UBS Neutral on Daycoval

UBS Pactual sees positives and negatives in the convertible debt agreement Daycoval has entered into with the IFC, Cartesian Capital and Wolfensohn Capital. The deal is valued at around BRL410m or about 20% of the company’s total value, says IFC’s principal investment officer Xavier Jordan. UBS, which has a neutral rating on the mid-cap Brazilian bank, notes that the deal boosts long term funding and will allow it to grow its loan portfolio for a few years. On the other hand, the shop is concerned about dilution in the longer term. UBS has a BRL7.00 target share price. The stock traded at BRL4.64 February 20. Jordan explains that in a first option, warrants with an exercise price of BRL7.30 can be purchased. He believes that these will likely go unexercised, as the bank’s stock trades at lower levels. A second option, he says, involves the purchase of warrants with an exercise price of BRL7.75, and an exercise period from March 2011-2014. Purchase of warrants in this second option is contingent upon shareholders investing in a 5-year CD issued by Daycoval whose value is initially 77% of the exercise price of each warrant. In the last 3 years that this CD is outstanding, it will earn interest at predetermined percentages of CDI applied to 100% of the exercise price of each warrant. If warrants are not exercised, the CD is repaid at the end of the fifth year at a value equivalent to 100% of the exercise price of each warrant. If exercised, the CD can be converted into shares.