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Cruzeiro bondholders at odds with "unfair" buyback plan -sources
August 21, 2012 / 8:37 PM / 5 years ago

Cruzeiro bondholders at odds with "unfair" buyback plan -sources

* Investors say plan treats bondholders unequally

* Bondholders, managing banks met in Miami Tuesday

* Impact of plan may affect other Brazil borrowers

* Plan needs approval of 90 percent of bondholders

By Guillermo Parra-Bernal

SAO PAULO, Aug 21 (Reuters) - Bondholders of Brazilian consumer lender Banco Cruzeiro do Sul, who stand to lose half of their investment under a repurchase program, questioned the plan at a creditors meeting on Tuesday, in an indication that they will press for a sweeter offer.

Investors who attended the meeting in Miami said the buyback, announced last week as part of efforts to save Cruzeiro from liquidation, treats them unequally. The meeting with HSBC Holdings and Bank of America Corp bankers overseeing the plan left bondholders “with the feeling that we are bearing most of the losses,” said a trader present at the meeting.

Cruzeiro do Sul was seized by Brazil’s central bank on June 4 and put under the administration of privately held deposit guarantee fund FGC the same day. Under terms of the plan the FGC agreed to repurchase, at an average 49.3 percent discount, $1.575 billion worth of Cruzeiro bonds maturing between September 2012 and September 2020.

The meeting left many investors at odds over what to do, with private banking clients who own Cruzeiro bonds more willing to accept terms of the buyback than hedge funds with experience in litigation. The plan requires the approval of 90 percent of bondholders.

“I wanted a more straightforward view about the bank’s future,” the Miami-based trader with a few clients who own Cruzeiro debt said. The tender will not muster the necessary support unless “the FGC sweetens the current offer,” he said.

Despite the large discount, some bondholders of Cruzeiro’s subordinated bond due in September 2020 may agree to the buyback to avoid seeing the bank forced into liquidation - a decision that would wipe out any remaining value for their debt. Subordinated debt ranks below senior debt and payroll debt if a company enters bankruptcy or defaults.

Calls made to Cruzeiro do Sul’s press office seeking comment were not immediately answered.

One New York-based analyst, who declined to be quoted by name because of the sensitivity of the issue, said the buyback is the best solution for Cruzeiro do Sul, since it would help lower the bank’s debt load and boost its allure among potential suitors. In the case of owners of the bank’s subordinated debt, “they are lucky that they are being offered to be bought out.”


Attendees left the meeting “very upset,” a bond fund manager present at the meeting told Reuters. He said the bankers from HSBC and Bank of America, which were hired by FGC to carry out the buyback, did not properly address investors’ questions.

“I don’t think it’s a fair proposal,” a third attendee said. “The discount we are being forced to assume isn’t recognizing the benefits of a potential sale of the bank, or the tax benefits the acquirer could reap over time.”

The same person, a Miami-based bond trader, said that the FGC’s failure to improve its offer might “spark uncertainty in the market for B-rated credit names that could see investors shunning new issues of debt by Brazilian meatpackers, for instance.”

The attendees declined to be quoted by name because of the sensitivity of the issue.

Cruzeiro do Sul’s senior note due in January 2016 is currently trading at about 40 cents on the U.S. dollar, down from about 60 cents when the repurchase was announced a week ago, traders said.

The price on Cruzeiro’s 8.875 percent subordinated bond due in September 2020 fell to about 20 cents on the dollar from 30.5 cents a week ago. When the FGC took over Cruzeiro, the securities were trading close to 70 cents apiece.

The Cruzeiro seizure was the third in the last year and a half, a sign that years of rapid growth have resulted in deteriorating funding and liquidity conditions as well as a relaxation of credit risk and accounting controls among some mid-sized lenders.

A round of auditing at the bank detected 2.25 billion reais ($1.12 billion) in losses, of which about 1.3 billion reais came from the flawed accounting of shares in a fund made of loan-backed securities on its balance sheet. (Reporting by Guillermo Parra-Bernal; Editing by Phil Berlowitz)

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