Tuesday, 13 January 2009

Banco do Brasil Mulls Bond Sale to Bolster Capital

In a conference call yesterday with analysts, Banco do Brasil executive Rene Sanda said the company may sell bonds to bolster its capital equity, following the acquisition of 49.99 percent of rival Banco Votorantim (Click here to read Estado's story.) Certainly the bank will need to replenish cash, as it is bound to pay the Ermirio de Moraes family a sizzling 3.75 billion reais as the first installment for the Votorantim purchase. According to Sanda, BB's Basel indicators will fall from almost 13 percent to a bit less than 12.5 percent with the transaction -- the minimum required by Basel II is 11 percent.

Details on the nature of the transaction were spared from us, unfortunately. The bank may tap local markets -- in general banks tend not to issue the so-called debentures (or senior unsecured notes) in the domestic market, according to a São Paulo-based source who works in debt capital markets. Banco do Brasil may try to raise funds in international markets but remember that its standing among other banks in Brazil isn't the best -- investors see BB as target of political pressures, and many others say the bank is underperforming relative to its potential, size and market share.

Banco do Brasil, on the other hand, may have to ramp up indebtedness as it undertakes a race for acquisitions -- instigated by President Lula and his ideological followers. The Votorantim acquisition wasn't expensive (BB paid 1.3 times Votorantim's reported market value in exchange for an increase in market share of system assets to 19.7 percent from 18.2 percent.) These numbers include its also recent purchase of São Paulo-based lender NossaCaixa. Nevertheless, expansion is costly and for the moment it may turn out even more expensive because of the slowdown and its side-effects in terms of credit asset quality.

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