Requests for judicial recovery increase with rising interest rates

The recent increase in the basic interest rate and the prospect of further increases are worrying Brazilian companies, especially those most indebted and those that depend on bank loans to maintain their daily operations. Different surveys show a significant increase in requests for judicial recovery.

The Central Bank raised the Selic rate to 11.25% last week, and the expectation is that the rate will continue to rise in the coming months, due to persistent inflation, IPCA expectations above the target and the imbalance of public accounts in the government of Luiz Inácio Lula da Silva (PT).

The pressure on prices should continue to affect companies and consumers in the short term, according to George Sales, coordinator of the professional master’s degree in Controllership and Finance at Fipecafi.

“Inflation related to energy and exchange rates tends to increase costs for companies and consumers, especially in retail, a sector that historically heats up during the festive period due to the temporary increase in family income”, he says.

It tends to limit interest cuts in the coming years. Central Bank research with the financial market reveals that, in just the last four weeks, projections for the Selic at the end of 2025 increased from 10.75% to 11.5%. For 2026, they rose from 9.5% to 9.75%, and for 2027, from 9% to 9.25%.

“In this context, companies with high levels of debt face great difficulty in honoring their financial expenses in a scarce credit environment. This is a ‘perfect storm’ that should intensify in the coming months”, assesses Rodrigo Gallegos, partner at RGF Associados and specialist in restructuring and judicial recovery.

The number of companies in judicial recovery reached its peak since the second quarter of 2023, according to RGF Associados. In 2024, there was a 40% increase in requests for judicial recovery and a 26.4% increase in bankruptcy requests, points out Serasa Experian.

Number of companies in judicial recovery is growing

The number of companies undergoing judicial recovery in Brazil reached, in the third quarter, its highest level since June 2023, according to a survey by RGF Associados with data from the Federal Revenue.

During the period, 4,408 companies were registered in judicial recovery, an increase of 4.3% compared to the second quarter. As a result, the proportion of companies that sought judicial protection rose from 1.84 per thousand to 1.9 per thousand.

“After a slowdown in the growth rate of judicial recoveries in the first two quarters of 2024, the third quarter showed a new acceleration”, comments Gallegos.

“Part of this increase is the result of high interest rates, which weigh on sectors that depend on financing. Furthermore, recent changes in legislation have made judicial recovery a more viable alternative for companies in difficulty”, says Gustavo Arzabe, lawyer specializing in restructuring at Arzabe Sociedade de Advogados.

In Brazil, the most affected sector, in absolute numbers, is civil construction, with emphasis on real estate development and building construction. The ranking is led by non-financial holdings.

According to IBGE, construction GDP increased 0.6% in the 12 months to June. However, the prospects are worrying. “High interest rates, fiscal difficulties and changes in housing financing rules make the scenario challenging,” says Ana Maria Castelo, construction project coordinator at FGV Ibre.

A survey by the National Confederation of Industry (CNI) and the Brazilian Chamber of the Construction Industry (CBIC), released in October, indicates that businesspeople’s perception of the companies’ financial health worsened in the third quarter. The increase in input prices is also a concern.

Proportionally, among the segments with more than one hundred companies in the country, the situation is especially critical among raw sugar producers, with 18.6% of companies in the segment in judicial recovery, followed by alcohol manufacturing (7.6%) and by the construction of large vessels (7%).

The biggest increase was in Minas Gerais, with growth of 18.8% in the third quarter, totaling 297 companies in judicial recovery. However, the state average is lower than the national average, with 1.52 companies in recovery per thousand.

Road freight transport, non-financial holdings and fuel retail were the sectors with the largest number of companies undergoing judicial recovery.

Monitoring carried out by RGF also showed considerable growth in the number of companies undergoing judicial recovery in Rio Grande do Sul. Currently, there are 396 companies in this situation, 9.7% more than in the second quarter. One of the factors that contributed to this scenario was the heavy rains that occurred between the end of April and the beginning of May, the most intense in 80 years.

Consumer default also affects businesses

According to Serasa Experian, the number of judicial recoveries between January and September 2024 was 44.1% higher than in the same period of the previous year.

“With high interest rates, the cost of credit increases, and companies face difficulties in paying their debts. The growing default of consumers worsens cash flow, and restricted access to credit limits companies’ financing options”, says Luiz Rabi, economist at Serasa.

He highlights that inflation reduces consumers’ purchasing power, harming sales and the financial health of companies: “These factors create a challenging scenario, leading many companies to resort to judicial recovery to restructure debts and continue operating.”

In the first three quarters of 2024, more than two thirds of judicial recoveries were in commerce and services. By size, the leadership belongs to micro and small companies. Three out of every four orders are from them. Negative debts at Serasa reached R$139.5 billion in September, the highest value in the historical series, which began in March 2016.

“When the economy faces challenges, micro and small companies are the most impacted, as they have less capacity to absorb economic shocks. Furthermore, they face obstacles such as limited access to credit”, says Rabi.