Dealtalk: Brazil banks use M&A to resolve complex restructuring cases

Banco Bradesco

09/03/2017 11:05

(Repeats March 8 story for wider distribution. (For more 
Reuters DEALTALKs, click  DEALTALK/  )) 
    By Tatiana Bautzer 
    SAO PAULO, March 8 (Reuters) - Brazil's largest banks are 
increasingly demanding that companies put themselves up for sale 
as a condition to cut loan principal amounts, providing a jolt 
to an otherwise weak M&A climate in Latin America's largest 
economy.  
    Since the start of September, about a dozen Brazilian M&A 
deals have been related to restructurings, Thomson Reuters data 
showed. That represents about 15 percent of total Brazilian 
deals during the period. The percentage is higher among the 
largest lenders. 
    Over the same five-month period, eight of the 16 deals in 
which Banco Bradesco SA  BBDC4.SA , Brazil's top M&A lender, has 
acted as adviser involved restructuring-related asset sales.  
    The banks have been bruised by an unprecedented credit 
downturn that magnified Brazil's harshest-ever recession and the 
fallout from a corruption scandal that hit many large corporate 
borrowers.  urn:newsml:reuters.com:*:nL1N1EI01R 
    Lenders have accepted losses north of 40 percent on the 
value of principal owed by some companies, from lingerie maker 
Scalina SA to sugar and ethanol mills Antonio Ruette 
Agroindustrial and Unialco SA Álcool e Açúcar, five people 
familiar with the cases said. 
    The sources, who spoke in recent weeks, requested anonymity 
in order to discuss matters freely. 
    They said drugstore chain Brasil Pharma SA  BPHA3.SA  could 
be the next candidate, as banks reduce the chain's 600 
million-real ($190 million) debt by 40 percent and Grupo BTG 
Pactual  BBTG11.SA  transfers its ownership, two of the sources 
said. 
    Banks such as Banco Bradesco SA, state-controlled Banco do 
Brasil SA  BBAS3.SA , Itaú Unibanco Holding SA  ITUB4.SA  and 
Banco Santander Brasil SA  SANB11.SA  are agreeing to cut 
principal only if the companies' owners agree to transfer 
ownership to a third party, the people said. The third party 
could be a buyout firm or a strategic rival with better 
prospects of running it profitably. 
    With Scalina, banks agreed to slash the company's debt by 44 
percent after rival Lupo bought the company from a group led by 
Carlyle Group LP  CG.O  funds, ending a dispute with lenders. 
 urn:newsml:reuters.com:*:nL1N1A10RM  urn:newsml:reuters.com:*:nL1N19Z01W 
    In Unialco's case, the company's assets were sold off as 
part of a restructuring in which creditors forgave around 85 
percent of its debts.  urn:newsml:reuters.com:*:nL8N1DT4UQ 
    And Antonio Ruette's creditors agreed to cut its debt by 40 
percent, but only after a deal was reached in which Proterra 
Investment Partners, a fund backed by Cargill Inc  CARG.UL , 
took control of its mills from the ethanol company's eponymous 
founder.  urn:newsml:reuters.com:*:nL8N19K08D  
     
    DEFINITIVE SOLUTIONS 
    Brasil Pharma  BPHA3.SA  could find a solution to transfer 
the ownership within weeks, one of the sources said. Grupo BTG 
Pactual, BR Pharma and the creditors declined to comment.  
    Banks are demanding ownership changes in order to stem 
defaults and curb the large loan-loss provisioning that caused 
their profits to decline last year for the first time since 
2009.  
    An initial phase of debt restructurings in 2015 had focused 
solely on extending terms of troubled loans. Bankers say they 
are hoping the latest deals will bring more definitive 
solutions.  urn:newsml:reuters.com:*:nL2N1530OG 
    After refinancing or setting aside provisions for about 140 
billion reais of loans last year, lenders have grown wary of 
leaving existing shareholders in place, a practice that has 
tended to create a situation of "moral hazard," three of the 
people said.  urn:newsml:reuters.com:*:nL1N1A81JM.  
    The new strategy may be allowing more companies to avert 
bankruptcy filings, which decreased by 22 percent in the first 
two months of this year, according to figures from Experian 
Plc. urn:newsml:reuters.com:*:nL2N1GG1F5 
    The ownership change deals can also create business for the 
banks in the form of M&A fees, although credit losses tend to 
overshadow that revenue by a large degree.  
    Stricter regulatory scrutiny stemming from the corruption 
scandal has contributed to a 55 percent drop in announced deals 
in Brazil so far this year, Thomson Reuters data showed, 
compounding the impact of the recession.  
 ($1 = 3.1560 reais) 
 
 (Additional reporting by Guillermo Parra-Bernal; Editing by 
Christian Plumb and Matthew Lewis) 
 ((guillermo.parra@tr.com; Tel: +55-11-5644-7714; Mob: 
+55-119-8346-7153; Reuters Messaging: 
guillermo.parra.thomsonreuters.com@reuters.net)) 
 
Keywords: BRAZIL RESTRUCTURING/M&A