China’s Sao Paulo Bank Shows No S&P Boost Needed: Brazil Credit

Bondholders of Banco do Comercio e Industria SA aren’t waiting for the Brazilian lender’s Chinese transformation to win over rating companies.

BicBanco (BICB4)’s $300 million of notes due 2020 soared to a four-year high of 111.35 cents on the dollar last week as investors wagered the bank will win an investment grade after its takeover by China Construction Bank Corp. (939), the Asian nation’s second-biggest lender by stock-market value. The bonds’ 8.2 percent surge since the purchase was announced on Oct. 31 has reduced BicBanco’s implied default risk to levels in line with investment-grade borrowers, data compiled by Bloomberg show.

BicBanco said last week that regulators will approve the purchase, the first by an Asian bank in Latin America’s biggest economy, by the end of June. Controlled by the Chinese government, China Construction Bank is rated A1 by Moody’s Investors Service, the sixth-lowest investment grade, and one step lower at A by Standard & Poor’s.

“These bonds are trading already based on the risk of China Construction Bank, even though the purchase was not completely approved yet,” Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole Securities USA, said by telephone from Miami. “There should be a positive rating action by rating agencies once the approval comes, and there is space for even further spread compression in those notes.”

Regulatory Approvals

Neither Juliana Lima, a spokeswoman for Sao Paulo-based BicBanco, nor China Construction Bank’s Deborah Tsui returned telephone and e-mail messages seeking comment on BicBanco’s bonds and rating.

Milto Bardini, vice president for operations and investor relations at BicBanco, said on a conference call May 15 that Brazil’s central bank and Chinese regulators will approve the sale by the end of next month. Brazil’s antitrust regulatory agency approved the purchase in January.

Founded in 1938 by the Bezerra de Menezes family, BicBanco said May 14 that first-quarter adjusted net income fell 90 percent to 3.8 million reais ($1.71 million). The bank cut lending as it prepares to shift its focus to bigger clients following the approval of the acquisition.

Its loan portfolio shrank 10.3 percent to 12.8 billion reais.

‘Stronger Clients’

“The tendency is for BicBanco to become a much more competitive bank focused on bigger and stronger clients, and the ratings will reflect that,” Leonardo Kestelman, a money manager and managing director at Dinosaur Securities LLC in Sao Paulo, said by telephone. “They should be upgraded to investment grade.”

BicBanco’s default probability of 0.2198 percent is below the 0.52 percent upper limit for investment-grade borrowers, data compiled by Bloomberg show.

Santiago Carniado, managing director for banks at S&P, said a rating increase for BicBanco won’t be automatic. S&P rates the bank BB, one level below the Ba1 grade from Moody’s.

“Brazil is a very a competitive market for banks,” Carniado said in a telephone interview from Mexico City. “The new controllers will really need to understand the local market, and the strategy they have in China will have to blend the two cultures. That sometimes is not done overnight.”

BicBanco’s bonds due in 2020 have returned 9.31 percent this year, more than twice the average gain for high-yield debt in emerging markets, according to data compiled by Bloomberg.

The real advanced 0.2 percent to 2.2109 per U.S. dollar at 12:24 p.m. in New York.

“This is totally a transition moment for BicBanco, and the market believes the bad results from the first quarter are just temporary and worth the risk,” said Gilberto Tonello, an analyst at GBM Grupo Bursatil Mexicano. “Investors are already considering the credit risk of the future controller, which is what explains the good performance of the bonds.”

To contact the reporter on this story: Filipe Pacheco in Sao Paulo at

To contact the editors responsible for this story: Brendan Walsh at Lester Pimentel, Bradley Keoun

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