Americanas case (AMER3): is it worth investing in shares of companies in judicial recovery?

The case of Americanas (AMER3) highlighted companies that have already entered – or are – in judicial recovery (RJ). With shares of the company falling sharply on the B3, and subsequently carrying strong valuations, several investors have been taking a closer look at the paper.

Following the disclosure that the retailer entered RJ on Jan. 19, the shares fell sharply. That trend, however, has started to change, with the stock jumping 146.5% from 20, and just this Wednesday (1st) their shares are up more than 15% around 11:00 a.m. Brasilia).

These earnings in a short period of time end up attracting the attention of investors, attracted by the possibility of earning a lot of money in a short time. Several experts, however, advocate caution.

In a recent survey, Guide, together with Economatica, highlighted that most of the shares of the companies that have filed for judicial reorganization have had a considerable decline since the beginning of the process.

Check it out below:

Currently, according to B3 data, there are 15 companies listed in the RJ process, 20 of which are listed on the stock exchange. Among these, only the ordinary shares of Eternit (ETER3), which entered Rio de Janeiro in 2018, have managed to provide positive returns to their shareholders – even by distributing dividends. The rest suffer heavy losses.

Other publicly traded companies, Guide recalls, were in the same situation Americana is in now and have managed to walk away.

This is the case of Oi (OIBR3), for example, who left RJ last December, after more than six years of litigation. OGX, on the other hand, became Dommo and was recently acquired by PRIO (PRIO3).

Other companies, however, haven’t been so lucky. MMX, from the same group as OGX, filed in RJ and subsequently one court declared its bankruptcy (which was later overturned by another court, but the assets have not traded on B3 since).

The shares of these companies also fluctuate wildly, “opening up opportunities,” but over the long term, almost all of them also experience steep depreciation – even those that have somehow managed to exit RJ without going bankrupt.

MMX shares, even shortly before the bankruptcy decreed in May 2021, jumped 800% in a week, with speculation of a possible sale. Soon after, the shares ceased to trade.

“Some well known examples of companies that have joined RJ are Oi, PDG, OGX, MMX. Another well-known case is that of Rodovias do Tietê, where many investors in incentive bonds have been negatively impacted. In all of these cases, the value of the shares is currently very low and, in most of them, significantly lower than the pre-bankruptcy price. Furthermore, these judicial reorganizations take a long time to complete (or have not yet been completed),” says Guide, in a report signed by analyst Mateus Haag.

Few businesses in RJ recover

Werner Roger, co-founder of Trígono, says the chances of a company recovering after joining RJ are low.

“If we look at the number of companies that enter RJ and are successful in exiting the process, the number is very low. These strong fluctuations, which we see as in the case of the Americans, are speculations”, says the manager. “We usually don’t recommend it anymore. In current market conditions, much less. They are usually heavily indebted companies and we are in a time of high interest rates”.

Remember that the judicial recovery process is followed by the loss of customers, suppliers and reputation. “It is pure speculation. If I wanted to have fun, I went to the jockey or to the casino”.

José Eduardo Daronco, an analyst at Suno Research, points out that a judicial recovery request is usually seen as a “last resort” to keep operations going – and reiterates that it brings a number of negative impacts to the entire chain of production.

“As soon as the judicial recovery is confirmed, the creditors drastically reduce the loan, fearing default. Furthermore, the suppliers themselves are skeptical and avoid supplying the goods. The company ends up having fewer products to offer to its customers, both due to the decrease in credit and for the goods themselves from suppliers, impacting the end customers and reducing the company’s competitiveness”, says the specialist of the research house .

The company faces other problems as well. This is the case, for example, with talent retention, when workers start looking for new opportunities, fearing mass layoffs.

“That said, the judicial reorganization process continues with the presentation of a plan for the future, which the company or the creditors present by trying to establish an economic-financial equilibrium for the company in RJ”, contextualizes Daronco. “Generally, these plans involve shareholder dilution and debt reduction. This means, in other words, that we all lose, shareholders and creditors».

The common opinion is that a process of “attention shift”, or turn aroundit’s never easy to accomplish.

When a company enters RJ, creditors and executives sit around a table to try to negotiate what the future of the company will be, the former trying to recover what is owed to them and the latter trying to keep the company going.

While changing course isn’t easy for a healthy business, when there are a number of operational weaknesses, enforced by the RJ process itself, it becomes even more difficult.

Americanas is currently starting negotiations with creditors, without yet having a defined path. In any case, this prevents us from clearly evaluating what the company is worth and what its future steps will be.

“A company that joins RJ encounters difficulties, mainly, with credit. No one wants to give this company credit. Most suppliers will ask for a guarantee or charge in cash,” says Laura Bumachar, partner at Dias Carneiro Advogados. “Furthermore, the company cannot alienate or encumber any assets from its permanent assets without judicial authorisation.”

Finally, the legal expert points out that the RJ process itself is costly, with the firm having to shell out a substantial fee with lawyers at a time when its balance sheets are no longer healthy.

Short term opportunity?

CM Capital analyst Alex Carvalho is one of the investors who says buying shares in a company in RJ could be attractive in the short term.

“These roles gain visibility and, with that, volatility as well, leading to short-term moves. It’s common to see these roles fluctuate a lot, which opens up some opportunities,” the coach discusses. “Usually these companies are considered cheap from the perspective of price bias, which is different from value.”

He points out, however, that when looking at the long term, the issue becomes more complicated.

“We created the prospect that the company could leave RJ, paying its creditors and generating cash, but there is an opportunity cost. While we expect this company to perform well, there are other large companies that continue to turn profits and pay dividends. The opportunity cost, then, can be expensive”, contextualizes Carvalho.

Some managers end up exposing themselves to these risks, believing they can ride these sharp fluctuations. However, they make these moves with smaller parts of their portfolios.

Bruno Garcia, manager of Truxt, in a recent interview with Stock Pickers, for example, said that he bought the debts of Americanas after the collapse of RJ.

We bought 0.70% of the Americanas debt fund. History is ugly, and bankruptcy of a retail company is complicated. It is difficult, but it is possible to find one asset value. We always have to think about a risk composition. Investing is thinking about how much risk you want to take

According to the expert, in addition to the possibility of recovery for Americanas, or for other RJ companies, there is, for example, the issue of litigation, with the possibility for shareholders to seek compensation from the controllers in court. Also on the radar is the possibility that banks are looking to do something to inject capital or that funds from stressed assets are brought in.

“We don’t have to buy distressed businesses, but we can. Taking a small position to enter an asset that nobody wants to take, when you think it makes sense, can pay off. We already had an Argentine debt position, I bought Oi. It’s something in the 1% of the fund,” the manager said on the show.

Related