Brazil Retirees Pay Hefty Price to Avoid Clash With Bondholders

  • Rioprevidencia is offering to increase bond interest
  • Pension fund's 2024 notes have soared 25.8% this month

Pensioners in Brazil may pay a steep price to stave off a battle with overseas bond investors.

Rioprevidencia, the pension fund for state workers from Rio de Janeiro, said Sept. 24 a measure of the amount of cash available to pay debt fell below the level required by its bond contracts, a violation that gives holders the right to demand immediate repayment on $3.1 billion of notes. Increasingly hard up for funds as the oil royalties it relies on plunge in the wake of crude’s swoon, Rioprevidencia could hardly afford such a bill. Instead, it’s offering to boost the interest on its bonds by 3 percentage points if investors waive the covenant, according to a copy of the proposal obtained by Bloomberg News.

Debt is backed by revenues from oil exploration royalties in Rio de Janeiro state
Debt is backed by revenues from oil exploration royalties in Rio de Janeiro state

Bondholders are wasting little time in showing their support for the deal. Rioprevidencia’s $2 billion of notes due in 2024 have surged 25.8 percent this month alone. That’s almost eight times the average gain in emerging markets. The fund’s bonds currently carry coupons of 6.25 percent and 6.75 percent.

“Bond buyers are clearly willing to give them some more time,” said Carlos Gribel, the Miami-based head of fixed income at Andbanc Brokerage. “It wouldn’t make sense to accelerate the debt now and start what could be a huge legal battle.”

Gustavo de Oliveira Barbosa, Rioprevidencia’s chief executive officer, said last week that he expects bondholders who own more than 50 percent of the notes’ face value to grant the waiver by the Nov. 3 deadline established by the funds.

Rioprevidencia’s press office said the fund couldn’t comment on the proposal to increase bond coupons before next week’s deadline.

“We have not missed any payment so far and do not plan to do so,” Barbosa said by phone from Rio de Janeiro on Oct. 21.  

He blamed lower oil prices for the drop in Rioprevidencia’s debt service coverage ratio below 1.5 times.

Rioprevidencia gets about a third of its revenue from oil royalties paid mostly by state oil company Petroleo Brasileiro SA, which is scaling back investments in the wake of a corruption probe. It issued the notes last year in an attempt to finance its budget gap.

The press office of Dodge & Cox, the biggest holders of the notes, didn’t return messages seeking comment. The press officer for Pacific Investment Management Co., Mark Porterfield, said the company wouldn’t comment.

The fund’s bonds due in 2024 sank to a record low 62.65 cents on the dollar on Sept. 28, pushing yields well above 13 percent, data compiled by Bloomberg show.

Brent prices declined close to 60 percent since 2024 bonds were issued
Brent prices declined close to 60 percent since 2024 bonds were issued

In the proposed offer to bondholders dated Oct. 20, Rioprevidencia may reduce the 3 percent step-up in coupons to 2 percent if it achieves certain “milestones.” That includes Rio de Janeiro state getting approval from lawmakers and Brazil’s treasury to make the pension fund’s debt senior to other obligations. Another entails the fund postponing loan payments to Banco do Brasil SA and Caixa Economica Federal for seven years.

Still, the main risk for bond investors is the price of oil, which is down 45 percent in the past year, according to Bank of America Corp. analysts Anne Milne, Juan Andres Duzevic and Barbara Halberstadt.

“The debt service coverage ratio will continue below covenant levels if none of the milestones are achieved,” they said in an Oct. 26 note. “Flows will be enough to continue servicing the debt. However, almost no income will flow to the Rioprevidencia pension fund. We remain focused on the political sensitivity of this situation and the risk of political intervention remains our main concern.”

Bank of America, which has an underweight recommendation on Rioprevidencia’s bonds, estimates the fund will post a deficit of 500 million reais ($128.6 million) this year, which would be the biggest since 2012.

Brazil’s real advanced 0.4 percent as of 10:49 a.m. in New York.

But for bondholders concerned they’d have a hard time recouping their money in Brazilian courts if they demand immediate repayment from Rioprevidencia, the fund’s proposal will likely get their approval, said John Haugh, a Latin America strategist at Mizuho Securities USA in New York.

“The bonds are advancing because it’s not in anyone’s best interest to accelerate this debt,” he said from New York.

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