CEO for 2,000 McDonald's Franchises Pushes for Brazil Pension Redo

(Bloomberg) -- Brazil must approve a pension reform before August to avoid killing the nascent rebound in consumption in its battered economy, according to Arcos Dorados Holdings Inc., the largest franchise operator of McDonald’s restaurants in the world.

“Brazil is our main concern, and we follow closely the evolution of the macro environment as it’s our main driver,” Chief Executive Officer Sergio Alonso said in an interview. “The big problem comes when expectations stimulating consumption aren’t followed by the economic policies.”

President Jair Bolsonaro has struggled with building congressional support for his promise to reform Brazil’s pension system, which in its current form aims to save over one trillion reais ($256 billion) in the next ten years. The rebound after years of recession has hinged on the new leader’s ability to revitalize the economy through reforms.

“If we get to June 30 and the reform isn’t approved, and remains unapproved in July, and in August they keep discussing, and the reform loses momentum, and finally ends in a mere 300 million reais to 400 million reais in savings a year, well, that will indeed ultimately end up repressing people’s expectations and there will be an impact in consumption,” Alonso said.

A Brazilian government spokeswoman had no immediate comment.

Fourth-quarter consumer spending on food services increased by 3.3 percent from the previous quarter, and 2.6 percent year-over-year, according to Instituto Foodservice Brasil. Arcos Dorados operates 2,160 restaurants in Latin America and generated the largest percentage of its 2018 income of $3.1 billion from Brazil. Alonso said the publicly listed company’s first-quarter performance is in line with industry data showing another increase for the fastfood sector.

Consumption is rising based on expectations that the economy will receive foreign investment as soon as Bolsonaro’s pension reform is passed by Congress and the clock is ticking, he said.

“We follow the situation closely,” Alonso said, “We are more worried than in January or February, but still confident.” While Arcos Dorados’s bonds are trading above par, the shares have tumbled more than 20 percent since a peak in January.

Investment Delay

Arcos Dorados plans to invest as much as $300 million through 2019 in Latin America, with about two-thirds of the cash to be spent in Brazil, Alonso said. A lack of reform could delay his plan to spend that money on building out the McDonald’s franchise in the largest market of the 20 countries in which the company operates, he said.

The Montevideo, Uruguay-based company will keep funding its investment plan with free cash flow and is not planning to issue new debt, Chief Financial Officer Mariano Tannenbaum said. The goal is to maintain a ratio of net debt to a measure of earnings at 1.4 times, he said.

The company could tap credit markets to manage its liabilities. As Arcos Dorados generates revenue in local currency, it could consider buying back some of its almost $600 million in mid- and long-term bonds denominated in U.S. dollar with an eye to later sell debt in reais. The franchise chain would avoid the cost of having 50 percent of that debt hedged in the foreign-exchange market, Tannenbaum said.

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