Cracker Barrel: The Bad Picture Is Improving (NASDAQ:CBRL)


Times have been tough because of the COVID-19 pandemic. Some industries have been affected far more than others. One industry hit incredibly hard as of late has been the restaurant space. Social distancing guidelines have pushed many restaurants to either change how they operate or to temporarily shutter. One firm hit awfully hard by this has been Cracker Barrel Old Country Store (CBRL). Fortunately, while times are still difficult for the niche restaurant play, recent data provided by management shows that the business is in a state of recovery. This is excellent news for shareholders, and even though they should anticipate this year to be more or less a wash for the enterprise, there’s no doubt that the company is well-positioned for the long haul.

A lot of pain

There’s no way to describe recent financial performance provided by Cracker Barrel without using the word ‘painful’ or something similar to it. Revenue in the third quarter of the business’s 2020 fiscal year, for instance, came in at only $432.54 million. This is down from $739.60 million the same time last year, which translates to a year-over-year decline of 41.5%. This drop in sales was driven by a number of factors. Comparable restaurant sales, for instance, were down 41.7%, while comparable retail sales were down 45.5%. This brought the average revenue generated per location $644,400 compared to the $1.12 million seen a year earlier.

To put in perspective just how awful this picture is, consider management’s prior guidance for the current fiscal year. On March 18th, management suspended guidance for its 2020 fiscal year in light of the COVID-19 pandemic. That guidance is still suspended. But prior to that point, the company expected for its restaurant comparable store sales to grow by between 2% and 2.5% for the current fiscal year. Retail comparable store sales, meanwhile, were expected to remain approximately flat. For the first three quarters of 2020, restaurant comps are own 11.8%, while retail comps are down 12.7%, so it’s safe to assume that the business should comfortably miss its mark this year.

As sales plummeted, so too did profits. In the latest quarter, the company generated a net loss of $161.93 million. This compared to a gain of $50.41 million in last year’s third quarter. This implies a change from $2.09 to -$6.81 on a per-share basis in the span of just one year. This truly is awful. If there is any sort of consolation, it’s that Cracker Barrel did at least see positive cash flow in the first three quarters this year. According to management, this figure came in at $87.23 million. This is far worse than the $252.59 million. Having said that, even just for the quarter the picture was far worse. In the third quarter, the restaurant’s operating cash flow was -$96.77 million. In the third quarter last year, it was $61.72 million. That’s a year-over-year difference of $158.50 million.

The picture is getting better

If these figures were all there were, I would caution investors to be worried about Cracker Barrel and its prospects moving forward. Fortunately, things aren’t as bad as this data makes it appear. Perhaps more appropriately, things are bad but the firm is built to last and the picture is starting to show real signs of improvement. Consider, first, the firm’s decisions in recent months aimed at coping with the crisis. In addition to focusing on cost-cutting, the business made the decision to pump up its cash reserves. As of the end of its latest quarter, Cracker Barrel’s cash and cash equivalents totaled $363.33 million. This compares to just $167.59 million the firm had on hand a year earlier.

This has, sadly, come at a cost. You see, one great thing about Cracker Barrel has been that the business has remained a low-leverage prospect for investors. Management has done well in recent years to mostly grow within cash flow. That’s why, this time last year, the company had just $400 million in gross debt and $232.42 million in net debt on its books. In order to deal with the crisis, management decided to air on the side of caution and tapped some of its debt capacity.

By the end of the third quarter this year, the firm’s debt had grown to $940 million. This was up from $460 million one quarter earlier. Because of its large cash position, net debt rose at a slower pace, standing at $576.67 million. This is still not bad considering the company’s historic cash flow record. Despite this modest worsening in its leverage situation, management made the decision to pay out assistance to its hourly store employees totaling $17 million. As a note before I go on, management did disclose that subsequent to the latest quarter, the firm had tapped a further $40 million worth of debt, bringing total gross debt up to $980 million.

