Chinese Owner’s Second Thoughts Sink Brazil Bank Back Into Junk

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It lasted exactly 278 days.

That’s how long Banco Industrial e Comercial SA boasted an investment grade until it was plunged back into junk Monday. Standard & Poor’s deemed the Sao Paulo-based bank unworthy of the higher rating as a capital injection from its Chinese owner is delayed at a time when loan defaults are swelling losses. The lender, known as BicBanco, has balked at China Construction Bank Corp.’s bid to cut the offer it made in August for the remaining stake it doesn’t already own by about 290 million reais ($90 million). The Chinese bank is likely to wait for the tender offer to be completed to inject money, S&P said.

The downgrade is a setback for bond investors who’d reaped a windfall after the Beijing-based bank agreed to acquire a controlling stake in BicBanco in 2013 and serves as a reminder of the increasingly fragile state of Brazilian banks as the economy falters. The lender’s benchmark notes due in 2020 are suffering their biggest slump this year, having lost 2.4 percent in the past week.

“For them to downgrade, my sense is that they don’t think the injection will come that soon,” Klaus Spielkamp, head of fixed-income sales at Bulltick LLC, said by e-mail from Miami.

Press officials for BicBanco and China Construction Bank didn’t reply to e-mailed requests made outside business hours in China for comment on the tender offer or the downgrade.

S&P lowered BicBanco’s rating by two levels to BB and warned of more downgrades on Monday, citing losses in the wake of a surge in non-performing loans.

Loan Delinquencies

In May, BicBanco reported a record fourth straight quarter of losses as it quintupled bad-loan provisions to 335 million reais. The move came after loans delinquent 90 days jumped more than twofold to 848 million reais and as the lender shifts strategies under the new controlling holder, focusing on larger clients seen as less risky.

The bank’s deteriorating finances have made ever more urgent a capital injection from China Construction Bank. The two sides have been deadlocked over a tender offer and delisting of BicBanco since the Chinese bank said it wants to reduce its initial offer for the remaining 28 percent stake.

While S&P analyst Edgard Dias said that China Construction Bank will continue to support BicBanco despite the impasse, the Brazilian lender’s worsening performance means it no longer merits an investment grade.

‘Bad Results’

“When we upgraded, we were just incorporating support from the new shareholder,” Dias said by telephone from Sao Paulo. “Since then, there were two quarters of bad results that make their risk position not compare well with peers. The shareholder wants to support the bank, wants to inject money, but only after the tender offer is completed.”

Even after the recent drop, prices on BicBanco’s bonds still indicate investors are confident the bank will continue to enjoy the backing of China’s second-biggest commercial lender. At 107.9 cents on the dollar, the notes are still up 11 percent since China Construction Bank agreed to pay 1.62 billion reais ($503 million) for a 72 percent stake in the Brazilian bank in October 2013.

Brazil’s real rose 0.9 percent Friday to 3.1908 per dollar as of 9:35 a.m. in New York.

Midsize lenders like BicBanco will continue to struggle as Brazil’s worst economic contraction in a quarter century wreaks havoc on borrowers’ ability to repay debt, according to Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC in Miami.

“The scenario is getting worse for all the banks,” Gribel said. “All the medium-sized ones are getting hit by the economy.”

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