Brazil Bank Collapse Spells Turmoil for Firms Holding Its Debt
(Bloomberg) — A handful of Brazilian companies are revealing exposure to Banco Master SA following the liquidation of the troubled lender and the arrest of its chief executive during a wide-ranging corruption investigation.
Healthcare provider Oncoclinicas said it held 433 million reais ($81.1 million) in Master term deposits, known locally as CDBs. It booked a loss of about half that amount in its most recent earnings report and said it would take “appropriate measures” to cover the rest; This represents slightly less than half of the company’s cash position at the end of the third quarter.
While Oncoclinicas, whose shares fell to a record low, is perhaps the most important company exposed to Master’s collapse, it is not the only one. Empresa Metropolitana de Águas e Energia, or Emae, also said it held Master-owned Letsbank-issued CBDs, which accounted for about 5.9% of its consolidated assets as of Sept. 30. CEDAE, the water and sewage company of the state of Rio de Janeiro, holds the CDBs issued by the lender but does not provide further details about its exposure. Rio’s pension fund, Rioprevidência, said it holds about 960 million reais in Banco Master notes and is currently negotiating to replace those investments.
Banco Master has come under scrutiny from the central bank in recent years by issuing debt guaranteed by the financial system’s insurance fund and underwriting risky assets. It has been seeking much-needed fresh capital for months, including a possible merger with Banco de Brasilia that has been banned by regulators. A last-ditch rescue deal was announced late Monday, just hours before the central bank announced its liquidation and Brazil’s federal police arrested Master CEO Daniel Vorcaro and five others over corruption allegations.
Despite the turmoil, Master’s collapse is not seen as a systemic risk, given that it is largely reliant on financing insured by Brazil’s recovery fund, known as the FGC. The FDIC-like backstop provides protection for those involved with a failing bank, including CDB insurance of up to 250,000 reais. About 1.6 million creditors of Master and other liquidated institutions owe about 41 billion reais, the FGC said in a statement.
Still, it adds to a growing list of credit booms across Brazil, from bond routs at companies like Braskem SA and Ambipar Participações e Empreendimentos SA to a collapse in debt at sugar and ethanol joint venture Raízen SA. Fitch Ratings compared the problems to the situation in early 2023, when the collapse of century-old retailer Americanas all but shut down local credit markets.
“Banco Master is another example of adding concern to the market,” said Sergio Rodriguez Garza, Fitch’s group credit officer for Latin American companies and financial institutions. “If you remember what happened in Americanas and the closure of the markets, there has not been a similar situation so far, but we are seeing some developments that may cause concern.”
“The pressure is increasing. What will be the tipping point for investors in the local market to demand higher returns or participate less? I don’t know, but we are monitoring that,” he said.
The central bank will now create a list of creditors and owners of the bank’s instruments, such as CDBs and bank bills known as Letras Financeiras, according to Alexandre Chaia, a professor at the Insper business school in Sao Paulo. He said public companies are not required to disclose their risks but must make provisions for losses in their financial statements as CDBs will no longer be considered cash equivalents.
In the Oncoclinicas case, the company and Master agreed in October to follow a new schedule for repayment of amounts deposited into these CDBs. The healthcare provider also said it plans to exercise its option to buy back shares held by two investment funds that own part of the company.
“If Banco Master defaults, the company may exercise this option; in the liquidation process, a court-appointed liquidator will sell assets and pay creditors according to legal priority,” JPMorgan analysts led by Joseph Giordano wrote in a note to clients.
JPMorgan analysts said Oncoclinicas’ weak cash position could be further jeopardized if none of the CDBs are rescued; The note states that the bank considers this scenario “likely.”
Oncoclinicas reported a cash balance of 495 million reais as of September 30. The firm, which provides outpatient services in areas including oncology, is struggling with cash flow pressure and high debt levels.
“In a sound investment policy, they should not invest their money in such an operation,” Chaia said, speaking more broadly about the exposed companies. “The bank was artificially propped up by raising large amounts of money through high-interest CDBs.”
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