Banco BMG Bonds Rally on Takeover Speculation: Sao Paulo Mover

Banco BMG SA dollar bonds rallied to a three-month high after a news report that Banco Bradesco SA plans to buy the payroll lender.

Banco BMG’s dollar bonds due in 2018 rose 7 cents to 90 cents on the dollar at 5:29 p.m. in Sao Paulo, after earlier touching 93 cents, the highest since March 14, according to Trace, the bond price-reporting system of the Financial Industry Regulatory Authority. The yield dropped 184 basis points, or 1.84 percentage point, to 10.33 percent.

O Estado de S.Paulo columnist Sonia Racy reported today on the newspaper’s website that Bradesco is buying BMG, without saying where she obtained the information.

“Right now the bond price is very low for what it should be if Bradesco makes the acquisition,” Luiz Campos, a partner at Dinosaur Securities LLC, said by phone from Sao Paulo. “BMG bonds will converge toward the yields of Bradesco.”

Clive Botelho, BMG’s chief financial officer, said the bank doesn’t comment on rumors. A press official for Bradesco in Sao Paulo, who asked not to be identified in accordance with company policy, declined to comment.

Bradesco shares retreated 0.9 percent to 29.33 reais today in Sao Paulo. Yields on Bradesco’s subordinated dollar bonds due in 2022 rose four basis points to 5.55 percent.

Banco BMG’s borrowing costs surged to a record this month after Brazil’s central bank took control of smaller peer Banco Cruzeiro do Sul SA, citing “serious” financial violations at the bank. The takeover of Cruzeiro intensified investor concern that limited access to long-term funding and increasing competition from larger rivals will erode profitability for the industry.

Funding Pressure

“The funding profile of these banks in the payroll segment has been under pressure even before what happened with Cruzeiro,” Cynthia Cohenfreue, an analyst with Standard & Poor’s, said from Buenos Aires. “This adds to the pressure.”

Regulators seized Cruzeiro do Sul 17 months after the bailout of midsize lender Banco Panamericano SA amid a fraud investigation of the bank.

Payroll loans 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.

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