Brazil Banks Postpone Pain by Giving Companies More Time to Pay

  • Renegotiated loans at Banco do Brasil more than double
  • Nation’s average maturity on loans jumps to widest on record

Brazil’s biggest banks, already reeling from a surge in bad loans, tried to avoid deeper losses as phone company Oi SA headed toward default, agreeing to a grace period of at least four years with no payments on 17 billion reais ($5.1 billion) in debt.

While Oi ultimately filed for bankruptcy protection after talks with other creditors and shareholders fell apart, the extension of debt maturities has been a favorite strategy for local banks trying to keep their borrowers afloat. Renegotiated loans at Banco do Brasil SA, the nation’s biggest lender by assets, more than doubled in the first quarter from a year earlier to 22 billion reais.

Borrowers are struggling to pay back their obligations as Brazil faces a second straight annual economic contraction, commodity prices remain low and unemployment rises. Even amid a credit crunch and high interest rates, the average maturity of outstanding loans in Brazil jumped to 49.7 months in May, the highest since the central bank began calculating the figure in March 2011. It was 47.1 months in May last year. While the practice of lengthening payback times can help viable companies recover, in many cases it only postpones the day of reckoning.

“A company can only pay its debt when it’s generating profits, and that’s exactly the main challenge in Brazil right now -- to generate profits,” said Ricardo Mollo, a professor at the Insper business school in Sao Paulo. “Sometimes extending debt maturities is not enough and banks may be only delaying their problems.”

QuickTake: Brazil’s Highs and Lows

Gol Linhas Aereas Inteligentes SA, Brazil’s second-biggest airline by market share, is negotiating with Banco do Brasil and Banco Bradesco SA for more time to pay on about 1.05 billion reais in debentures as it tries to restructure, according to the Sao Paulo-based air carrier. The talks don’t include proposals to reduce the amount outstanding.

Steelmaker Usinas Siderurgicas de Minas Gerais SA reached an agreement to extend the maturity on 5.6 billion reais in debt to 10 years, with a three-year grace period for principal payments, the company said. Creditors include Banco do Brasil, Bradesco, Itau Unibanco Holding SA, Banco Santander Brasil SA and Brazil’s development bank, BNDES.

Deals like those are what’s pushing renegotiated-loan levels higher at the nation’s biggest creditors. Bradesco posted an 18 percent increase in such loans in the first quarter, to 13.1 billion reais, while Itau’s figure jumped 17 percent to 22.7 billion reais, according to the companies’ financial statements.

Oi Fallout

Banks are eager to keep struggling borrowers from failing to avoid losses and capital reductions. Now that Oi is seeking court protection from its creditors, for example, banks are required to set aside provisions of at least 30 percent of unsecured loans, an amount that could increase to 100 percent in the third quarter if the court restructuring process fails, according to Rafael Frade, an analyst at Bradesco BBI SA.

Banco do Brasil has 4.3 billion reais in unsecured debt with Oi, the phone company said. That includes 2.4 billion reais in loans, which will require about 650 million reais in increased provisions in the second quarter, and bonds, which were marked to market before the bankruptcy filing, one person familiar with the matter said.

Banco do Brasil has more bad-loan provisions than required, Chief Executive Officer Paulo Caffarelli said last week. The bank declined to comment further.

Caixa Debt

Caixa Economica Federal has 1.85 billion reais in unsecured debt related to Oi, and Itau’s exposure is 1.5 billion reais in real estate-backed securities, which must also be marked-to-market. The timing for that process is unclear, Frade said.

Itau has an additional 2.2 billion reais in guarantees for tax liabilities from Oi, while Bradesco has about 1.5 billion reais and Santander has 1.4 billion reais, Frade said, adding that no provisions would be initially required for them. The guarantees may not even come into play depending on how the tax court rules, Fitch Ratings said in a report.

BNDES has 3.3 billion reais in secured debt with Oi, the bank said, declining to comment further.

Bradesco, Santander and Itau declined to comment. Caixa didn’t reply to e-mails and phone calls seeking comment.

If banks agree to reduce the outstanding principal owed, a so-called haircut, Brazilian regulations require them to book losses of the same amount, while a debt extension doesn’t trigger that requirement, according to Felipe Ribeiro da Luz Camara, a lawyer who specializes in cross-border debt negotiations at Milbank Tweed Hadley & McCloy LLP in Sao Paulo.

Rare Haircuts

“Amending to extend the maturity of agreements has always been a standard for Brazilian banks, while haircuts are really rare,” Camara said.

Borrowers usually prefer a haircut because the reduction in total debt can result in immediate gains, according to Mollo. As for banks, a maturity extension may even generate profits by reducing provisions if the collateral structure of the loan is improved or if the company starts paying again, he said.

Many banks are asking for stocks and real estate as collateral, said Henrique Filizzola, a lawyer specializing in debt restructuring at Stocche Forbes in Sao Paulo.

Odebrecht Collateral

An example is sugar and ethanol firm Odebrecht Agroindustrial SA, which is in final talks with local banks including BNDES, Banco do Brasil, Bradesco, Itau and Santander to extend maturities on its 13 billion reais in debt, a person familiar with the matter said. As part of the proposal, the holding company would provide an injection of 4 billion reais into the unit and give part of its shares in petrochemical producer Braskem SA as collateral. An additional 2 billion reais in energy assets may also be used as collateral.

The risks from the strategy could be seen in banks’ first-quarter earnings reports, according to Moody’s Investors Service. Oil-rig supplier Sete Brasil Participacoes SA filed for bankruptcy protection in April with debt of 18 billion reais, forcing Bradesco, Itau and Banco do Brasil, which had been buying time with standstill agreements, to increase provisions for loan losses. All three missed analysts’ earnings estimates as a result.

Before it's here, it's on the Bloomberg Terminal.