People walk in front of a Lojas Americanas store in Brasilia, Brazil. Image Credit: Reuters

Hours after revealing a scandal that would roil Brazilian markets, Sergio Rial joined a Zoom call with hundreds of panicked investors. It was an attempt to explain the $4 billion accounting gap that pushed him to quit his new job at the helm of retailer Americanas SA.

The Jan. 12 call was a tumultuous mix of English and Portuguese that some analysts were locked out of because the meeting reached its 1,000-participant capacity. Those who were able to cram into the headquarters of Banco BTG Pactual SA "- the Sao Paulo-based creditor that was hosting the event "- were left "perplexed" by Rial's presentation, as one participant put it.

Four hours later, when the shares started trading, the stock plummeted 77%, wiping out $1.6 billion in market value. By the end of the day, bonds had lost half their value.

Within a week, the company filed for bankruptcy protection with $8.2 billion of debt.

"I don't think there's a company whose debt has gone down this much in two to three days," said Omotunde Lawal, a portfolio manager at Barings UK Limited who focuses on emerging-market debt. "Maybe this is the fastest plunge ever."

The startling and rapid meltdown has left Brazilians with the prospect of losing a ubiquitous company known for its iconic red-and-white logo and holiday sales, including in Rio de Janeiro where it was founded in 1929. The collapse dragged down the country's stock market, sent creditors rushing to organize and pitted some of the nation's most famed investors against each other. Billionaire Andre Esteves's BTG Pactual, which days before had hosted the meeting with Rial, called it "the biggest fraud in Brazil's capital markets."

It was a sharp reversal for a company that had seen its stock rally after Rial was named chief executive officer last August, a job he only started on Jan. 2. Investors thought Americanas, which has been backed by billionaires Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira for more than four decades, was set for improved performance under the 62-year-old former banker's leadership.

It unraveled on the night of Jan. 11 when it announced "inconsistencies" that had artificially boosted profits and reduced reported liabilities by half. The company's disclosures imply it misreported numbers tied to financing of debts with suppliers while also wrongly deducting interest paid to lenders from its liabilities.

In the Thursday bankruptcy protection filing "- similar to a Chapter 11 in the US "- lawyers for the company said, "due to unexpected reasons that rocked the group's structure, the petitioners saw their cash and revenue expectations crumble within minutes."

Americanas Bondholders Face $8.2 Billion Debt Restructuring

The findings set off a whirlwind week in which Rial decided to personally deliver the bad news to a group of employees. Many of them had been working at the Brazilian retailer for decades, and put all their savings in shares of the company.

"Your faces are not particularly nice. But their faces were in deep pain," he told investors on the BTG call, recalling the meeting with employees.

Shares in other Brazilian retailers including Via SA and Magazine Luiza SA sold off immediately, but trimmed losses as the firms rushed to reassure analysts that all their debt was properly booked on their balance sheets.

Americanas saw its market value collapse 90% from its peak hit during the coronavirus pandemic. Wall Street analysts quickly put their ratings under review and ratings firms downgraded the debt, after which banks refused to advance credit card receivables, draining more than 3 billion reais from the company's cash.

After the Thursday bankruptcy protection filing, MSCI Inc. and Brazilian stock exchange operator B3 SA removed the stock from their indexes.

Americanas was granted emergency temporary protection against creditors from a court in Rio de Janeiro on Jan. 13, which also forbade them from freezing or seizing assets. The decision surprised bankers, who rushed to file motions to overturn the decision. Days later, BTG was allowed to block 1.2 billion reais to compensate part of the company's debt. That triggered a similar reaction from other creditors, which also cut credit lines, and accelerated the crisis.

Americanas Scandal Pits BTG Billionaire Versus 3G 'Demigods'

The collapse threatens to tarnish the reputation of Lemann and his partners as well as lead to losses in the shares they hold in Americanas. The trio controlled the company until they were diluted in a 2021 reorganization, which left them with a stake of 31%, still the main shareholders. They told the board they plan to keep supporting the company, but investors fear that any negative outcome may hurt other firms in which they are involved, such as Kraft Heinz Co. and Anheuser-Busch InBev SA/NV.

Americanas said in its bankruptcy protection filing the move by creditors to declare the early maturity of obligations, closed "the door to any kind of viable friendly negotiation." The firm has approximately 43 billion reais in debt and now has 48 hours to present a list of creditors, which already started to organize.

Investment banks Moelis & Co. and Seaport Global Securities LLC are separately pitching to organize bondholders into a group. Investors holding local debt have hired lawyers and are deciding whether to work with a financial adviser, according to a person familiar with the matter who requested anonymity as the discussions are private.

"It's hard to tell what the bankruptcy process will bring," said Omar Zeolla, an analyst at Oppenheimer & Co. It seems Americanas's main shareholders "are willing to contribute capital, but it's hard for me to see at the moment how that could play out in terms of recovery for bondholders."