Bond Traders Blindsided as Brazil Probe Claims Its Latest Victim

Updated on
  • Police searched Eldorado’s Sao Paulo offices on Friday
  • The company sold bonds abroad for the first time on June 9

Bond investors in Eldorado Brasil Celulose SA have become the latest victims of Brazil’s biggest-ever corruption scandal.

On Friday -- just three weeks after the pulp and paper producer sold debt abroad for the first time -- police officers searched the company’s Sao Paulo offices, part of a probe into kickbacks at Brazil’s state oil producer that has implicated some of the country’s highest-profile conglomerates, business executives and politicians. The news sent Eldorado’s $350 million of notes to near the lowest level since they were issued June 9. Investors who bought the debt when it was sold have now lost 3.2 percent, versus an average gain for emerging-market bonds.

The search of Eldorado’s offices is a reminder that the two-year-old bribery investigation remains an ever-present risk for bond investors. When the company sold its notes earlier this month, it capitalized in part on optimism that Brazil was putting the scandal behind it after ushering in a new government. The company was the first junk-rated Brazilian company able to pull off a debut issue since July 2014. The cost of hedging losses in Brazilian bonds using five-year credit-default swaps dropped 1.1 basis points to 313.1 basis points as of 12:40 p.m. in New York.

“This just sends a terrible image about the company and ultimately about Brazil,” said Bernardo Rodarte, who oversees 1 billion reais ($309.5 million) of assets at Sita Corretora. “I am just glad I don’t hold these notes.”

Eldorado is part of the J&F Investimentos conglomerate run by the billionaire Batista family. It includes meat-producing behemoth JBS SA, and the two companies’ offices are in the same building. A JBS spokesman confirmed the search and said police sought documents related to Eldorado; the meat producer wasn’t the target of the operation and no arrest warrants were issued for its executives, he added.

The pulp and paper company said in a statement that it “doesn’t know the action’s motivation and provided all the information requested.”

While Brazil’s federal police said the search was part of the so-called Carwash probe, it hasn’t provided details yet.

— With assistance by Gerson Freitas Jr, and Filipe Pacheco

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