(Bloomberg) — Investors are dumping bonds tied to Simpar SA, concerned that rising interest rates will spell trouble for the Brazilian transportation and logistics conglomerate after a debt-fueled growth spree.
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Ratings firms and analysts have called out the company’s strategy of using floating rate debt to finance its expansion in the past few years. Simpar bought nearly 20 companies between 2020 and 2022.
With rates on the rise — Brazil’s central bank has boosted borrowing costs by almost three percentage points since mid-2024 — dollar bonds issued by Simpar and subsidiary Movida have tumbled, lagging emerging-market peers in the last three months. The stock has lost more than a third of its value in this period.
There might be more trouble ahead as Brazil’s Selic benchmark rate is expected to hit 15% in 2026, the highest in about two decades. The backdrop for emerging markets broadly is also bearish, with a more hawkish Federal Reserve, Donald Trump’s return to the White House and worries over the Chinese economy keeping investors at bay.
Simpar is now working to slash debt and free up cash, including through potential asset sales or a listing of one of its divisions, according to a person familiar with the matter, who asked not to be named because the information is private. The priority now is to pull back on expansion, the person added.
In an emailed response to questions, Simpar said it has made “robust” investments and that it can extract “maximum value” and achieve “sustainable financial results that will face variations in interest rates.”
Expansion
Starting out with a single truck in 1956, Simpar has morphed into a conglomerate with several subsidiaries, including Vamos Locacao de Caminhoes, Maquinas e Equipamentos SA, Movida Participacoes SA and JSL SA. Fernando Antonio Simoes has been at the helm for over 40 years, a position he took over from his father, who founded Simpar. The family owned as much as 60% of shares at the end of 2024, according to data compiled by Bloomberg.
“This is a group that has always had a relevant focus on growth,” said Pedro Bruno, an analyst at XP Investimentos. “They have always operated with high leverage and most of their businesses are capital intensive, which demand cash burn for growth.”
The company has emerged as the poster child for heavily indebted businesses in Brazil, with many of them now facing a reckoning as financing costs surge following a selloff in December. Notes due 2029 issued by car-rental firm Movida have handed investors losses of 8.2% in the past three months, while Simpar debt maturing in 2031 has dropped 5.6%. On average, EM corporates have gained 1% over the time span, according to a Bloomberg index.
Rate Trouble
Simoes in a 2022 interview described market turmoil as the “Brazilian cost,” which hasn’t stopped the company’s growth plans. He declined to comment for this story.
The company reported earnings before interest, taxes, depreciation and amortization of 2.72 billion reais ($470 million) for the third quarter of 2024, up 30% year-on-year. Net revenue came in at 10.9 billion reais, also up around 30%.
Simpar’s interest coverage ratio for 2024 — calculated by dividing earnings before interest and taxes by its interest expense — likely stood at 1.3 times, according to S&P Global Ratings. That’s down from 1.8 times in 2021, but a slight improvement from 1.2 times in 2023. A lower ratio usually indicates more difficulty to pay down debt.
“There are growing pressures because of the interest rate scenario, so we are looking at it with more caution,” said Fabiana Gobbi, an analyst at S&P. “It’s one of the names that we receive the most questions about from investors.”
Lowering Debt
The goal is to slash debt levels from the second quarter onward, the person familiar said, adding that capital expenditures for 2025 will be at historically low levels. The company has discussed potential financing options with foreign banks, but would only tap debt investors if a strong opportunity arises, the person said.
Simpar’s leverage has hovered around 3.7 times net debt to Ebitda since the start of 2023, below the 4 times set as covenant on its dollar bond yet.
Despite the mounting rate pressures on its debt, the company does not have an imminent liquidity issue, said Roger Horn, senior emerging-market strategist at Mariva Capital Markets.
“It’s not like we expect the company to have problems, but there’s probably some caution on the credit because at some point their relatively high leverage could bite them,” Horn said, echoing comments from other analysts.
