Credit Suisse Joins JPMorgan to Repackage Brazil State Loan

Credit Suisse Group AG and JPMorgan Chase & Co. are selling to investors through pass-through notes a $1.27 billion loan made to the Brazilian state of Minas Gerais, according to people familiar with the matter.

Credit Suisse made the original 10-year loan in November with an interest rate of 5.33 percent to help repay debt owed to Cia. Energetica de Minas Gerais, or Cemig, as the utility company is known. The loan will be sold to a special-purpose entity that will issue the pass-through notes to investors, according to the people, who asked not to be identified because they aren’t authorized to comment publicly. The state of Minas Gerais declined to comment on the offering.

Banks are taking advantage of federal guarantees to make more loans to Brazilian states seeking to refinance debt as benchmark interest rates have fallen to record lows. Brazil authorized 21 states in August to borrow 60 billion reais ($30 billion) through 2014 with government guarantees to compensate for lower tax transfers.

“This type of borrowing is OK as long as constraints are in place,” John Welch, a strategist at CIBC World Markets, said by phone from Toronto. “Minas Gerais looks pretty good fiscally. They got themselves in good shape.”

Brazilian states and cities haven’t been able to take advantage of the unprecedented decline in borrowing costs because they have been restricted from selling bonds since a 1997 bailout, leaving the country without a municipal bond market. States faced financial turmoil in the 1990s after years of mismanagement and hyperinflation.

1999 Crisis

Minas Gerais threatened to halt payments of debt owed to the federal government in 1999 in a challenge to then President Fernando Henrique Cardoso’s bid to restore investor confidence. The crisis helped lead to the devaluation of the real.

“The idea is to keep the purse strings very tight on the states because historically they tend to overdo it and expect a bailout,” Welch of CIBC said.

Leonardo Colombini, the state finance secretary, told Bloomberg News in October that Minas Gerais also planned to borrow $450 million from the World Bank and 300 million euros ($387 million) from the French Development Agency to pay off debt to Cemig.

To contact the reporter on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

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

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