*Taken from Cracker Barrel Old Country Store

In addition to battening down the hatches and pumping up its cash reserves, Cracker Barrel had some positive news to share with its investors. The environment for the firm does appear to be improving rather considerably. This can be seen by looking at the image above. In it, you can see that in the week ending May 1st, restaurant comps were down 79% year-over-year. Retail comps, meanwhile, were down 83%. Each week since then, through the week ending May 29th, this picture changed and rather rapidly at that. By the last week recorded, restaurant comps were down just 45%, while retail comps were down 38%.

The big thing that helped improve these numbers was the number of stores the company had open for dine-in service. Over the timeframe covered, the number went from 0 of its 692 stores to 434. This covers stores for the ‘full fiscal period’ covered. The total number of stores open as of the May 29th date totaled 505 and management anticipates that by the end of June all of its stores will be open again. The firm also provided another interesting tidbit of knowledge. They stated that stores with dine-in service available (as of May 29th) had comparable sales declines of just 32% for that week in question. This compared to declines of 76% for those that still offer off-premise dining options only.

Takeaway

Based on the data provided, it looks pretty clear to me that Cracker Barrel has had some pain along the way. More likely than not, some of this pain will flow into its fourth quarter as well, but that doesn’t mean investors should despair. The picture is clearly improving and at a rather rapid pace. Add in that shares look pretty cheap, and it’s hard to say no to the firm. After seeing units plummet from a 52-week high of $180.93 to just $53.61, the firm’s stock rebounded to $107.03. It’s still down 40.8% from its 52-week high, but consider what will happen once the business returns to full health. Yes, the debt picture could change things some, but its market value today of $2.57 billion would work out to a price/operating cash flow multiple of just 7.1 once operating cash flow returns to 2019’s levels. That’s quite a bargain for a healthy firm like Cracker Barrel.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Some global firms consider moving treasury operations out of HK: sources By Reuters


© Reuters. A general view of skyline buildings, in Hong Kong

By Sumeet Chatterjee

HONG KONG (Reuters) – Some global companies are considering shifting some of their treasury operations out of Hong Kong as the United States moves to end the city’s privileges, senior bankers said, in the latest blow to the territory’s status as a major financial hub.

U.S. President Donald Trump has begun the process of eliminating special U.S. treatment for Hong Kong to punish Beijing’s decision to impose new national security laws there – which China and Hong Kong say will not hurt rights and freedoms.

Against the backdrop, a handful of global firms are eyeing a move of some of their corporate treasury operations to countries like Singapore, Malaysia, Thailand, and Vietnam, four senior bankers with knowledge of the matter said.

“Companies’ treasury operations follow trade flow and now there are many questions around Hong Kong’s status as a trade hub,” said a Hong Kong-based banker with a leading global trade finance bank.

Trade flows could be hit if the end of Hong Kong’s special relationship with the United States sees the city’s goods subject to the same – higher – rates paid by companies in mainland China, which has been fighting a trade war with the United States. Hong Kong’s zero tariff rates on U.S. imports could also be at risk.

“Some (multinational corporations) are considering shifting a part of their treasury operations (out of Hong Kong) to start with and then gradually scale it up,” the banker said.

A leading U.S. retail chain, which operates hundreds of stores around Asia, is already in early talks with its banks to move some cash management related operations to Singapore from Hong Kong, the banker said.

The bankers, who declined to be named due to the sensitivity of the matter, help companies set up the treasury centres and manage them. They are in talks with the companies about their likely relocation plans but said there was no strict timeline.

If it happens, the development would deal another blow to Hong Kong’s status as a major financial hub, following widespread pro-democracy protests last year.

Already there are signs rich Chinese are seeking to park fewer funds in Hong Kong.

But the Hong Kong Monetary Authority (HKMA), the city’s de-facto central bank, told Reuters via e-mail that interests from corporates in setting up treasury operations in Hong Kong remained strong.

“There is no noticeable sign of fund outflow from either the Hong Kong dollar or banking system,” it said.

