Cruzeiro Impact on Peers Seen as Temporary

Despite assets taking a hit, investors were not terribly concerned for the Brazilian mid-size banking sector following the announcement of a temporary takeover of payroll lender Cruzeiro do Sul, citing noncompliance with financial standards. Cruzeiro’s bonds dropped Monday, with the 2020’s closing at 48-54, or 22% yield, according to investors, down from levels of around 80. B2 rated Cruzeiro’s troubles may cause an uptick on borrowing costs, but it is not expected to be permanent. “There is intervention [from the central bank] on the back of potential fraudulent activity, but the intention is to continue servicing the debt with the intention to sell Cruzeiro. There will be a spillover to other bank institutions that give the same services, but it shouldn’t be a problem for banks with better balance sheets. The tone of the market is risk-off and it complicates things for issuers at the moment,” says a west coast-based EM fixed-income investor. “For the innocent it makes it more expensive to access the bond market and for the guilty it will shut them off,” adds another bond investor. “There is always worry in the sector when this happens, but I think Cruzeiro do Sul is an isolated case,” Aloisio Lemos, equity analyst at Agora Corretora, tells LatinFinance. Cruzeiro represents less than 0.5% of the sector by assets or by deposits, and analysts consider payroll lending as one of the safer banking segments. Some mid-size lenders have been trading at wide spreads, with BBB rated Banco BMG’s 2020 bond trading at 13.8% and BBB+ Banco Bancusesso’s 2020 at 17.3%. Cruzeiro has been shut of from international funds, but others, including BMG in March, have had access. Like Banco Panamericano in 2010 – which required a bailout after irregularities were found – a sale is expected. Cruzeiro said it was holding talks with Panamericano buyer BTG Pactual, though discussions were said to have broken down. Brazil’s central bank announced Monday an intervention for 180 days in Cruzeiro