Distressed debt sales get under way in Brazil

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EM SQUARED

October 29, 2015 6:12 pm

Distressed debt sales get under way in Brazil

Luke McLeod-Roberts

NPL rates remain low but signs are they will rise and vulture funds are positioning accordingly

©AFP

Brazil’s plunge into negativity is turning into a godsend for distressed asset hunters, arriving in search of cut-price corporate restructurings. Drawing them in is a rise in bankruptcy filings and the disposal by banks of their non-performing loan portfolios.

NPL rates have yet to rise significantly, a reflection of conservative lending practices and the lag between the drop in economic activity and a rise in consumer defaults.

But analysts believe it is just a question of time. Unemployment is at its highest level since March 2011 and non-bank delinquency, a precursor to bank NPLs, is also increasing.

Sales of NPL portfolios are expected to reach R$25bn ($6.5bn) this year, a rise of about two-thirds on the R$15bn sold into the market in 2014, according to KPMG.

Brazilian banks are following a lead set by seasoned international operators Citi and Santander. State-owned Caixa Econômica Federal, the country’s largest mortgage lender, sold down loans with a face value of R$3bn in the first three-quarters of this year, and plans to sell a further R$5bn before year-end. The total represents almost 2 per cent of its active credit portfolio.

“We had been studying this process for some time,” said Alexsandra Camelo Braga, vice-president of the comptroller’s office and risks at Caixa.

“If I don’t offload it I will have to maintain all the costs for a portfolio for which the possibility of recovery is very low. And as soon as I sell I have revenue which was provisioned and a positive effect on my balance sheet.”

Caixa got started in September 2014 by transferring loans with a face value of R$5bn to Emgea, a government-owned so-called bad bank holding 1.3m mortgages. The next quarter, Caixa made its first sale of an NPL portfolio to the secondary market by auctioning overdue overdraft facilities with a face value of R$1bn. It invited at least eight businesses to bid.

It has made a further two sales so far this year, one in the first quarter for R$1bn and one in the second for R$2bn, both for overdrafts, credit card loans and corporate working capital, 95 per cent in arrears of more than 12 months. In both cases the bank had bids from 13 businesses, about a third of which were foreign. The bank plans two further sales this year of about R$2.5bn each, with a continued focus on middle market and consumer credit.

According to FT Confidential Research, an FT research service, loan portfolios in Brazil are going for between 1.5 per cent and 8 per cent of face value. Little wonder that the distressed asset teams are moving in.

Copyright The Financial Times Limited 2015