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Cruzeiro in Biggest Latin America Default in 10 Years

Banco Cruzeiro do Sul SA will be liquidated by Brazil’s central bank after attempts to find a buyer failed, prompting Latin America’s biggest corporate-bond default in more than 10 years.

Officials appointed to run the Sao Paulo-based company found a “serious violation” and unfunded liabilities that made it impossible to resume normal operations, Brazil’s central bank said today in a statement.

Regulators took over Cruzeiro do Sul on June 4, handing control to the deposit-insurance fund known as FGC after finding violations of banking rules. The fund last month offered to buy back $1.6 billion of bonds at discounted prices as part of a recapitalization plan, and was overseeing efforts to find a buyer for the company, which specialized in making loans backed by paychecks.

Cruzeiro do Sul was the sixth lender to need emergency help from regulators since 2010, prompting investors including Precise Securities’ Carlos Legaspy to say they were becoming skeptical of all mid-sized banks in Brazil. In July, the government allowed such lenders to increase sales of debt backed by the FGC to help shore up their finances.

Takeover talks with Banco Santander Brasil SA fell apart when negotiators couldn’t reach agreement on guarantees for hidden problems that might arise at Cruzeiro do Sul after a deal was struck, Valor Economico newspaper reported earlier today, without saying where it got the information.

Buyback Fails

The FGC said today that investors representing 88.7 percent of Cruzeiro do Sul’s bonds agreed to the buyback, just short of the 90 percent participation the fund was requiring. The default is the biggest in Latin America since Telefonica de Argentina SA failed to pay on $2.9 billion of debt in 2002, according to Standard & Poor’s.

Regulators today also liquidated Banco Prosper SA, the lender Cruzeiro do Sul said it would acquire in December, and said they would continue to probe fraud allegations and punish anyone found responsible.

“It is quite healthy to have this kind of reminder every once in awhile that doesn’t pose a systemic threat,” said Pedro Bastos, chief executive officer of HSBC Global Asset Management in Brazil, in a phone interview from Sao Paulo. “It’s an important reminder that risk and return need to be in line with the investor’s profile.”

Cruzeiro do Sul yesterday jumped 25 percent in Sao Paulo trading after the FGC extended the deadline for its bond buyback offer through 6 p.m. Sao Paulo time. It said it needed more time to assess the bids.

Banco Panamericano

Brazil took 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-size banks.

The FGC bailed out Panamericano, with a market value of about 2.8 billion reais, amid a fraud investigation by the central bank. Regulators liquidated Banco Morada SA in April 2011 after finding “serious financial violations” at the Rio de Janeiro-based firm.

Other banks bailed out or liquidated in the past two years were Banco Schahin SA, Banco Matone SA, and Oboe Credito Financiamento e Investimento SA.

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 Scheer at dscheer@bloomberg.net

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