SINGAPORE EDGE

The end of the preferential treatment could hurt Hong Kong’s hard-fought progress in competing with Singapore for treasury operations centres – which manage risk, borrowing, lending and raise capital for companies – in Asia.

While Singapore has historically had the edge thanks to its low tax base and pro-business policies, Hong Kong recovered some ground in recent years as the HKMA unveiled sweeping tax measures in 2016.

Chinese and global companies favour Hong Kong to run their treasury operations and reroute enormous amounts of trade via the city lured by the presence of large trade finance banks, ease in capital flow and access to foreign exchange liquidity.

All of this could come under threat if the U.S. pulls the plug on Hong Kong’s special relationship.

“These political moves will see global companies putting in place back-up plans for their critical treasury operations,” said another banker with an European bank.

(The story refiles to corrects to delete extraneous word in the headline).





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Is it safer to stay at a hotel or an Airbnb during your summer vacation? ‘We need to balance sanity and risk’


When shelter-in-place orders went into effect across the country in March, many Americans quickly sought refunds for hotel bookings, airfare and travel expenses. But now that states have relaxed some social-distancing measures, Americans have gone full-circle and are planning road trips.

But when it comes to lodging you might be faced with this question: Is it safer to stay at an Airbnb or a hotel?

Leaving your home for any reason increases your chances of getting infected and spreading COVID-19, and travel is certainly no exception. That’s why the U.S. Centers for Disease Control and Prevention holds that “staying home is the best way to protect yourself and others from getting sick.”

But if appropriate precautions and considerations are taken into account in advance, you shouldn’t write off a summer getaway entirely, said Thomas Russo, chief of the division of infectious disease at the University at Buffalo.

“We need to balance sanity and risk,” Russo said. “It’s important for us to get out and reemerge from our caves but we need to do so safely.”

The CDC encourages you to consider some of these questions if you are planning a trip.

Before embarking on a trip, “travelers should research the local effects in any area they are planning to visit,” said Scott Pauley, a spokesman for the CDC. “The best source for those localized reports are the local health departments for the area they are traveling.”


‘We need to balance sanity and risk.’


— Thomas Russo, University at Buffalo

If you do travel, the CDC recommends you “pick up food at drive-throughs, curb-side restaurant service, or stores,” and practice regular social-distancing protocols, including wearing face coverings in public places.

Traveling with the people you’ve been sheltering in place with, be it family or roommates, Russo referred to as a “fixed risk.” Simply getting in a car with them won’t increase your chances of contracting coronavirus anymore than watching TV at home.

Traveling with people from outside your household, however, increases the risk of spreading the virus, he said. Consider whether you’ll be interacting with someone who is more at risk of contracting coronavirus after your vacation, he added, including older adults and people with underlying health conditions.

The case for staying at an Airbnb over a hotel

Given that person-to-person contact is believed to be the main way coronavirus spreads, experts recommend driving yourself as opposed to traveling by bus, train or airplane. “You’re bound to have fewer interactions with people than you would if you were flying,” Russo said.

For the same reason, Russo recommends staying at an Airbnb or Airbnb equivalent over a hotel. “In a hotel, it’s inevitable that you’ll have more interactions than at an Airbnb,” he said.

Related: Redfin CEO: Vacation real-estate markets are ‘toast’ because of the pandemic as Airbnb owners rush to offload their homes

Hotels are offering contactless check-ins, but elevators, narrow hallways and the risk of coming into contact with cleaning and administrative staff can make it hard to keep six feet apart from other people.

If travel from the U.S. into Canada wasn’t currently restricted he said he would have taken the vacation he booked to British Columbia where he planned to stay at a home he rented through VRBO, a home rental site owned by Expedia
EXPE,
+2.18%
.

In late April, Airbnb rolled out an “Enhanced Cleaning Initiative”, a set of protocols for hosts to follow which were designed by former U.S. Surgeon General Vivek Murthy.


