Strapped Rio Fund Starts Talks With Holders of $3.1 Billion Debt

  • Rioprevidencia is also in talks for 1 billion-real credit line
  • Fund is not considering a full debt restructuring, CEO says

Rioprevidencia, the pension fund for public-sector workers from Rio de Janeiro state, is holding informal talks with holders of its $3.1 billion in bonds after a waiver for breached debt-covenants expired.

Rioprevidencia, which is grappling with a 10 billion-real ($2.8 billion) budget hole this year, isn’t currently considering a full restructuring of its dollar-denominated debt and hasn’t hired any new financial advisers to tackle its funding needs, said Chief Executive Officer Gustavo Barbosa. He declined to provide additional details on the talks.

“We believe the structure of the notes is resilient and has been supporting the financial service of the bonds," Barbosa said by telephone from Rio de Janeiro. "Now, we are seeking friendly solutions with bondholders."

Investors granted a waiver in October after Rioprevidencia’s forward-looking debt coverage ratio -- a measure of cash flow available to pay interest and principal -- fell below the minimum threshold required to prevent a possible acceleration of payments. In exchange for the waiver, the fund boosted the coupon on the securities by 3 percentage points to as much as 9.5 percent. It breached debt covenants again in the past two fiscal quarters that ended March 22, when the waiver expired.

Separately, the pension fund is also in talks for 1 billion reais in credit facilities from Banco do Brasil SA to help finance its deficit, Barbosa said. The state-run bank declined to comment on the conversations.

Rioprevidencia relies on royalties from crude oil sales, most of which come from state-controlled Petroleo Brasileiro SA, to pay its debt and its retiree benefits. Brent prices have declined 65 percent since the first tranche of Rioprevidencia’s debt was issued in June 2014.

The pension funds’s $2 billion in notes due 2024, its most liquid outstanding maturity, advanced 0.2 cent on Monday to 59.2 cents on the dollar, data compiled by Bloomberg show.

In a worst-case scenario, the Rio state Treasury would have to step in and pay the fund’s liabilities, Barbosa said. Last year, the pension fund tapped about 7 billion reais in judicial deposits it had the right to access, but these proceeds are no longer available, he added.

Standard & Poor’s lowered Rio state’s rating in January by one step to BB-, three levels below investment grade, citing fiscal deterioration in 2015 and "weak" financial management and budgetary flexibility. The ratings company also cut Rioprevidencia’s grade on its dollar notes by two steps to B+ on Feb. 29.

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