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Cruzeiro Posts Biggest Market Loss on Financing: Brazil Credit

Banco Cruzeiro do Sul SA is posting the biggest losses in the Brazilian bank bond market on concern the lender’s funding sources are dwindling.

Yields on the bank’s bonds due between 2014 and 2020 have soared an average of 299 basis points, or 2.99 percentage points, in the past two months, according to data compiled by Bloomberg. Borrowing costs for 14 other Brazilian mid-size lenders have increased 82 basis points during the same period. Yields on bonds sold by global emerging-market banks have climbed 29 basis points since Sept. 2.

Brazilian banks with less than 3 billion reais ($1.7 billion) in equity are seeking alternative financing options as Europe’s debt crisis shutters overseas credit markets and the central bank phases out guaranteed time deposits, known as DPGEs. No mid-size Brazilian bank has sold debt abroad since Aug. 3. Cruzeiro do Sul, which depends on the international bond market for a third of its funding, has used up 96 percent of its allotted financing under the DPGE program.

“Cruzeiro will have to explore other financing alternatives in the coming years and their future will depend on how the bank is going to replace the funding they’ve had and that they rely on and is no longer available,” Natalia Corfield, a corporate debt analyst at ING Groep NV, said in a telephone interview from New York.

Cruzeiro do Sul’s bonds due in 2020 yield 13.75 percent, or 1,167 basis points more than similar-maturity U.S. Treasuries, according to data compiled by Bloomberg. Spreads of more than 10 percentage points are considered distressed. Brazilian government bonds maturing the same year yield 3.48 percent.

‘Too High’

An official at Cruzeiro do Sul in Sao Paulo who asked not to be identified in accordance with company policy declined to comment.

“The moment right now is of panic, so we can’t analyze the bond market behavior in a long-term perspective,” Fausto Guimaraes, superintendent of investor relations at Cruzeiro do Sul, said in a telephone interview on Aug. 8 from Rio de Janeiro. “We had noticed the market was asking for too high rates for our bonds in the U.S., so we won’t consider new sales.”

Higher capital requirements and a slowdown of loan portfolio sales to larger banks have also made it harder for lenders including Cruzeiro do Sul to raise funds.

International financing accounts for 29 percent of Cruzeiro do Sul’s total funding, the biggest among the country’s mid-sized banks. The lender, which specializes in payroll-deductible loans, has tapped the overseas bond market five times since the beginning of 2010, according to data compiled by Bloomberg.

Timed Deposits

Payroll loans in Brazil are similar to payday loans in the U.S., except the Brazilian government allows banks to deduct the payments directly from payroll and pension payments before consumers ever see their checks.

The bank is also the biggest user of DPGEs, which were created in 2009 to shore up deposits at medium-sized banks after institutional investors moved their money to larger lenders. It has issued about 2.5 billion reais of DPGEs, which are guaranteed by the nation’s deposit insurance fund.

Cruzeiro do Sul may find the international market closed until at least next year, said Vinicius Pasquarelli, an emerging-market debt trader at Tradition Asiel Securities.

“We have not seen even the big guys coming in,” Pasquarelli said in an e-mailed response to questions. “Once the Brazilian Treasury issues bonds, corporate will have a better mood to issue and a better idea of their spread over the sovereign.”

Bond Sale

The Brazilian government sold $1 billion of global bonds due 2041 to yield 160 basis points above similar-maturity Treasuries today, its first international dollar debt offering in four months.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries climbed four basis points to 220 at 7 p.m. Sao Paulo time, according to JPMorgan Chase & Co.

The cost of protecting Brazilian bonds against default for five years rose four basis points today to 144, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Rate Futures

The yield on the overnight interest-rate futures contract due in January 2013 fell four basis points to 10.23 percent.

The real weakened 0.8 percent to 1.7518 per dollar.

Cruzeiro do Sul stock has slipped 7.9 percent this year.

The lender should not have trouble managing short-term bond payments, according to ING’s Corfield.

“They have more funding constraints than peers, however it’s not a situation of a default,” Corfield said. “I don’t see any imminent serious problem. The bank has challenges on the funding front, and we’ll have to continue to look how it’s going to explore new possibilities.”

Jansen Moura, a corporate debt analyst at BCP Securities in Rio de Janeiro, recommends investors buy Cruzeiro do Sul’s longer-maturity bonds as the bank is likely to find local financing sources.

“There are undeniably some funding challenges ahead, but I’ve been positively surprised by how the local funding market for mid-cap banks has been reacting,” Moura said in a telephone interview.

Letras Financeiras

Mid-size banks have boosted their issuance of longer-term bank debt known as letras financeiras in the local market this year. The amount outstanding of the securities, authorized by the central bank last year to help banks obtain funding, has surged to 96 billion reais from 4.9 billion a year ago, according to Cetip SA - Balcao Organizado de Ativos e Derivativos.

If Cruzeiro is unable to obtain financing in international markets, “they may face funding problems,” Pasquarelli said. “Cruzeiro is among the worst credits in Brazil and they are where they should be.”

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