Oppenheimer Lawsuit Magnifies Bondholder Backlash: Brazil Credit
OppenheimerFunds Inc.’s threat to sell some of its $2 billion in Brazilian fixed-income holdings over a legal dispute with state-backed JBS SA (JBSS3) is underscoring increased discontent with Latin America’s biggest nation.
Art Steinmetz, chief investment officer at the New York-based fund, said Aug. 20 “things are going backward in the country” and he’s “distressed that a company that is partially owned by the Brazilian government is handling creditor rights in a cavalier fashion.” JBS, 30 percent owned by Brazil through state banks, is leasing a plant from a French poultry producer in violation of Oppenheimer’s rights over the unit, which was offered as collateral in a $100 million defaulted loan, he said.
The lawsuit comes at a time when Brazilian companies led by Eike Batista’s OGX Petroleo & Gas Participacoes SA have left investors with the biggest losses on dollar-denominated bonds in emerging markets after Peru this year. As President Dilma Rousseff boosts government involvement in Brazil’s electricity and banking industries, the nation’s corporate bonds have fallen 8.5 percent as sluggish economic growth fuels speculation the country will have its ratings cut.
“Investors see Brazil as a country with a lot of government intervention,” Siddharth Dahiya, who helps oversee $11.8 billion of emerging-market debt as money manager at Aberdeen Asset Management, said in a phone interview from London. “And the growth outlook isn’t looking great.”
An official for JBS, who can’t be identified in accordance with policy, said the company was just leasing the plant from Chateaulin, France-based Doux SA, not buying it and therefore not taking on debt. JBS holds an option to buy the plant by 2022, said the official, who declined to provide further details.
Guillaume Foucault, a Paris-based external press officer for Doux, declined to comment when contacted by Bloomberg News.
Brazilian development bank BNDES holds 19.85 percent of JBS while Caixa Economica Federal owns 10.07 percent, according to data compiled by Bloomberg. Caixa Economica Federal and BNDES declined to comment in e-mailed statements.
Oppenheimer loaned the funds to Doux in 2008 and claims it’s owed $73.5 million in principal and interest, according to a case filed against Doux in the State Supreme Court in Manhattan in June. In July, Oppenheimer, which oversees $208 billion in assets, filed a lawsuit in Sao Paulo against JBS, the world’s top beef and poultry producer, to seize and sell the Passo Fundo plant.
Oppenheimer’s corporate bond holdings include state-controlled banks Banco do Brasil SA and Banco do Estado do Rio Grande do Sul SA, as well as Oi SA, Banco BTG Pactual SA, Gerdau SA and Braskem SA, according to filings of Oppenheimer’s Emerging Markets Debt, International Bond and Global Strategic Income funds.
As part of her effort to revive economic growth, Rousseff prompted state banks to boost lending to six times the rate of privately held lenders in the first half of 2013 after announcing a plan in September to reduce power costs as much as 32 percent.
Analysts surveyed weekly by the central bank have cut 2013 economic growth forecasts by more than one percentage point so far this year after gross domestic product expanded 0.9 percent in 2012, the worst performance in three years.
Standard & Poor’s in June cut the outlook on Brazil’s BBB rating, which is two levels above junk, to negative, citing slower economic growth and expansionary fiscal policy.
“The bondholders that once liked Brazil aren’t liking it anymore,” Luiz Campos, money manager at Dinosaur Securities, said in a phone interview. “ Rousseff isn’t helping. Brazil is not experiencing a good moment economically. It’s all about the macroeconomics. Everything looks bad for Brazil’s corporates.”
The base-case scenario for Brazil is a downgrade in the first quarter of 2014, Barclays Plc (BARC) said in a report to clients on Aug. 16.
Shamaila Khan, an emerging-market money manager at AllianceBernstein LP, which oversees about $444 billion of assets, said the selloff in Brazilian debt has created a buying opportunity, particularly for companies such as food exporters that could benefit from a weakening currency, which makes their products more competitive.
The real has plunged 16 percent this year, the most in emerging markets after the South African rand.
“There’s room to buy, but it depends on the credit,” she said in a telephone interview from New York. “Some companies are exporters that benefit from depreciation. They didn’t do very well when Brazil grew at high growth rates because they were squeezed by the currency. You really have to differentiate.”
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries dropped four basis points, or 0.04 percentage point, to 248 basis points at 10:15 a.m. in New York, according to JPMorgan Chase & Co.
Brazil’s five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, climbed 15 basis points to 221 basis points.
The real rose 0.2 percent to 2.4543 per dollar, after plunging 2.5 percent yesterday. Yields on interest-rate futures contracts due in January 2014 increased 11 basis points to 9.31 percent.
BNDES should reduce holdings in privately owned companies to avoid getting pulled into disputes such as the one between JBS and Oppenheimer, according to Michael Roche, an emerging-market strategist at broker-dealer Seaport Group LLC.
Rio de Janeiro-based BNDES, which holds stakes in 140 Brazilian companies, has increased its lending as part of the government’s effort to spur growth and has expanded its equity investments. Its lending doubled since 2007 to 156 billion reais in 2012.
“Is it worth it for the state banks to get dragged into measures such as this?” Roche said in a telephone interview from New York. “It’s more important for the private sector to sort this stuff out. JBS is not a company in distress now, and the government may be thinking it has to get out of it as soon as possible, instead of hanging around longer than need be. Know when to fold ’em.”