‘The beauty of Airbnb is that each property is unique and each host has a lot of discretion.’


— Sheryl Kline, University of Delaware

Airbnb said that these protocols would be publicly available in May. A spokesman for the company told MarketWatch that the protocol is ready but in light of recent unrest over the death of George Floyd in police custody in Minneapolis, they have been postponed.

Hosts are not required to follow the protocols, but those who do “will get a special call-out on their listing page, so guests will know they’ve committed to following more rigorous cleaning and sanitization practices,” an Airbnb post states.

That’s in line with Airbnb’s business model, said Sheryl Kline, a professor at the University of Delaware who has researched hotel hygiene.

“The beauty of Airbnb is that each property is unique and each host has a lot of discretion when it comes to creating the guest experience when renting their properties.” That may come with a downside, however. “This flexibility means they do not have the same set of standards as large hotel companies,” she added.

Given that Airbnb doesn’t inspect rental properties, it will have to “rely on the word of the hosts to determine if these new cleaning protocols are followed.”

“I would consider staying at an Airbnb if it had a four-day buffer between guests, was cleaned using their new protocols and if I rented the entire space and did not share it with the host,” she said.

The case for staying at a hotel

Hotels have less discretion when it comes to cleaning rooms, said Chip Rogers, CEO of the American Hotel and Lodging Association.

In early May the association introduced industrywide cleaning standards, which Rogers said were reviewed by the CDC. These guidelines are meant to be “baseline standards that can be applied to every hotel across the country.”

The 16 largest hotel groups in the country including Marriott
MAR,
+0.61%
,
Hilton
HLT,
+2.06%

and Hyatt
H,
+2.13%

have all signed off on these standards and were involved in setting them.

Also see: ‘Opening up does not mean social activities’: Your coronavirus guide to safely commuting, shopping, traveling and visiting the doctor as states reopen

Kline said that these hotels “have dramatically improved their cleaning protocols,” compared to pre-coronavirus days. “They have implemented housekeeping training programs and use the CDC and the Environmental Protection Agency’s recommended cleaners and disinfectants.”

“I would feel comfortable staying at a major chain hotel because of the standardization of hotel operating procedures,” she said.

Best practices to follow no matter where you decide to stay

Regardless of whether you choose to stay at a hotel or an Airbnb, “it is a good idea to take your own cleaning and sanitizing products and re-clean those areas that are high-touch areas,” Kline said.

High-touch areas she said include doorknobs, light switches, telephones, remote-control devices, tabletops and bathroom fixtures.

It’s not necessary to bring your own linens and towels “if you are staying at a reputable hotel or home rental.” In fact, bed linens are “most likely the cleanest item in the guest room because they are washed [after] each guest and most likely washed and changed daily,” Kline said.

However, she said she wouldn’t use the bedspread, bed scarf or decorative pillows since “they may not be washed as frequently.” Alternatively, you could always ask for them to be replaced.

And when checking in? Experts recommending bringing your own pen.



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Currency Wars Continue In The Shadows


With everyone focused on the latest virus statistics and the riots, it is easy to overlook the ongoing saga of currency wars fought by the Bank of China (BoC) and the Swiss National Bank (SNB).

The Currency War 10 Years Ago

The term “currency war” had been largely absent from mainstream economic vocabulary since the 1930s until it was reintroduced by Brazil’s then-finance minister Guido Mantega in September 2010 in response to attempts by China, South Korea and Japan to lower the value of their currencies to gain a competitive advantage relative to other countries such as Brazil. At the time, the dollar had fallen nearly 25% against the Brazilian Real, so that further currency actions by other trading partners risked inflicting serious harm to Brazil. While the term “currency wars” captured the imagination of journalists and book authors, not much economic warfare ever erupted.

In today’s economy two central banks are managing the fixed rates of their currencies deliberately lower: the SNB and BoC.

