SAO PAULO (Reuters) - Brazil’s largest banks are increasingly demanding that companies put themselves up for sale as a condition to cut loan principal amounts, providing a jolt to an otherwise weak M&A climate in Latin America’s largest economy.
Since the start of September, about a dozen Brazilian M&A deals have been related to restructurings, Thomson Reuters data showed. That represents about 15 percent of total Brazilian deals during the period. The percentage is higher among the largest lenders.
Over the same five-month period, eight of the 16 deals in which Banco Bradesco SA (BBDC4.SA), Brazil’s top M&A lender, has acted as adviser involved restructuring-related asset sales.
The banks have been bruised by an unprecedented credit downturn that magnified Brazil’s harshest-ever recession and the fallout from a corruption scandal that hit many large corporate borrowers.
Lenders have accepted losses north of 40 percent on the value of principal owed by some companies, from lingerie maker Scalina SA to sugar and ethanol mills Antonio Ruette Agroindustrial and Unialco SA Álcool e Açúcar, five people familiar with the cases said.
The sources, who spoke in recent weeks, requested anonymity in order to discuss matters freely.
They said drugstore chain Brasil Pharma SA (BPHA3.SA) could be the next candidate, as banks reduce the chain’s 600 million-real ($190 million) debt by 40 percent and Grupo BTG Pactual BBTG11.SA transfers its ownership, two of the sources said.
Banks such as Banco Bradesco SA, state-controlled Banco do Brasil SA (BBAS3.SA), Itaú Unibanco Holding SA (ITUB4.SA) and Banco Santander Brasil SA (SANB11.SA) are agreeing to cut principal only if the companies’ owners agree to transfer ownership to a third party, the people said. The third party could be a buyout firm or a strategic rival with better prospects of running it profitably.
With Scalina, banks agreed to slash the company’s debt by 44 percent after rival Lupo bought the company from a group led by Carlyle Group LP (CG.O) funds, ending a dispute with lenders.
In Unialco’s case, the company’s assets were sold off as part of a restructuring in which creditors forgave around 85 percent of its debts.
And Antonio Ruette’s creditors agreed to cut its debt by 40 percent, but only after a deal was reached in which Proterra Investment Partners, a fund backed by Cargill Inc [CARG.UL], took control of its mills from the ethanol company’s eponymous founder.
Brasil Pharma (BPHA3.SA) could find a solution to transfer the ownership within weeks, one of the sources said. Grupo BTG Pactual, BR Pharma and the creditors declined to comment.
Banks are demanding ownership changes in order to stem defaults and curb the large loan-loss provisioning that caused their profits to decline last year for the first time since 2009.
An initial phase of debt restructurings in 2015 had focused solely on extending terms of troubled loans. Bankers say they are hoping the latest deals will bring more definitive solutions.
After refinancing or setting aside provisions for about 140 billion reais of loans last year, lenders have grown wary of leaving existing shareholders in place, a practice that has tended to create a situation of “moral hazard,” three of the people said..
The new strategy may be allowing more companies to avert bankruptcy filings, which decreased by 22 percent in the first two months of this year, according to figures from Experian Plc.
The ownership change deals can also create business for the banks in the form of M&A fees, although credit losses tend to overshadow that revenue by a large degree.
Stricter regulatory scrutiny stemming from the corruption scandal has contributed to a 55 percent drop in announced deals in Brazil so far this year, Thomson Reuters data showed, compounding the impact of the recession.
Additional reporting by Guillermo Parra-Bernal; Editing by Christian Plumb and Matthew Lewis