Brazil Bank Said to Lose $2 Billion on Junk-Rated Loans

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Brazil's national development bank lost out on an estimated $2 billion by setting interest rates too low on loans to junk-rated countries and builders facing corruption allegations, said the federal prosecutor leading an investigation into the lender.

The prosecutor, who is assigned to Brazil’s budget watchdog, said the losses are tied to $12 billion of loans from a workers fund that the state bank known as BNDES shouldn’t have made because the rates trailed inflation. More than two-thirds of that cash funded projects from Angola to Venezuela by builder Odebrecht SA, whose chief executive officer was indicted this week as part of a separate corruption probe at state-run Petroleo Brasileiro SA.

“We’re questioning the real social benefits of these loans,” federal prosecutor Marinus Marsico, who led the nine-month preliminary inquiry into the bank, said in an interview. “If BNDES’s goal is to promote national development, why is the bank allocating scarce funds to a couple of private companies overseas?”

The inquiry marks another offshoot in ever-widening corruption scandals that have paralyzed builders and fractured the political alliance President Dilma Rousseff needs to stabilize the economy and avert a credit-rating downgrade. Under Rousseff’s watch and that of her predecessor, the BNDES went from funding mostly domestic infrastructure projects to a lending powerhouse whose portfolio is 50 percent bigger than the World Bank’s.

Marsico presented the report with his findings Monday in Brasilia and is asking the court that oversees government spending, known as the TCU, to halt BNDES loans for engineering services overseas while it investigates further.

The BNDES said in an e-mailed response to questions that it hasn’t been notified of the findings and that it lent the money according to Brazilian law and technical requirements.

BNDES’s $1.75 billion in senior bonds due 2023 dropped 0.75 cents to 99.75 cents on the dollar on Tuesday, its third straight day of losses. They declined to the lowest level in four months.

Influence Peddling

The inquiry comes as former President Luiz Inacio Lula da Silva is being targeted in a separate investigation for alleged influence peddling to help Odebrecht win contracts abroad after his term ended. Odebrecht and Lula have denied any wrongdoing and declined to comment for this article.

Marsico, a former member of BNDES’s fiscal council, estimated losses by analyzing 539 loans to fund projects by 10 construction companies between 2007 and May 2015 using money from a workers fund known as FAT. Loans were too concentrated among the biggest builders, and interest rates of 2.8 percent to

5.4 percent weren’t high enough to keep up with inflation, as required by law, the prosecutor said.

BNDES said in its statement that it’s legally allowed to use the workers’ fund and it offers rates in line with those of fellow export banks abroad.

By investigating BNDES, Marsico is going after the lender behind Brazil’s biggest infrastructure projects, from the Belo Monte hydroelectric dam in the middle of the Amazon jungle to World Cup stadiums.

The loans being investigated include $3.5 billion in financing for projects in Angola and $2.2 billion each in Venezuela and the Dominican Republic. Moody’s Investors Service rates Angola Ba2, two steps below investment grade. The Dominican Republic and Venezuela are rated four levels and nine levels below investment grade, respectively. The report does not cite the larger graft scandal at Petrobras, being directed from Curitiba, Brazil, or the federal prosecutor’s investigation of Lula for alleged influence peddling in Brasilia.

(Updates with BNDES’s bonds in sixth paragraph, country credit ratings in 11th paragraph.)
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