Swiss Franc Front and Center

About two thirds of Switzerland’s economy depend on exports, so it is no surprise that the SNB is far more concerned about its exchange rate movements than the Fed. The last time the SNB made headlines was its surprise ending of intervention on January 15, 2015 which led to a subsequent sharp appreciation of the Franc. The SNB had intervened for more than three years to keep the Franc at a rate above 1.20 to the Euro. Markets had expected a continuation of the weak Franc policy, so that many speculators were caught wrong-footed by the sudden drop. NYSE-listed retail currency broker FXCM had to turn to Leucadia National to be bailed out with an emergency loan{i}.

The 2015 suspension of intervention caused the Franc to appreciate to 0.97, but in 2018, it fell back to 1.20 prior to recently appreciating again, despite heavy SNB intervention, to its current level near 1.06 (Figure 1). (A low rate represents a strong Franc and a weak Euro.)

Figure 1; Swiss Franc / Euro Exchange Rate. Source: Bloomberg.

One particularity of the SNB’s currency management is that it invests a portion of its foreign currency reserves that it accumulated during its interventions into stocks, whereas most other central banks hold their foreign currency reserves in bonds or short-term paper.

At the end of 2019 the SNB’s foreign currency reserves amounted to 770 billion Francs. Not too shabby for a country with 8 million citizens. On these reserves, the SNB generated profits of 49 billion Francs last year, of which 4 billion were handed over to Switzerland’s Treasury. During the market turmoil in March, however, investment losses were 38 billion Francs.

While existing investments crashed during the recent global market meltdown, demand for the Swiss Franc as a safe-haven intensified, causing the SNB to reinitiate its interventions to keep the Franc from appreciating.

Interest rate cuts are politically controversial – the SNB’s benchmark rate was negative 0.75% before the crisis. Apparently, in the eyes of many, this leaves currency intervention as the only option. Clearly, the SNB chose intervention. The substantial inflows in the Franc may have had a collateral benefit: the Swiss stock market is down only 4.42% year-to-date, outperforming the S&P 500 by 0.26% [iii].

The SNB’s intervention has not gone completely unnoticed. In January, the U.S. Treasury added Switzerland to the Monitoring List of potential currency manipulators along with China and eight other countries[ii].

China

China’s intervention in currency markets has the same goal as Switzerland’s: keep the currency low in order to export. Like Switzerland it has amassed significant foreign currency reserves as a result, which are, however, invested in the traditional manner in bonds. After all, it was the infamous call to then-Treasury Secretary Hank Paulson in which the Chinese threatened to stop purchasing securities of Fannie Mae and Freddie Mac that led to the takeover of these two Government-Sponsored Enterprises by the U.S. government.

The crucial difference between China’s and Switzerland’s currency regimes lies in the severe restrictions that the Chinese government imposes on its citizens’ ownership of foreign currencies. Chinese who earn foreign currency are required to hand much of it over to their government at the exchange rate that the same government deems appropriate, which also restricts the amount of foreign assets that Chinese citizens can hold legally. The Swiss have no such constraints and can hold unlimited amounts of currency or foreign assets.

These severe restrictions have enabled the BoC to keep the Yuan more stable than the Franc: over the last ten years it has fluctuated between a low of 6.0409 and a high of 7.1372, its rate last Friday (Figure 2). In contrast, the Swiss Franc has a spread of 45% between the lowest and highest rate over the same period. (In the same manner as for the Swiss Franc/Euro pair, a higher exchange rate signifies a devaluation of the Yuan).

Figure 2: Chinese Yuan / U.S. Dollar Exchange Rate. Source: Bloomberg.

Similar to the SNB, facilitating exports is the main motivator behind the BoC’s currency management. This is clearly visible in the devaluation of the Yuan in 2018 as U.S. tariffs were imposed: the initial 10% tariff rate led to a depreciation of the Yuan from the 6.30 area to 6.90, while the threat of additional 25% tariffs has caused the BoC to continue letting the Yuan depreciate.

