Description

Summary

Americanas SA’s 2030 senior unsecured bonds (CUSIP: USL5788AAA99) are trading at 15c making them a very interesting and cheap option on a successful restructuring of the company.

The bonds create the company at ¬4x LTM EBITDA with Brazilian e-commerce peers trading between 6-17x. A re-rating to the lower end of the range could result in close to 100% upside from current levels.

Business Overview and Shareholding

Founded in 1929, today Americanas SA is one of the largest retail chains in Brazil with an online and physical presence. The Company had over 3,600 physical stores and approximately 100,000 employees in Brazil as of Q3 2022. Americanas SA, which has been publicly listed since the 1940s is 30% owned by the investment firm 3G capital.

Americanas SA’s business covers physical stores and electronic e-commerce sectors. The physical stores are comprised of the following formats (1) traditional stores that have an average sales area of approximately 1,000 m2 for multiple retail departments, (2) express stores with average sales area of approximately 400m2, (3) local convenience stores with an average sales area of approximately 100m2, (4) “Ame Go” store formats with an average sales area of approximately 50m2 focusing on convenience products with autonomous purchasing technology, and (5) stores that offer a mix of electronic products with an average sales area of approximately 70m2.

The Company’s online platforms complement the retail business and consist of (1) e-commerce retail business selling products under recognized brands including “Submarino,” “Shoptime” and “Sou Barato,” (2) a digital consumer credit services business, (3) AME payment services which is a digital payment tool for purchases made through online stores, (4) technology, logistics, distribution and customer service platform services and (5) “Marketplace” platform services that connect third party sellers and buyers.

During 2020-2021, the financial performance of the group was strong, however Brazilian e-commerce players have faced challenges in 2022 due to inflationary pressures and rising interest rates which have resulted in a steep decline in consumer purchasing power. During Q3 2022, The Company’s SSS revenue fell by 2.7% in physical stores and e-commerce revenues fell by 14.4% reflecting a lower demand for higher ticket items.

Recent Events and Bankruptcy Filing

At the beginning of 2023, the Group identified material accounting inconsistencies in its financial statements relating to the misclassification of certain purchase financing debts as debts owed to suppliers. On January 11, 2023, Americanas SA published a “material fact” notice informing that =reduced the balance of supplier payables in prior fiscal years including FY2022. The disclosure was accompanied by the resignation of the then CEO, Sergio Rial and Head of IR, Andre Corve. The Board of Directors also appointed an independent committee to investigate the inconsistencies.

The accounting inconsistencies would effectively increase the debt balance by as much as BRL 20 billion ($3.87 billion) as of September 30, 2022, causing the Company to be in breach of restrictive covenants on its debt instruments, triggering the acceleration of its debt obligations as well as cross-default provisions throughout the cap structure. However, the actual cash impact of the inconsistencies is immaterial. As a result on January 12^th, Americanas SA filed a preliminary injunction petition in the Brazilian RJ court to prevent creditors from accelerating their debt and triggering cross defaults and to stay enforcement actions including the seizure of R$1 billion ($193.5 million) by BTG Pactual.

However on January 18^th, 2023, the Special Court of the State Court of Appeals of Rio de Janeiro granted a Suspension Order to BTG which freed it to accelerate its claims against the Americanas Group and retain over R$1 billion of seized funds until the final adjudication of the Suspension Order. The granting of the Suspension Order sent the shares and bonds of Americanas SA tumbling and resulted in several rating agency downgrades. Additionally, other banks blocked access to credit lines and receivables which drained a further R$3 billion ($580 million) of cash.

Although the Company’s YE cash balance was around R$8 billion, the amount shrunk to a few hundred million which was not sufficient to cover operating expenses. As a result, the Americanas Group urgently filed an RJ petition on January 19^th to preserve its going concern operations.

A letter signed by the three main partners of 3G Capital (Jorge Paulo Lemann, Marcel Telles e Carlos, Alberto Sicupuria) and key shareholders in the reference shareholder group owning 30% of shares was published on January 22^nd does statedd that they are committed to the rapid recovery of the company as shareholders but is not explicit in terms of the kind of support they may provide, if any.

The current visibility around the Company’s recovery prospects is uncertain given that as banks pull lines the Company’s operating results may deteriorate further as the cash crunch starts to impact relationship with suppliers and third party sellers. The current trading levels of the bonds reflect this.

Capital Structure and Valuation

According to the RJ petition filed on Feb 1, Americanas SA’s debt is actually significantly higher than  noted in the January 11^th disclosure, with total debt at around R$46 billion of debt split among the 4 classes of creditors – Class I (labor) of R$65m, Class II (secured) of nil, Class III (unsecured) of R$41,057m, Class IV (small business) of R$109m, and extraconcursal creditors of R$4.7 billion which would fall outside the RJ process.

This is roughly R$27 billion higher than the R$19.3 billion of debt reported in Q3 2022. Given the structure of the debt classes, a majority of unsecured creditors could confirm a plan if labor claims and small business claims are paid in full for example.

Within Class III, there are two series of dollar bonds outstanding, which are both governed by NY Law - $500m of 4.75% Senior Notes due Oct 2030 issued JSM Global and $500m of 4.375% Senior Notes due Dec 2030 issued by B2W Digital Lux S.a.r.l. The B2W Notes and the JSM Global Notes are both guaranteed by Americanas.

The cash position of the Company which was estimated at R$8 billion at YE 2022, has been completely drained by recent liquidity issues. With the estimated RJ debt of R$47 billion and the R$1 billion DIP, total debt would be approximately R$48 billion. The bonds, which are trading at 15c would create the capital structure at around 4x based on LTM Adjusted EBITDA of R$3,574 million and assuming a full depletion of the cash balance. The creation multiples through the unsecured debt are shown below at various bond prices and EBITDA levels – this could take place through full or partial equitization of the unsecured debt in the RJ process.

The troubles at Americanas SA have benefitted other Brazilian e-commerce players such as Magazine Luiza, Via and MercadoLibre which currently trade at an average EV/LTM EBITDA of 16x with Via trading at 6.6x at the low end of the range despite sectoral challenges. If Americanas re-rated to Via’s multiple, the bonds should trade at 35c which would represent more than 100% upside from the current price.

We see further upside to the current bond trading levels from

1. Potential equity injection / rights offering from shareholders who have indicated they will support a recovery of the company
2. Multiple re-rating or acquisition by an e-commerce peer
3. Return of liquidity upon successful restructuring and emergence from RJ

Catalyst

1. DIP Financing
2. RJ emergence / normalization of operations
3. Re-rating to peers
4. Organization of bondholders