Bloomberg News

Cruzeiro Bondholders Say Brazil Seizure Should Be Default

June 06, 2012

Brazil’s seizure of Banco Cruzeiro do Sul SA should trigger a default that allows bondholders to demand immediate payment of all debt, investors told the bank’s overseers.

The central bank took control of Sao Paulo-based Cruzeiro on June 4, citing “serious” financial violations, and said it would be run by the privately owned deposit-insurance fund known as FGC for about 180 days. FGC said that during the intervention the bank will meet all financial obligations as they come due.

“Any intervention by the central bank or the FGC is an event of default and therefore gives the bondholders the right to accelerate” payments they are due, Matthew Campbell, an emerging-markets trader at Goldman Sachs Group Inc., said yesterday on a conference call Cruzeiro and FGC held with analysts and investors.

Campbell said allowing the company to operate in the interim will allow assets to be removed that should go to bondholders.

“If you are going to continue to honor deposits and certificates of deposits that are maturing during this time, essentially letting the assets out of the door before the bondholders can really make a claim on these assets, it seems liquidation will be the best alternative for bondholders,” Campbell said.

Campbell declined to comment beyond his remarks on the call, said Michael DuVally, a spokesman for New York-based Goldman Sachs.

Central Bank

Luciana Dias, a commissioner at Brazilian securities regulator CVM, said in an interview yesterday that her agency and the central bank have been supervising Cruzeiro do Sul “for a long time.”

“The market was aware of the fragilities of the institution,” she said in an interview at Bloomberg’s headquarters in New York.

Cruzeiro do Sul has about 2.8 billion reais ($1.39 billion) in international debt maturing through 2020, Antonio Carlos Bueno, head of FGC, told reporters in Sao Paulo June 4. The next maturity will be $175 million in September for a three-year Eurobond.

Accelerated Payments

The prospectus of Cruzeiro’s bonds due in 2020 says payments “may be accelerated only in the case of certain events involving our bankruptcy, liquidation, reorganization or insolvency proceedings, whether voluntary or involuntary.” The document also says the bank will be required to accelerate its obligations after being “declared bankrupt,” liquidated or dissolved.

“In the event of default it’s very clear,” Richard Segal, director of the emerging-markets group at London-based Jefferies International Ltd., said in a telephone interview today. “On the other hand, it doesn’t seem as though they are granted the right to accelerate right away. It’s kind of in a gray area.”

The fund plans to prepare the bank for sale while PricewaterhouseCoopers LLP concludes an audit, Bueno said. The period of FGC control may be shorter than 180 days should the process be concluded in less time, FGC said.

Brazil’s federal police will begin investigating Cruzeiro do Sul for possible fraud, according to an e-mailed statement.

Disbursing Funds

Debt payments during the intervention period are being financed by assets Cruzeiro do Sul sold to the FGC in an asset- backed receivables fund last year. It has 2.3 billion reais ($1.1 billion) to be disbursed during the remainder of the 180- day period, said Fabio Mentone, an FGC board member.

“We are confident this portfolio is good,” Mentone said. “We do not have a problem with future disbursements for the next 180 days.”

The takeover “creates inequality between the creditors that have short-term maturing debt and the ones that have more than 180 days maturing debt,” Luis Miguel Santacreu, an analyst at Austin Rating in Brazil, said in an interview.

That encourages every creditor to call their debt at the first opportunity, Santacreu said.

“No creditor will take the risk to roll the debt over because of all the accusations against the bank,” he said. “If this were a bank liquidation, all the creditors would be treated the same way according to the law.”

No Preference

Mentone said on the call that no preference is being given to any creditor during the intervention process. Interest payments on bonds will be honored when they are due, just like payments to other creditors, he said.

“We understand that after we have all the data controlled by the auditing company, we believe that we will be able to have a solution for the bank and continuity for the bank,” Mentone said. “But we can’t assure that.”

The bank’s shares fell 42 percent to 4.40 reais in Sao Paulo, the lowest price since December 2008. Trading resumed today after being suspended June 4 on the central-bank intervention.

Moody’s Investors Service cut Cruzeiro’s rating to Caa1 from B2 yesterday, citing “uncertainties” about the bank’s ability to service its debts.

“The bank’s financial strength and solvency have been severely impaired by much weakened asset quality and funding conditions, which present a very high credit risk to bondholders,” Ceres Lisboa and Maria Celina Vansetti-Hutchins, analysts at Moody’s, wrote in an e-mailed statement.

To contact the reporters on this story: Francisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net; Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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