Fitch: Brazil Congress Labor Discussions Positive for CRM/BPOs

SAO PAULO & NEW YORK--(BUSINESS WIRE)--

Fitch Ratings anticipates a net positive impact from current Brazilian Congress discussions related to new labor rules and a reduction in the tax-incentive program for Customer Relationship Management (CRM) and Business Processing Outsourcing (BPO) companies.

A more robust and favorable regulatory framework for third-party providers should benefit the companies in the medium term. Contax Participacoes S.A. ('AA(bra)'; Stable Outlook) and Atento Brasil S.A., which is fully owned by Atento Luxco 1 ('BB'; Stable Outlook) are among those likely to benefit.

Still, the Brazilian federal government is discussing changes to the Brasil Maior tax-incentive program, which would have a moderately negative impact on CRM/BPO companies' cash flow. The program, implemented in 2012, exchanged social security taxes, representing 20% of payroll, for an additional 2% tax on domestic sales of CRM/BPO companies, which aided their EBITDA generation.

The federal government proposes to raise the tax to 3% from 2%. Fitch expects discussions in the Upper House to be concluded in the second half of 2015 and this measure to be effective in early 2016. Despite having contracts with automatic pass-through clauses, some price renegotiations may occur as CRM/BPO clients may be reluctant to increase costs given the weak economic environment and overall cost structure adjustments. Based on 2014 financial statements, a one-time 3% charge would reduce the EBITDAR of Contax Participacoes and Atento Luxco 1 by 7% and 4%, respectively, if companies do not transfer the burden to the final client.

The lack of specific labor legislation for third party services has weighed on CRM/BPO companies. Currently, companies are not allowed to outsource core activities in Brazil, although this rule does not specify which services are considered core or non-core. In addition, a legal dispute initiated by the outsourced employee may include not only the CRM/BPO operator, but also the company that hired the service. The lack of a clear regulation has prevented some companies from outsourcing services due to the high risk of labor litigation.

The changes in the labor rules, if approved by Congress, should increase the demand for CRM/BPO services. It is hard to quantify the benefit to margins, though Fitch believes they are likely, especially in the medium- and long-term. We estimate that around 75% of the job positions dedicated to CRM in Brazil are still performed in-house and part of this workforce could be absorbed by CRM/BPO companies, generating gains in scale. Potential new rules should also benefit CRM/BPO's cash flows through lower costs and expenses regarding legal disputes. The project law is now with the Senate, though timing for approval is uncertain.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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