‘Born-to-Fail’ Cruzeiro Buyback Offer Deepening Bond Selloff

Banco Cruzeiro do Sul SA’s benchmark dollar bonds plunged to a record low as concern mounted that creditors will reject a repurchase offer for $1.6 billion of notes, pushing the Brazilian lender toward liquidation after its takeover by regulators.

The bank’s $400 million of bonds due 2016 sank 11.2 cents to 39.6 cents on the dollar at 2:27 p.m. in Sao Paulo, according to data compiled by Bloomberg. Its $250 million of securities due 2015 sank 12.2 cents to 37.77 cents on the dollar.

Brazil’s deposit insurance fund, which has overseen the Sao Paulo-based payroll lender since the central bank uncovered financial violations in June, offered Aug. 15 to buy back the bonds at discounted prices as part of a recapitalization plan. At least 90 percent of bondholders must accept the offer for it to proceed, according to the fund, known as the FGC. Cruzeiro will be liquidated if the offer fails, Antonio Carlos Bueno, the head of the FGC, said at an Aug. 14 press conference.

“Born-to-fail, ludicrous, absurd were a few of the adjectives used by investors to describe Cruzeiro’s restructuring proposal,” BCP Securities analysts Jim Harper and Jansen Moura wrote in a research note today. “Cruzeiro’s liquidation is now the most likely scenario as it would be practically impossible to get 90 percent of bondholders on board.”

The average discount that Cruzeiro’s local and international creditors are being asked to accept is 49 percent, according to the FGC. Bank of America Corp. and HSBC Holdings Plc are arranging the bond-repurchase offer. Creditors have until Sept. 12 to tender their bonds.

Moody’s Investors Service cut the bank three levels yesterday to Ca, the second-lowest rank.

“The probability of liquidation of the bank is increasing every day,” Luiz Campos, an emerging-market portfolio manager at Dinosaur Securities LLC, said in a telephone interview from Sao Paulo. “The FGC proposal isn’t welcomed by bondholders.”

To contact the reporter on this story: Boris Korby in New York at bkorby1@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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