Traders Burned by Graft Scandal Now Singed by Brazil Bank Probe

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Bond investors in Brazil just can’t catch a break.

After being burned by a bribery scandal at the country’s state-owned oil company, they were buffeted again last week when federal prosecutors probing Brazil’s national development bank said the lender lost out an estimated $2 billion by setting interest rates too low for risky borrowers. The bank’s $1.75 billion in notes due 2023 have now suffered their biggest-ever weekly rout, losing 4.2 percent. The report followed two other investigations announced this month.

The allegations against BNDES, as the bank is known, come after it ratcheted up lending to $201.4 billion to power Latin America’s biggest economy, eclipsing the World Bank. Prosecutors said Wednesday the estimated losses are tied to $12 billion of loans, more than two-thirds of which financed projects from Angola to Venezuela by a Brazilian builder also implicated in the graft investigation into oil producer Petroleo Brasileiro SA.

“The flow of negative news has been very intense and coming from every side when you talk about Brazil,” Paulo Nepomuceno, a fixed-income strategist at brokerage Coinvalores CCVM, said by telephone from Sao Paulo. “More problems coming out of BNDES are very likely.”

The bank shouldn’t have made the loans because they come from a workers’ fund, according to Marinus Marsico, the federal prosecutor who led the nine-month inquiry into Rio de Janeiro-based BNDES.

‘Social Benefits’

“We’re questioning the real social benefits of these loans,” he 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?”

Marsico is asking the watchdog of government spending to halt BNDES loans for engineering services abroad while prosecutors investigate further.

BNDES declined to comment on the allegations or bond performance.

In an e-mailed statement Tuesday, the development bank said it hadn’t been notified of the $2 billion loss finding by the prosecutor, and that it lent the money according to Brazilian law and technical requirements.

Odebrecht SA, whose chief executive officer was indicted last week as part of the probe in Petrobras, was one of the recipients of the loans used to fund projects abroad.

Odebrecht has denied any wrongdoing and declined to comment on the prosecutor’s questioning of loans it received from BNDES.

Yields Soar

Yields on BNDES notes due in 2023 jumped 0.65 percentage point last week to a four-month high of 6.04 percent, data compiled by Bloomberg show. That was 16 times the average increase for emerging-market bank bonds.

Brazil’s real declined 0.3 percent to 3.3643 per dollar as of 1:46 p.m. in New York.

“Investors are getting more and more used to scandals out of Brazil,” Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC, said in an e-mail. “The list is getting longer, and BNDES is definitely becoming another source of concerns.”

Investors are bracing for more scrutiny after Brazil’s lower house started a congressional probe of BNDES loans on July 17, official news agency Ag. Camara reported. A federal prosecution office in Brasilia also opened an investigation of possible influence peddling by former president Luiz Inacio Lula da Silva on BNDES loans to Odebrecht overseas.

Subsidized Rate

BNDES has long provided financing to Brazilian companies seeking to expand abroad, even owning stakes in many of those businesses. It typically lends at a subsidized rate of 6.5 percent, which is far below the nation’s 13.75 percent benchmark.

“It’s now becoming clearer that the bank lacked criteria in some of its concessions,” Sergio Lazzarini, a professor at Sao Paulo-based business school Insper and co-author of a book on BNDES, said by telephone from Sao Paulo. “Many big companies ended up borrowing money at rates that were too low.”