Marcio Cypriano, CEO of Bradesco, tells LatinFinance he sees few opportunities to grow through acquisition, and that his institution is focused on organic growth in the wake of Itau’s planned purchase of Unibanco. “The opportunities to buy [another bank] are very limited. The Brazilian [bank] market is clearly defined,” he says in an exclusive interview Thursday. “There has been a specific, one time event that has shifted the overall ranking [of banks in Brazil,] which is causing some commotion out there,” he says, referring to the deal announced Monday. “For us, it is remains essential to evaluate carefully any potential deal, especially from the point of view of its value to our investors, and only follow through if it really makes sense.” The bank is in no hurry to go out and buy another bank, Cypriano adds. Bradesco executives add that organic expansion is the main route, which could eventually help it catch up to Itau-Unibanco. Bradesco’s already distant hopes of acquiring Nossa Caixa, which belongs to the state of Sao Paulo, appear to have been dashed by two developments this past week. A Tuesday ruling by the National Judicial Council defending state-owned entities exclusive right to manage judicial deposits, of which Nossa Caixa has many, and a local report by the Folha de Sao Paulo Thursday saying Sao Paulo’s governor met with Banco do Brasil officials to sell the bank for BRL6.4bn. Nossa Caixa shares rose 13% Thursday while the Bovespa dropped 3.8%.
Category: Corporate & Sovereign Strategy
Vale Chief Prioritizes Buyback, Capex
Vale CEO Roger Agnelli insists his company plans to deploy the bulk of its $15.3bn cash position internally, rather than on acquisitions. “[There’s] nothing better [to do] right now than to buy back our own shares. We feel current [share] prices are implying a disaster for next year. We don’t see this disaster,” Agnelli says during Vale’s visit to the New York Stock exchange. He notes the company’s $11.5bn follow-on in July was executed at twice today’s levels. The costs of organic investment have dropped along with asset prices, and Vale is committed to finishing all of the projects in its pipeline, he claims. According to its investment plan, the miner is looking at spending $14.2bn on more than 30 projects on five continents. Agnelli did not discount the possibility of studying an acquisition if the right opportunity was there. Also, Angelli says the move to cancel a 12% price increase for Asian customers, was due to a drop in demand. “The problem today is not price, the problem for everyone is demand,” he says.
CCM to Try Again for Bankruptcy
Mexico’s CCM has filed a third motion for bankruptcy protection in Mexico, after two previous requests were rejected by the courts. After reviewing alternatives, the retailer still believes that “concurso mercantil,” the Mexican equivalent of Chapter11, is the best way of renegotiating $2bn in unsecured debt. CCM defaulted last month after reporting a $1.1bn negative derivatives position. It obtained MXN3.3bn in credit from government development bank Nafin last week to keep operating during the debt-negotiation process.
Itau-Unibanco Merger Sparked by Santander Bid
Santander’s proposed acquisition of ABN AMRO’s Banco Real, initially announced last year, led Unibanco’s CEO Pedro Moreira Salles to sit down with Itau CEO Roberto Setubal to discuss the possibility of a merger. “For the first time we were faced with a foreign competitor that was bigger in scale and capital than Unibanco, and the same size as Itau,” says Salles, referring to Santander in an internal memo obtained by LatinFinance. The memo was sent yesterday to Unibanco employees. The talks began in Salles’ living room in July 2007, says the note, just as a domestic debt crisis in the US began spreading to other parts of the financial system. The CEO’s affirmation counters the notion the deal was hurriedly put together amid a global wave of bailouts, failures and mergers, though analysts tell LatinFinance they believe changing markets accelerated the talks. Unibanco shares fell 46% between October 1 and October 24. “This totally changes the banking landscape in Brazil,” Celina Vansetti, banking analyst at Moody’s, tells LatinFinance. She notes while the system was previously dominated by a five large private and state owned banks, it will now have one single institution that is by almost every metric much larger than its next competitor. Vansetti says she believes the change is positive for both institutions and fortifies Brazil’s banking system as it heads into a more challenging environment. Unibanco preferred shares closed at BRL7.09, up 21.00%, while Itausa preferred shares closed at BRL8.23, up 14.31%.
Agencies Flag Vitro Default Risk
Moody’s has downgraded Vitro to Caa1 from B2, and keeps it on review for possible further downgrade, highlighting elevated risk of default, while Fitch cut it to B minus (watch negative) from B. “The downgrade reflects Moody’s belief that Vitro’s liquidity and financial flexibility have further weakened in light of derivative exposure, low unrestricted cash reserves and increasing reliance on short-term debt amid uncertain credit market conditions and deteriorating economic fundamentals,” says Moody’s. Its review will focus on the extent to which margin calls and derivative related liabilities will affect Vitro’s financial position, as well as the feasibility and effectiveness of the measures the company is undertaking to meet near term cash requirements and to restore financial flexibility. Vitro is Mexico’s leading glass manufacturer with revenues of $2.7bn for the 12 months ended September 30, says Moody’s. It has the following bonds outstanding $300m due 2012, $225 due 2013, and $700m due 2017.
TGN Seen Closer to Flaring Up
Exchange rate risks, reduction in export revenues and market uncertainty are combining to push Argentina’s Transportadora de Gas del Norte (TGN) closer to the edge of default. Fitch has downgraded the pipeline operator’s ratings to CCC from B, it says. TGN’s 8% of 2012 bond has recently been bid down to the high 40s from the mid-50s a week earlier, according to Credit Suisse. It next faces principal and interest payments of $16m and $6.4m, respectively, due December 31, according to Fitch. “Currently, the company’s cash position is sufficient to these payments, although the margin of error as well as the ability to replenish additional liquidity is limited given TGN’s lack of access to external financing,” the agency says. It expects cash flow from operations to fall below original projections. Other Argentine utility credits recently trading at distressed levels include Transagas and Transgener.
