Brazil’s Esteves Wealth Sinks Most Among Banker Billionaires

Brazil’s Esteves Wealth Sinks Most Among Banker Billionaires

By Blake Schmidt

2:37 PM BRT
March 19, 2015

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Andre Esteves, billionaire and founder of Grupo BTG Pactual, speaks during a session on the opening day of the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, Jan. 21, 2015. World leaders, influential executives, bankers and policy makers attend the 45th annual meeting of the World Economic Forum in Davos from Jan. 21-24. Photographer: Chris Ratcliffe/Bloomberg

(Bloomberg) — Andre Esteves, the chairman of Grupo BTG Pactual, has shed $650 million from his fortune this year as his firm gets dragged down by loans and investments with companies embroiled in a corruption scandal at Brazil’s state oil firm.

Esteves’s 19 percent decline is the biggest among bankers on the Bloomberg Billionaires Index. BTG, Brazil’s only publicly traded investment bank, has trailed the Ibovespa index by 4 percentage points so far this month, a performance that coincided with the real plunging below 3 per dollar for the first time in a decade. His personal fortune, which peaked at $4.9 billion in September, is valued at $2.7 billion today.

Assurances from Esteves during a Feb. 26 conference call that the bank’s exposure to Petroleo Brasileiro SA is “very low” haven’t stopped the selloff. Deutsche Bank AG cut BTG to “hold” in a March 8 report after the bank missed analysts’ profit estimates, and said that BTG has the largest exposure among Brazilian banks to companies in the oil and construction sectors that are swept up in the biggest corruption investigation in the nation’s history.

“The risk for BTG appears to be rather high,” said Monica de Bolle, a former International Monetary Fund economist who is a partner at Galanto Consultoria. “It has a fair amount of exposure to Petrobras assets or Petrobras-related assets, which could be somewhat problematic.”

Limited Transparency

Scrutiny of BTG’s exposure to the Petrobras fallout comes after fourth-quarter profit rose 10 percent. The firm missed the estimates of four analysts surveyed by Bloomberg after a loss in its principal-investments business and higher bad-loan provisions. Its principal investments, which include private equity, real estate and proprietary trading, posted negative revenue of 132 million reais in the fourth quarter, BTG said Feb. 26.

Deutsche Bank analyst Tito Labarta said 14 percent of BTG’s loans are exposed to the energy and infrastructure segments, noting that the risks are probably contained because corporate lending accounts for less than 10 percent of its revenue. He said the bank’s exposure could be bigger because transparency is “very limited.”

Esteves said during the Feb. 26 call the bank is prepared to deliver a 20 percent return on equity, even if client oil rig supplier Sete Brasil were to “turn to dust.” A former Petrobras manager said in a March 10 congressional hearing that he had knowledge of bribery payments involving Sete Brasil and that lenders are now reluctant to offer financing to the company.

Batista Pledge

The company’s press office said in an e-mail March 13 that it’s working to get long-term financing and declined a request this week for additional comment.

Brazil’s development bank has yet to disburse a 10 billion reais loan it approved for Sete Brasil 14 months ago. BTG invested in the industrial company along with banks Banco Bradesco SA and Banco Santander Brasil SA. BTG hasn’t provisioned any potential losses on a proprietary investment of about 1 billion reais. The bank has also invested more than 1 billion reais in client money.

Esteves said during the call the bank’s provision increase of about 300 million reais was mostly related to its exposure to Eneva SA, the Brazilian utility controlled by EON SE and former billionaire Eike Batista. The company, formerly MPX Energia SA, filed for bankruptcy protection in December. Esteves declined an interview request for this story.

Plunging Fortune

A report by Goldman Sachs Group Inc. analysts on Feb. 27 said BTG’s fourth-quarter weakness in trading and corporate lending was counterbalanced by “strong” asset management results and a lower effective tax rate. Despite higher provisions in corporate lending and global markets, a successful divestment in private equity and a “tax shield” from interest on capital meant “in the end everything mostly offset.”

Esteves’s wealth is headed for the biggest quarterly slide since BTG agreed to support Eike Batista’s commodities empire with a $1 billion credit line in March 2013, a pledge that sent the banker’s fortune plunging by more than $1 billion. The billionaire rebounded after BTG canceled the loan without having released any funds.

As chairman of the top bank in Brazilian mergers and acquisitions and equity underwriting last year, Esteves joked in a 2012 interview that BTG — officially Banking and Trading Group — stands for Better Than Goldman. BTG traded at a price-to-book value of 1.36 at the end of 2014, compared to 1.13 for Goldman Sachs.

Africa Assets

The Rio de Janeiro native built his fortune by selling the Brazilian investment bank he owned with partners to UBS in 2006 for $3.1 billion, and bought it back three years later for $2.5 billion as the Swiss bank faltered during the financial crisis.

Today, BTG’s commodities business is budding — exports of raw materials surged to $500 million last year from zero. Some other investments have tanked. BTG has stakes in Brasil Pharma SA, BR Properties SA and Banco Pan SA, each of which fell more than 40 percent last year.

The bank said in an e-mail on March 17 that 4 percent of its credit portfolio is in the oil and gas sector. While 40 percent of that portfolio is guaranteed by Petrobras, another 40 percent is with European and Latin American companies with no relationship to the Brazilian sector, and another 20 percent is diversified, with no relevant concentration.

Erstwhile Billionaires

Government auditors in May opened an investigation into BTG’s $1.5 billion purchase of a 50 percent stake in Petrobras operations in six African nations after an opposition lawmaker indicated the price may be too low. Petrobras said in a January statement that 14 companies were invited to bid and the price was vetted by Standard Chartered Bank, an adviser on the deal.

Standard Chartered declined to comment. BTG said in an e-mail the Africa purchase has no relation to the bank’s share performance, which it says has been in line with other Brazilian assets.

BTG’s infrastructure loans include a 2 billion reais pass-through from Brazil’s development bank for Belo Monte, the world’s third-largest dam. BTG said in an e-mail the loan includes guarantees from shareholders. The 29-billion-real dam, which was supposed to begin delivering energy last month, won’t produce power until November, the dam’s operator Norte Energia SA said in an e-mail.

Prosecutors that accused construction firms of forming a cartel to rig Petrobras contracts are turning their attention to the megadam. Camargo Correa SA Chief Executive Officer Dalton Avancini agreed to a plea deal with prosecutors to testify about what he said was fraud and the participation of a cartel in the building of Belo Monte, said two sources with knowledge of the matter who couldn’t be identified because the agreement is private.

‘Paralysis Mode’

Camargo said it is cooperating with authorities while working to fix any irregularities. Norte Energia declined to comment because it didn’t have access to the testimony.

Esteves’s decline comes after Brazilian magnates including builder Cesar Mata Pires and education entrepreneur Janguie Diniz lost their status as billionaires this year. Speculation that a stalled economy and fiscal weakness will lead to a sovereign downgrade have helped fuel the currency’s rout.

“The unknown puts people in a sort of paralysis mode,” de Bolle said in a phone interview. “That sort of counter-party risk may be happening in the financial sector.”

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