The implosion of Brazilian billionaire Eike Batista’s empire is increasing pressure on the nation’s state development bank to disclose the loans it made to his companies.
While BNDES, as the government-owned lender is known, has said it made loans totaling 10.4 billion reais ($4.7 billion) to Batista’s companies in response to a request by Bloomberg under Brazil’s freedom of information law, it has declined to say how much is outstanding. BNDES has rejected requests by prosecutors and lawmakers to reveal how much debt it is owed by the companies, prompting a proposal by Congressman Cesar Colnago to exclude BNDES financing and equity operations from protection by bank secrecy laws.
The collapse of Batista’s fortune, down an estimated $31 billion from its peak, is raising concern BNDES may suffer losses, posing a risk to taxpayers, said Aldo Musacchio, professor of business administration at the Harvard Business School. Moody’s Investors Service said July 8 that BNDES is the most exposed Brazilian lender to Batista’s firms, almost four months after it downgraded the bank because of increased dependence on the Treasury and deteriorating capital ratios.
“They have this feeling they are not supposed to disclose information because they are a bank, but they are owned by the government and are doing industrial policy,” Musacchio said in a telephone interview. “They could lose from these loans and that may be reflected eventually in a hit to public finances.”
Yields on BNDES benchmark dollar bonds due 2020 have jumped 2.05 percentage points this year to 4.95 percent, more than the 0.93-point average increase in similarly rated emerging-market bonds, according to data compiled by Bloomberg and Bank of America Corp.
Brazil’s banking secrecy law prohibits BNDES from divulging the outstanding amount of its loans to Batista’s companies, the bank said in an e-mailed statement. BNDES says its mandate is to release information about its operations to the maximum extent the law allows. The bank has responded to 700 formal requests for information under Brazil’s Access to Information Law.
An official at the Finance Ministry press department declined to comment.
Federal prosecutors last month appealed a federal court’s decision to refuse their demand that BNDES release details of all its loans from the past 10 years on its website and be required to release that information going forward, according to a statement on the federal prosecutor’s office website.
Batista pledged his own wealth to guarantee 2.3 billion reais in loans from BNDES, the bank said. Another 8.6 billion reais of its loans involve guarantees from companies including MMX Mineracao SA (MMXM3), MPX Energia SA (MPXE3), OSX Brasil SA (OSXB3) and LLX Logistica SA. (LLXL3) For most of those loans, the corporate guarantees are replaced with guarantees from the projects when they are completed.
BNDES said its structuring of guarantees for Batista’s group was done with the usual rigor that the bank uses for its operations, following the best banking practices, according to an e-mailed statement July 15.
BNDES’s 4.9 billion reais in loans to Batista’s holding company, EBX Group Co., is equal to 10.1 percent of the bank’s tier 1 capital, Moody’s said in a report July 8.
“When you study a loan in a project such as a port, if they were guaranteed by the project’s cashflows, we don’t have a way to evaluate the dimension of the cashflows,” Ceres Lisboa, analyst at Moody’s, said in a telephone interview. “The difficulty of understanding the guarantees makes our values more like estimates than accurate accounts.”
Moody’s cut BNDES’s long-term rating by two levels to Baa2, the second-lowest investment grade, in March, citing increasing dependence on the Treasury and accounting maneuvers that boosted 2012 profit by 2.4 billion reais by allowing it to avoid mark-to-market losses in the stock market. The Treasury lent the bank 326 billion reais between 2008 and 2012.
The government’s use of BNDES to stimulate the economy by expanding credit has already “deteriorated” the bank’s capital ratios, Lisboa said. The bank’s lending doubled since 2007 to 156 billion reais last year.
Vinicius Pasquarelli, emerging-market debt trader at Standard Credit Group LLC, said BNDES’s outstanding loans to Batista’s companies are too small to have an impact on the bank’s total credit portfolio of 492 billion reais.
“If you compare all the Batista stuff to BNDES, it’s nothing,” he said. “At the end of the day, math is math, and numbers are numbers. It’s too small.”
Concern BNDES’s lending may saddle the government with losses comes a time when the nation’s budget deficit has widened to the biggest in almost four years. The government recorded a 12-month trailing shortfall of 130.6 billion reais in May.
The government’s worsening finances have helped push the extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries to 211 basis points, or 2.11 percentage points, from 140 basis points at the end of 2012, according to JPMorgan Chase & Co. (JPM)’s EMBI Global index.
BNDES allowed at least two projects of MPX to postpone loan payments that were due as early as June 2012 in contracts worth a combined 483 million reais, according to Colnago, a member of the opposition PSDB party.
The bank said in an e-mailed statement on July 15 that its treatment of Grupo EBX is “rigorously equal” to that of any other company that takes credit from the bank and that Batista hasn’t received privileged treatment.
If the bank has nothing to hide about the way it has treated Batista, it should make its loan details public, Colnago said in a telephone interview from Brasilia.
“It is clear that BNDES is using public resources and is increasing public debt without any transparency,” Colnago said. “BNDES establishes benefits to companies that should be open for society to see. We should open the black box of BNDES.”
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