Ecuador Default Risk Ratchets Up
With oil plunging and 2009 debt maturities looming, Ecuador bond prices suggest an increasing likelihood of default on some $3.7bn in debt next year. Ecuador’s 2012, 2015 and 2030 global bonds were bid around 35, 40, and 28, respectively Tuesday, according to traders. Both ability and willingness to pay are diminishing, as the sovereign is expected to release soon results of a study that suggests the external debt is illegitimate. “The probability of default is high. The market is already pricing this in,” says David Spegel, head of EM strategy at ING. He adds that sovereigns generally could take a cue from corporates and use poor external conditions as an excuse to default. Carola Sandy, analyst at Credit Suisse, does not expect a decision before legislative elections in January and February. Her shop expects Ecuador to make its next payment of $125m on the 2012s next month. If oil prices stay low into 2009 and president Correa decides against cutting spending, Ecuador would have to tackle the problem head on. Multilateral debt, which Ecuador has used heavily in the past, could provide a solution, as neighboring Colombia agreed recently to borrow $2.4bn for 2009 from three multilaterals. Ecuador is also heard preparing to challenge creditors in Ecuadorian and international courts, following its own study that alleges that much of the debt is invalid. A debt moratorium would only save Ecuador $470m in 2009, according to local research boutique Analytica. But the process appears to be politically motivated, so cost may not be an issue. If it comes down to a restructuring, creditors can expect an approach as aggressive as Argentina’s in 2005. The take-it-or-leave-it gambit from Buenos Aires left investors with little more than 30 cents on the dollar.
Barcap Warns Against Argentina Warrants
Argentine sovereign GDP warrants may look cheap, but Barclays warns clients to steer clear given high default probabilities priced by CDS and nominal depreciation indicated by NDFs. Global turmoil and nationalization of pension funds have pushed warrants to $4 from $9 in the past month alone, Barclays notes. It adds that the CDS curve implies a 50% default probability in one year and a 95% default probability in 5 years, while ARP NDFs price a 60% nominal depreciation per year for the next 5 years. “These two phenomena are devastating for the value of the warrant. Although the warrants do not mature until 2035, the market expects Argentina to default in the next few years, stripping the warrants of their potential for long-term gains,” says Barclays. “We fear that warrant prices may experience a further market correction and do not recommend adding exposure at current levels,” it adds. For those investors unconvinced by its argument, the shop recommends EUR warrants over USD warrants. Barclays is working with Deutsche and Citi on a settlement between the Argentina sovereign and holdouts.
Vale’s Agnelli Mum on Acquisition Possibilities
Vale CEO Roger Agnelli dodged questions about a possible re-attempt at Swiss miner Xstrata during a conference call Friday. “The fact is we’re quiet. We’re just looking after our own house,” he says, as Vale prepares to face poorer economic conditions in 2009. Debt problems at Xstrata parent Glencore and a decline in Xstrata’s market value have led to speculation that it might be an opportune time for the Brazilian miner to try again for the unit. “Even with the current asset prices, it’s more interesting for Vale to continue with its organic growth,” Agnelli says. Vale also said this week it was not attempting a purchase of Xstrata in a statement. The CEO sees a recession of at least 6-7 months, but that Vale is in a strong position due to its strong cash position. It raised $12.6bn in a share sale in August and has about $15.3bn total on hand. The majority of 2009 investment will be maintained, Agnelli says, but 2010 investments could be reduced depending on the extent of poor conditions.
Sovereigns Better Placed Than Other EM
The credit crunch is not likely to push marginal sovereigns like Venezuela, Argentina or Ecuador into default, and may actually help some of them, says Jerome Booth, head of research at Ashmore, the EM manager of $32bn in assets. “There are some countries that are going to have serious problems. Frankly, not in Latin America. We’re talking about Latvia, and Serbia, Ukraine and Pakistan,” Booth tells LatinFinance. “The risks in those countries in Latin America that have sovereign risk – those risks were there before the credit crunch, and they haven’t substantially changed, with the exception possibly of Ecuador because of the oil price,” he adds. According to Booth, the oil challenge for Ecuador is temporary, since he foresees crude prices rising again. And the investor detects no change to default risk in Argentina. “If anything, it’s the other way round. Argentina is now in the market for selling real assets to the Chinese and to other big sources of new capital,” says Booth. Other countries like Colombia may have what are temporary and insignificant problems, but nothing like what is infecting the UK, adds the London-based manager. “The main risks lie in the banking sector – which is not significantly a Latin American problem – it’s an Eastern European problem,” he says. Overall, Ashmore is bullish on EM currency, which it plays through short duration local T-bills; private equity; and dollar corporate debt, where there is value owing to distressed selling. Booth is meanwhile negative on equity, based on correlation with the US market. Ashmore lost 14.7% of assets under management in Q3, but Booth claims institutional investors like sovereign wealth funds, central banks and pension funds, anchor the fund. “We have been buying assets the last few weeks . . . We’re not in the business of catching falling knives, so we’re still basically defensive, but redemptions are not driving the investment philosophy or portfolio management,” adds the investor.