable, from a bullshit detection standpoint. (I like to pretend that I am the Dr. House of this inexact science.)

I am actually more interested in the true crime story about a real estate development with some utopian pretensions running up against the hard truths of the Hobbesian state of nature that is the São Paulo real estate market.

And the story of a prosecutor running amok in a way that would shock even the bar association of New Jersey.

And most amazing of all, the story of how Veja used a source to found its accusation that in the past it had done everything possible to discredit.

Continue reading