Brazil’s No. 2 Bank Plans $1.2 Billion Asset-Backed Revival

  • Caixa to tap rising interest in market after 2-year absence
  • Fund to invest in BMG payroll loans linked to credit cards

Caixa Economica Federal, Brazil’s second-largest bank, is returning to the asset-backed security market after two years to take advantage of investors’ rising appetite for risk.

Caixa plans to raise as much as 4 billion reais ($1.2 billion) of such securities for the FIDC fund it manages, the Brasilia-based company said in a regulatory filing last month. Proceeds will be invested in payroll loans made by Banco BMG SA, which are linked to credit cards issued to beneficiaries of Brazil’s pension system. Return on the securities will be based on the performance of the credit portfolio and have a target minimum equal to Brazil’s main consumer-inflation index plus 6 percent, according to the fund’s bylaws.

Not many options exist for yields that high, so “institutional investors that have a return target of inflation plus 6 percent, which is the majority of them, must start looking at other investment opportunities to beat their targets,” Daniel Boueres Sandoval, manager of Caixa’s corporate investors, said in a phone interview.

Funds that invest in Brazil asset-backed securities are coming back into favor after a period of adjustment to adapt to stricter rules, Sandoval said. After a series of fraud cases related to mid-size banks’ loan portfolios, including Banco Panamericano SA, Banco BVA SA and Banco Cruzeiro do Sul SA, new regulations went into effect in 2013 that prevent sellers of receivables from passing the payments to FIDCs through their own accounts, giving custodians more oversight.

Relative Performance

Inflation-linked securities known as NTN-B notes with a maturity of 2030 yield 6.08 percent, down 1.38 percentage points this year. The real has strengthened 20 percent against the U.S. dollar in 2016, the best performer in the world, while the nation’s Ibovespa benchmark stock index climbed 22 percent.

BMG formed a payroll-loan joint venture with Itau Unibanco Holding SA, Latin America’s largest bank by market value, in 2012. While the venture retained all of BMG’s payroll loans, the bank created a new portfolio of similar credits tapped with credit cards issued to pensioners. That portfolio reached 3.81 billion reais in the first quarter, more than doubling from a year earlier, according to BMG’s earnings statements.

An official at Sao Paulo-based BMG declined to comment on the planned offering.

As Brazil faces its worst recession in more than a century, banks have sought to focus on payroll lending because of the business’s relative safety. Under Brazilian regulations, lenders are allowed to automatically deduct payments from borrowers’ paychecks. The loans’ delinquency rate for pensioners was unchanged a 1.72 percent in May compared with a year earlier, while nationwide debt not earmarked for a specific purpose that’s more than 90 days overdue climbed to 5.85 percent, the highest since the central bank began calculating the figure five years ago.

Last year, FIDC funds raised 5.44 billion reais, a seven-year low, compared with the record 17.4 billion reais in 2011, according to the nation’s capital-markets association, Anbima. Such funds total 1.54 billion reais so far this year. If Caixa raises the entire 4 billion reais it’s proposed, the fund would be Brazil’s largest since 2002, according to data tracked by Anbima that doesn’t include private placements.

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