BTG Bonds Slump to New Lows as Downgrades Follow Esteves Arrest

  • Moody's cuts bank to junk, warning of further downgrades
  • BTG founder gives up controlling stake in deal with partners

BTG Pactual’s bonds fell to new lows and yields soared after Moody’s Investors Service downgraded the lender to junk, the latest setback for the investment bank that found itself in the middle of Brazil’s largest corruption scandal when founder Andre Esteves was jailed last week.

Yields on the bank’s 2020 bonds surged to 20.6 percent as of 4:23 p.m. in Sao Paulo on Wednesday, more than three times the 6.7 percent they traded at on Nov. 24, the day before Esteves’s arrest. Yields on subordinated notes due 2022 jumped to 24.23 percent from 7.99 percent in the span, while yields on the lender’s perpetual bonds rose to 15.5 percent from 9.4 percent. The subordinated notes slumped to about 40 cents on the dollar today, while the bonds due 2020 and the perpetual notes traded around 55 cents.

Esteves was jailed on Nov. 25 along with Senator Delcidio Amaral on allegations both tried to interfere with the testimony of a former executive of state-controlled Petroleo Brasileiro SA about a pay-to-play scheme. Esteves has denied any wrongdoing through his lawyer.

"Banks’ subordinated debt is ranked lower than senior debt and usually suffers the most in stress scenarios and events of default," Fitch Ratings director Eduardo Ribas said in a telephone interview from Sao Paulo. "They are indeed more sensitive to price swings."

Moody’s lowered its baseline credit assessment for BTG by two levels to Ba2 from Baa3, according to a statement late Tuesday. It did the same for the firm’s long-term global local- and foreign-currency deposit ratings, placing the bank two levels below investment grade. The ratings remain on review for further downgrades.

On Wednesday, Standard & Poor’s cut the lender’s grade to BB- from BB, also saying it could downgrade further. Fitch placed BTG’s BBB- rating on watch negative on Nov. 26, saying that the wholesale funding nature of the bank and its dependence on its franchise to perform its normal business could be undermined. The ratings company is in daily contact with BTG, Claudio Gallina, a senior director at the firm, said in a conference call Wednesday.

BTG said in a statement on Wednesday that Esteves gave up control of the group by agreeing to swap shares with some of his partners. The announcement came within hours of BTG saying it sold a stake in Rede D’Or Sao Luiz SA, Brazil’s biggest hospital chain, for 2.38 billion reais ($620 million), as it seeks to shore up cash.

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