Billionaire Esteves Is Losing Pharma Bondholders: Brazil Credit

Bondholders of Brazilian drug chain Brasil Pharma SA have given up on billionaire Andre Esteves.

They won full repayment on June 25 of 560 million reais ($253.7 million) of bonds from Brasil Pharma, which is controlled by Esteves’s Banco BTG Pactual SA, after demanding their money following the company’s breach of covenants in back-to-back quarters. In four months of negotiations, the Sao Paulo-based company had failed to reach an agreement with bondholders including BRAM Bradesco Asset Management SA and Votorantim Asset Management DTVM on the drug chain’s leverage limits.

Esteves, who’s boosted the market value of the bank he acquired in 2009 almost six times, has been unable to turn around Brasil Pharma even after BTG helped inject 400 million reais into the company in May, when it violated covenants and posted losses for a second-straight quarter. Brasil Pharma, struggling to integrate the eight pharmacy chains it has bought since 2009, saw net debt to earnings jump to 3.3 times in the fourth quarter, above the 3 times cap in its bond contracts.

“The company is going through a very difficult moment, with its cash flow very much pressured,” said Pedro Zabeu, a health care financial analyst at the brokerage division of Banco Fator SA in Sao Paulo. “For bondholders, it’s better to get their payment now than to wait for it to mature. The prospects for Brasil Pharma in the short term are not good.”

OGX Bonds

Officials at Brasil Pharma, BTG, Bradesco and Votorantim declined to comment on the negotiations and bond payment.

Brasil Pharma is at least the second case in which Esteves’s reputation for turning around companies has failed to sway bondholders. As part of an effort to boost confidence in Eike Batista’s OGX Petroleo e Gas Participacoes SA last year, BTG provided a $1 billion credit line to the oil producer’s parent and said it would manage the finances of Batista’s six publicly traded companies. The move failed to stem declines in OGX’s notes or, later, Latin America’s biggest corporate bond default.

Esteves gained recognition after he joined former partners in 2009 to buy UBS AG’s Brazilian investment bank, UBS Pactual, at a 19 percent discount to the $3.1 billion they had sold it to the Swiss bank for in 2006. The value of the investment bank has soared to $14.5 billion after 44-year-old Esteves, Brazil’s youngest self-made billionaire, used acquisitions to help triple assets under management.

‘They Deteriorated’

BTG, which became the biggest shareholder in Brasil Pharma in 2009, participated in the drug chain’s 400-million-real share sale in May, according to company filings. Brasil Pharma said in its May 14 earnings release that it lost 185.3 million reais in the first quarter as it faced challenges seeking to integrate chains acquired in the past few years. The shares have fallen 44 percent this year to 3.79 reais, compared with a 3.9 percent gain in Brazil’s benchmark Ibovespa stock index.

“We were expecting numbers would normalize in the first half of this year, but they deteriorated,” Renato Donatti, an analyst at Fitch Ratings, said in a telephone interview from Sao Paulo. “They are not generating cash, and the second quarter should be challenging, considering they have a high burden of debt maturing in the short term.”

Fitch estimates Brasil Pharma has 500 million reais of debt due in the next 12 months, while its cash reserves will end the year at about 140 million reais. It cut the drug chain’s local rating of AA-(bra) by one level with a negative outlook on June 23.

Brazil’s real fell 0.1 percent to 2.1997 per dollar at 3:14 p.m. in New York.

BTG Support

Erick Rodrigues, an analyst at Moody’s Investors Service, said he expects continued support from BTG, which will help Brasil Pharma over the long term.

“We also see the strong backing and commitment already demonstrated by biggest shareholder, BTG Pactual, as a positive factor for the company,” he said in a telephone interview from Sao Paulo.

Bondholders weren’t so optimistic. By bailing on the drug chain this month, they left the company with no remaining bond debt. Brasil Pharma’s remaining liabilities of 1.2 billion reais are predominantly to banks including HSBC Bank Brasil SA, Banco do Brasil SA and Banco Santander Brasil SA.

The challenges associated with integrating newly acquired drug chains mean Brasil Pharma will struggle to stem losses, according to Andre Fontoura, an analyst at BES Securities Brazil.

Brasil Pharma has opened 354 pharmacies since 2012, according to the company’s earnings statement in May.

“Their situation is not good, and they still will struggle in the short term to adjust their inventories,” Fontoura said in a telephone interview from Sao Paulo. “They tried to do too many things at the same time.”

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