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Cruzeiro Bonds Rally on Restructuring Bets: Sao Paulo Mover

Debt issued by Banco Cruzeiro do Sul SA, the Brazilian lender seized by regulators in June, rallied after the bank asked bondholders to identify themselves, fueling speculation it’s preparing a restructuring.

The bank asked investors in a statement to disclose holdings to foster “future communications.” The move eased concern the bonds could become worthless after the nation’s deposit insurance fund, known as FGC, said two months ago that the lender committed “serious” regulatory violations. The FGC is overseeing the bank as it searches for a buyer.

“This is a typical course of action for a company that’s going to restructure its debt,” said Marco Aurelio de Sa, the head of trading at Credit Agricole Securities in Miami. “Investors who thought there could be a total loss, now they know there is room for negotiation.”

Cruzeiro do Sul’s dollar bonds due in 2013 jumped 5 cents to 59 cents on the dollar at 3:30 p.m. in Sao Paulo, according to Trace, the bond price-reporting system of the Financial Industry Regulatory Authority. The bonds are rebounding from a record low of 40.45 cents reached on June 7, three days after the central bank ordered the takeover.

Losses at the Sao Paulo-based bank may amount to 2.5 billion reais ($1.2 billion) as an audit found irregularities in its loan portfolio, O Estado de S. Paulo reported July 14, citing an audit. Cruzeiro do Sul said two days later that it wasn’t possible to estimate the size of the losses at the time.

Liquidation Concern

Concern the size of the alleged fraud may be larger than anticipated has fueled speculation the lender could be liquidated by the FGC, burdening overseas creditors with further losses. Financial violations at Banco Morada SA prompted the central bank to liquidate the Rio de Janeiro-based lender in April 2011.

A Cruzeiro do Sul press official declined to comment today on the losses. The FGC said June 4 it hired Price Waterhouse to perform a due diligence process at the lender that would be completed in 60 to 90 days.

The bank sent the communication to investors today because the FGC is trying to determine who the foreign bondholder base is, according to the Cruzeiro do Sul press official, who asked not to be identified in accordance with company policy.

The FGC will pay all of the bank’s obligations coming due while the lender is under its control, Fausto Guimaraes, head of investor relations for Cruzeiro do Sul, said in June. Debt payments during the intervention period are being funded by assets the bank sold to the FGC in an asset-backed receivables fund last year.

Cruzeiro do Sul is rated Caa1 by Moody’s Investors Service and CC by Standard & Poor’s. The bank’s shares climbed 3.4 percent to 1.84 reais in Sao Paulo.

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