BRAZIL: THERE’S A RAT IN THE KITCHEN

BTG Pactual, the once darling of the emerging market investment banking scene, appears to be in its death throws. Andre Esteves, ex-CEO, is wearing much wider pin stripes than he would like in Brazilian prison, with no day passes for Carnival. The arrest came on Nov. 25th (formal charges, accusing Esteves and Brazil Senator Delcidio do Amaral of obstructing a criminal investigation were laid Dec. 7th) as a result of the on-going Operation Lara Jato (Operation Car Wash), Brazil’s largest ever corruption case. Twelve + private companies, involving upwards of 100 individuals are accused of paying bribes to secure contracts with Petrobras, a publicly listed (incl. a US listing importantly, subject to the Foreign Corrupt Practices Act) company which Brazil owns a controlling stake.

Sete Brazil is a private company which was co-founded in 2010 by BTG Pactual, Brazilian banks and Petrobras (9%). Sete had 28 charter agreement with Petrobras, representing over $89bln (total backlog) with a 14.5 year duration. The total investment to build the 29 ultra deepwater rigs (with 5 different shipyards in Brazil) was $26.4bln.  We have all seen what has transpired in oil & gas land over the past year. A group of five Brazilian lender extended $5bln to Sete Brazil in June 2015 in an effort to stave off bankruptcy. The Sete rig plan has been cut to 18 (14 underway) with $3.6bln of the aforementioned loan still o/s with repayment pushed to 2016.

Others have pointed to the Andre Esteves arrest as  being the equivalent of Lloyd Blankfein, Goldman’s CEO being arrested, perp walked down Wall Street and thrown in Leavenworth. On some metrics, the scale of this story is bigger. It was most recently reported that Mr. Blankfein’s net worth is estimated at $1.1bln. Andre Esteves is also a self-made billionaire, recently reported to be worth $2.2bln (2 Lloyds), #13 in Brazil and #628 of Forbes 2015. Esteves owned approx. 23% of BTG Pactual equity and the all important Golden Share that gave him largely unfettered management control. Subsequent to Mr. Esteves’s arrest the “top 7”, as they are affectionately referred, have taken control of BTG Pactual. The Golden Ticket was shredded and Esteves’s common exchanged for preferred shares (exact terms not disclosed, but note pref shares rank ahead of common in a wind up). Challenges lie ahead. Both major rating agencies have stripped BTG Pactual of their former investment grade rating (now BB-/Ba2, both with negative outlook). Moody’s is a press release on Nov. 25th stated, “BTG Pactual CEO’s absence could hurt credit rating.” Over 1/2 of BTG Pactual’s BRL30bln (US$8bln equiv.) in funding comes form wholesale sources. A finger has been placed in the dike, as BRL6bln has been provided to BTG Pactual by Fundo Garantidor de Creditos, a private deposit insurance plan funded by the Brazilian Banks. Non-core assets are being sold to further bolster liquidity, with some success. Singapore’s sovereign wealth fund GIC purchased BTG Pactual’s 25.6% stake in Brazilian hospital chain Rede D’Or BRL2.38bln (US$618mm). BTG is also looking to sell BSI, the Swiss private bank they bought less than 6 months back, with CS and Julius Baer said to be potential bidders. BTG Pactual’s USD bonds, BTGPBZ 4% 01/16/20 have lost about 44% of their value in recent weeks, falling from $90.00 to $50.00 (dipping into the $40’s). BTG Pactual equity also fell by 50% over the same period but appeared to have a floor at BRL15.00, until today. The stock is down another 12% to BRL13.22 in early trade today.

A billion here, a billion there, and pretty soon you’re talking real money. 12/09/15 Moody’s placed Brazil’s Baa3 issuer, bond rating for review downgrade. Moody’s does not see a turnaround likely in 2016 for Brazil. Investment grade ratings are hard to achieve, and it appears even harder to maintain. JCG

Note: USD/BRL (US Dollar / Brazilian Real) exchange rate stands at 3.75 at the time of writing, down 44% over the last year (2.60 on 12/09/14).