Bloomberg News

Cruzeiro Liquidation Concern Mounts as Bonds Sink: Brazil Credit

August 16, 2012

Banco Cruzeiro do Sul SA bondholders are bracing for a liquidation of the Brazilian bank after officials proposed a repurchase plan that imposes harsher terms than investors anticipated.

The bank’s senior notes due in 2016 sank 9.625 cents yesterday to 47.375 cents, or 8.625 cents below the 56-cent offer price extended to creditors who tender by Aug. 28. The price gap shows bondholders are concerned the country’s deposit- insurance fund, which has overseen Cruzeiro do Sul since accounting irregularities prompted its June takeover, won’t gain the 90 percent approval required to complete the buyback and push the bank toward liquidation.

Investors are “not confident a solution will be found,” Marco Aurelio de Sa, the head of trading at Credit Agricole Securities, a unit of the Montrouge, France-based bank, said in a telephone interview from Miami. “It’s going to be a complicated resolution of this story.”

A default on Cruzeiro do Sul’s $1.6 billion of dollar bonds would be the biggest in Latin America since 2002, according to Moody’s Investors Service. Brazil is taking a harder line with Cruzeiro do Sul bondholders than it did with creditors of Banco Panamericano SA in 2010, establishing a precedent Alliance Bernstein LP says may drive up borrowing costs for the country’s other mid-sized banks.

‘Significant Haircut’

“It’s the first time bondholders are taking a significant haircut on the sector, so it will impact sentiment,” Shamaila Khan, an emerging-market portfolio manager at Alliance Bernstein, which oversees about $418 billion of assets, said in a telephone interview from New York. “Investors are going to be a lot more discriminating. They will focus a lot more on who the bank lends to, where its funding comes from and who the owners are.”

Subordinated bonds from Banco Bonsucesso SA, which like Cruzeiro do Sul and Panamericano is focused on the payroll- deductible loan sector, yield 16.39 percent, according to data compiled by Bloomberg. The 9.25 percent securities due 2020 are rated B2 by Moody’s Investors Service, five steps below investment grade. Similar-maturity notes from Banco Industrial & Comercial SA yield 8.32 percent. Global junk-rated bank debt yields an average 7.01 percent, Bank of America Corp. (BAC:US) data show.

“Cruzeiro doesn’t help of course,” Juliana Pentagna Guimaraes, the bank’s head of investor relations, said by phone from Belo Horizonte, Brazil. “From now on the market is going to be more selective, knowing and appreciating banks that can still work with good possibilities in the segment.”

A spokeswoman for Sao Paulo-based Banco Industrial & Comercial, who asked not to be identified in accordance with company policy, declined to comment.

‘It’s Over’

While both Cruzeiro do Sul and Panamericano were taken over by the deposit-insurance fund amid accounting irregularities, Panamericano’s bondholders suffered no losses. Antonio Carlos Bueno, the head of the fund, known as FGC, said at an Aug. 14 press conference that he was looking to be “firm” with Cruzeiro do Sul creditors.

“We are treating bondholders in a way that’s not offensive, not aggressive, but firm,” Bueno said. “You can’t joke around. This is not a soccer game. If nothing happens, it’s done, it’s over. The bank will be liquidated.”

The discounted bond repurchase is part of the deposit- insurance fund’s attempt to cover a capital shortfall after Cruzeiro do Sul took a writedown of 3.11 billion reais ($1.5 billion). An audit requested by the FGC found accounting violations that included the balance sheet showing more than 1.3 billion in assets that don’t exist, deposit insurance fund officials said at the Aug. 14 briefing in Sao Paulo.

Finding Buyer

Central bankers seized Cruzeiro do Sul on June 4 after finding “unsubstantiated asset items” and turned the bank over to the privately owned FGC with the goal of finding a buyer and saving it from liquidation.

The bond repurchase is dependent on the FGC receiving a binding offer from a financial institution to acquire control of Cruzeiro do Sul, according to an Aug. 14 statement from the lender’s administrators. The deposit insurance fund set an initial Aug. 28 deadline for bondholders to tender their securities, and it offered a 5-cent bonus payout for those who meet that date. Creditors have until Sept. 12 to meet a final deadline.

The average discount that Cruzeiro do Sul’s local and international creditors are being asked to accept is 49 percent, according to Celso Antunes da Costa, executive director of the FGC. In addition to the dollar bonds due in 2016, the buyback also includes senior notes due in 2012, 2013, 2014 and 2015 and subordinated bonds due in 2020. Bank of America and HSBC Holdings Plc (HSBA) are arranging the bond-repurchase offer.

Acceptance Threshold

The combination of lower-than-anticipated offer prices, the 90 percent acceptance threshold and the need to find a buyer for Cruzeiro do Sul in four weeks threaten to sink the bond repurchase deal, according to Credit Agricole’s de Sa.

Investors “aren’t confident that after the intervention period, that some bank will take over Cruzeiro,” de Sa said.

Bingham McCutchen LLP, a Boston-based law firm, plans to hold a conference call with bondholders today after being contacted by “a number of” them, Timothy DeSieno, a partner at the firm, said in an e-mailed statement yesterday.

“The proposed sequencing -- ‘creditors make concessions now, and we will figure out the rest later’ -- is consistent with behavior in recent years in many stressed bank situations,” DeSieno said in the statement. “Experience shows that investors are best served to be well-organized with a credible alternative plan at a very early time.”

‘Better Recoveries’

Carlos Legaspy, who bought Cruzeiro do Sul senior bonds after the lender was taken over by the FGC as part of the $350 million he manages at Precise Securities, said he’ll wait for the creditor meeting before deciding whether to tender his bonds.

“At least it opens the door for that dialogue,” Legaspy said in a telephone interview from San Diego. “In Latin America, normally, a strong group of bondholders have much better recoveries than a non-strong group.”

The extra yield investors demand to own Brazilian government dollar bonds instead of Treasuries fell three basis points yesterday to 162, according to JPMorgan Chase & Co.’s EMBIG index. (JPM:US)

The cost of protecting Brazilian bonds against default for five years was little changed at 128 basis points, according to prices compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The real strengthened 0.2 percent to 2.0229 per dollar.

Emergency Action

Yields on interest-rate futures contracts due in January 2014 were little changed at 7.75 percent.

Cruzeiro do Sul’s shares fell 3.9 percent yesterday to 1.72 reais, extending losses this year to 87 percent.

The lender is at least the sixth mid-size Brazilian bank to need emergency action from regulators since 2010 as the industry struggles to get long-term financing and Latin America’s biggest economy slows.

Banco BTG Pactual SA, the Sao Paulo-based bank controlled by billionaire Andre Esteves, acquired Banco Panamericano in January 2011. BTG received a 1.3 billion-real loan from the FGC to help finance the acquisition.

With Panamericano, the FGC “took the loss,” Carlos Gribel, director of sales at Miami-based broker dealer Tradewire Securities LLC, said in a telephone interview. “And now it’s the bondholder who is going to have to take the hit.”

To contact the reporters on this story: Boris Korby in New York at; Gabrielle Coppola in Sao Paulo at;

To contact the editors responsible for this story: David Papadopoulos at; Michael Tsang at

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