Investment Implications

With the U.S. Presidential election season approaching and Hong Kong having turned into the new geopolitical hotspot, investors should be cautious about the potential for political rhetoric erupting about exchange rates. Clearly, labelling China a currency manipulator would have a dual effect of scoring political points inside the United States while also causing economic harm to investments in China, which would be hit by increased incentives to move supply chains out of China

Switzerland’s interventions are less exposed politically, and it is hard to see why it would suffer more than rhetorically. The country has managed to get through the epidemic much more smoothly than most other countries. Swift action in the initial phases coupled with an excellent healthcare system has kept the number of deaths low and has allowed a gradual reopening to start much earlier than the rest of the world. We believe that the Swiss market will outperform due to fundamentals as well as due to the weakening currency. However, any investment in Switzerland should be flanked with currency hedges because further weakness in the Franc is likely.

We would also like to point out an important investment implication of the China tariffs coupled with the devaluation: many commentators have warned of the potential impact that U.S. tariffs could have on the cost of consumer products in the U.S. While many retailers initially warned about a tariff impact, such complaints faded as 2019 progressed because the cost push of the tariffs was offset in part by a depreciation of the Yuan. We expect that China’s devaluation playbook will be repeated should trade tensions escalate again in the next few months over Hong Kong or due to the presidential election campaign.

[i] Anirban Nag, Steve Slater: “Swiss franc shock shuts some FX brokers; regulators move in.” Reuters, January 16, 2015.

[ii] “January 2020 Report to Congress on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” Department of the Treasury, January 2020. The other eight countries are Germany, Ireland, Italy, Japan, Korea, Malaysia, Singapore, and Vietnam

[iii] Total return of the Swiss Market Index and S&P 500 year-to-date through 5/29/20.

Thomas Kirchner, CFA, has been responsible for the day-to-day management of the Camelot Event Driven Fund (tickers: EVDIX, EVDAX) since its 2003 inception. Prior to joining Camelot he was previously was the founder of Pennsylvania Avenue Advisers LLC and the portfolio manager of the Pennsylvania Avenue Event-Driven Fund. He is the author of ‘Merger Arbitrage: How To Profit From Global Event Driven Arbitrage.’ (Wiley Finance, 2nd ed 2016) and has earned the right to use the CFA designation.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of Camelot Event-Driven Fund (tickers: EVDIX, EVDAX). Mr. Hoffmeister is a graduate of Georgetown University with a BS in Accounting and Finance, and MBA from Northwestern’s Kellogg School of Management.

Disclosures:

• Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

• This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Camelot Event Driven Advisors can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

• Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Event Driven Advisors. Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach. Only your professional adviser should interpret this information.

Originally published on Commentaries – Camelot Portfolios

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.





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Brazil’s rescue plan flaws imperil small business recovery By Reuters


2/2
© Reuters. A floating gas station for small and medium vessels is seen in the middle of the Rio Negro river, near the Port of Panair in Manaus in Amazonas state

2/2

By Tatiana Bautzer and Carolina Mandl

SAO PAULO (Reuters) – Most of Brazil’s small businesses, which account for more than half of its jobs and 30% of gross domestic product, are not getting the cash President Jair Bolsonaro pledged to help them through the coronavirus crisis, putting recovery at risk.

Despite a $7 billion program to help small and medium-sized businesses pay their workers as lockdowns tipped Brazil into its steepest annual downturn since records began, banks have so far only 5% distributed of the funds, Economy Ministry data shows.

Jose Eutimio Brandao Jr, who fired 50 of the 170 people he employed at a bar, restaurant, bakery and nightclub in the northeastern state of Alagoas, is one of those affected.

Brandao wanted a loan to help pay his remaining staff, but says his bank turned him down because his group’s total revenue surpasses a 10 million reais ($1.9 million) ceiling.

“(The) interest rate is low, equal to the then benchmark Selic, at 3.75% a year, the banks won’t make money with it,” Brandao told Reuters.

