September 13, 2012 / 4:11 PM / 5 years ago

UPDATE 1-Cruzeiro debt buyback deadline extended; shares soar

* Buyback is prerequisite for sale of Cruzeiro do Sul

* Cruzeiro shares rally on speculation a bid is near

SAO PAULO, Sept 13 (Reuters) - The administrator of Brazil’s Banco Cruzeiro do Sul gave bondholders a few more hours on Thursday to agree to a debt buyback that is central to saving the lender from bankruptcy.

Privately owned deposit guarantee fund FGC will analyze bondholders’ responses until 1800 local time (2100 GMT), buying more time to consider takeover bids for the lender, according to a securities filing. The prior deadline on the debt buyback expired at midnight Wednesday.

A lack of firm takeover bids threatens Cruzeiro do Sul, which the central bank seized on June 4 following fraud-related losses, with liquidation. FGC’s failure to win a 90 percent approval from bondholders for the debt buyback is likely the main reason a sale of the bank has not yet been sealed.

“It’s in the interest of all parties involved and the banking system as a whole that Cruzeiro do Sul finds a buyer,” a financial industry consultant who advised the FGC in previous similar deals told Reuters, speaking on condition of anonymity. “It’s hard to tell at this point if this story will end well.”

The FGC is seeking to convince bondholders to accept an average 49.3 percent discount on the value of their Cruzeiro do Sul bonds. The lender has $1.59 billion in outstanding, dollar-denominated bonds.

A liquidation of Cruzeiro do Sul would be Brazil’s second bank liquidation since October and the nation’s biggest bank collapse since Banco Santos was shut down in 2005 amid allegations of fraud. Years of fast credit growth resulted in deteriorating funding and liquidity conditions for mid-sized lenders and, in some cases, led to the relaxation of accounting controls.

Concerns about transparency standards, slow industry consolidation and eroding profits have led many investors to shed Brazilian mid-sized bank stocks in recent months. At the core of such worries is the segment’s inefficient funding structure, in which cash flow mismatches are frequent, making these lenders vulnerable to a downturn in credit markets.

Government officials have sought to dismiss concerns that a bankruptcy of Cruzeiro do Sul could seriously harm Brazil’s financial system. As of March, the lender had control of only 0.24 percent of the nation’s banking assets and 0.33 percent of deposits.

SHARES RALLY

Results of the debt repurchase, which is a precondition for a sale of the bankrupt lender, are due to be announced on Friday, the FGC said in the filing.

Earlier in the day, newspaper Valor Econômico said Banco Santander Brasil, the nation’s largest foreign lender, might bid for Cruzeiro do Sul. A Santander Brasil spokeswoman said the bank “does not comment on market rumors.”

In recent weeks, local media reports have named Banco Bradesco, Brazil’s No. 2 private sector bank, and investment banking powerhouse BTG Pactual as potential bidders.

Preferred shares of São Paulo-based Cruzeiro do Sul surged 40 percent this week, on optimism that a takeover of the bank is imminent, if not inevitable. The stock surged 21 percent to 2.41 reais on Thursday, on top of gains of 3.6 percent and 20.6 percent in the two previous trading sessions.

Shares in mid-cap banks fell 0.3 percent in dollar terms on Thursday, according to the MSCI Brazil Small and Mid Financials Index, paring this year’s gains to 10 percent.

The consultant, who declined to be named because of the sensitivity of the issue, said liquidation of Cruzeiro do Sul could take at least a couple of years and creditors may recover less than half their money.

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