Citigroup Sounding Alarm on $13 Billion of Bank Bonds in Brazil

To Citigroup Inc., traders in Brazil’s bank-bond market are being far too complacent.

The country is in danger of having its rating cut to the cusp of junk by Moody’s Investors Service, and that means the nation’s biggest lenders are also in the crosshairs. That’s because banks’ credit grades typically are aligned with those of their home country, given the lenders’ importance to the local economy.

A Brazil downgrade will be especially damaging for the riskiest corner of the market, says Citigroup’s Eric Ollom. Banco do Brasil SA, Itau Unibanco SA and Bradesco SA have issued $13 billion of subordinated notes, which already are rated lower than senior notes that give bondholders stronger protections in a default. And their prices don’t yet reflect the pain that’s in the offing, says Ollom, the head of global emerging-market corporate debt strategy at Citigroup.

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