A survey by small business industry group Sebrae found that some 86% of firms that sought loans had not received them, with 28% still awaiting an answer.

Meanwhile BNDES, Brazil’s state development bank, is in talks to bail out airlines like Azul and Gol Linhas Aereas Inteligentes, jetmaker Embraer and even the local units of multinationals like Volkswagen (DE:) and General Motors (NYSE:).

And while some big corporate rescues have suffered problems, the small business program’s limitations have reinforced a perception of inequality in Latin America’s largest economy.

Brazilian banks extended 442 billion reais in new loans over the last two months, but almost 60% went to large corporations, Central Bank data on Brazil’s total loan book shows.

The Economy Ministry said in a statement to Reuters that it is working on alternative credit lines, and that it is already subsidizing the payroll loan program.

OVERESTIMATED

Many business owners, unsure about their future revenues and concerned they will be taking on debt that will be tough to repay, say they are reluctant to apply for the aid.

Unlike the U.S. Paycheck Protection Program, which forgives the loan if used to pay employees, the funds offered in Brazil are liabilities that would add to a company’s debt.

So firms are firing staff or cutting salaries instead.

Luiz Soares, whose three hair salons and one restaurant saw sales decimated by Sao Paulo’s stay at home orders, opted to pass on the payroll loan program and fired at least 10 of his 25 formally hired employees.

Soares, 68, who has another 100 people working for him as contractors, is now renegotiating existing bank loans, although he worries whether customers will show up at his mall-based restaurant and how many will be allowed in his salons.

“I can’t get more credit, I have no idea of when I will be able to reopen and how much my revenue will be,” Soares said.

Only 40% of the small businesses polled by Sebrae sought loans, although 90% say they lost revenue during the pandemic.

Even among those who did try to borrow, many said they struggled with the complexities of the program, which include having a bank manage payrolls and risk analysis by the banks, which include Itau Unibanco, Banco Bradesco and Banco Santander (MC:) Brasil, administering the scheme.

These banks must also provide 15% of each loan, which critics say has made them overly strict in considering applications because their own capital is at risk.

“The reach of payroll credit has been overestimated, as most targeted companies do not comply with requirements,” Cassio Schmidt, Santander Brasil’s director of retail loans, said.

Schmidt told Reuters the bank has been less strict for the payroll loan, but is still flagging obvious risks, such as borrowers more than 30 days in arrears on existing loans.

Itau and Bradesco did not comment.

LONG STRUGGLE

But many businesses say banks are avoiding a program they view as risky and offering too little profit.

“Banks do not want to run the risk, they know restaurants will struggle for a long time,” said Paulo Solmucci, head of Brazil’s restaurants association, which represents 6,000 businesses, saying most of them did not get loans.

Some business owners told Reuters that since the loans are focused on payrolls only, they fall short of many of their needs, including rent and utility bills.

The program also requires companies to process their payrolls through one of Brazil’s largest banks, giving small businesses, many of which electronically transfer funds to employees or pay cash, an added hurdle.

To broaden the program’s reach, the government is considering changes such as allowing companies to fire up to 50% of their workforce and raising the revenue limit to 50 million reais, central bank chief Roberto Campos Neto said this week.

And in answer to complaints from some businesses that the payroll loans did not address other costs, it will start offering an all-purpose credit line.

But borrowers under that program, which is not yet operational, must start repaying the loans within a month, a tough ask for companies that have no idea of when they can resume activities, at least three businessmen told Reuters.

And while the government has promised to make up for 85% of potential losses under that program, banks are responsible for the full amount of the initial loan, making them even more cautious, one executive told Reuters, on condition of anonymity.

Bolsonaro’s economic team rolled out yet another program in late May for which small businesses will also be eligible, using funds from an existing state development bank fund.

But Carlos Chiaroni, who owns a music store in a Sao Paulo mall, wants the state to do more.

“If I had all the collateral banks are requesting, I would not need a loan right now. It shows that if the government doesn’t provide credit, nobody will,” he said.





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