SAO PAOLO: A handful of Brazilian companies are disclosing exposure to Banco Master SA following the liquidation of the troubled lender and the arrest of its chief executive amid a sweeping corruption probe.
Healthcare provider Oncoclinicas reported holding 433 million reais or about US$81.1mil in Master time deposits, known locally as CDBs.
It had provisioned losses of about half that amount in its latest earnings report, and said it will take “appropriate measures” to cover the rest, which represents a little less than half of the company’s cash position at the end of the third quarter.
Oncoclinicas, which has seen its shares slump to a record low, is perhaps the most prominent company exposed to Master’s meltdown, but not the only one.
Empresa Metropolitana de Águas e Energia, or Emae, also said it held CBDs issued by Master-owned Letsbank which amount to around 5.9% of its consolidated assets as of Sept 30.
CEDAE, Rio de Janeiro state’s water and sewage company, holds CDBs issued by the lender, without giving more details on its exposure.
Rio’s pension fund, Rioprevidência, said it holds about 960 million reais in Banco Master notes, adding it’s now negotiating to replace those investments.
Banco Master drew central bank scrutiny in recent years by issuing debt guaranteed by the financial system’s insurance fund and loading up on risky assets.
For months, it had been hunting for much-needed fresh capital – including a potential merger with Banco de Brasilia, which was barred by regulators.
A last-ditch rescue deal was announced late on Monday, just hours before the central bank announced its liquidation and Brazilian federal police arrested Master chief executive Daniel Vorcaro and five others on corruption allegations.
Despite the turmoil, Master’s collapse is not viewed as a systemic risk, given that it depended largely on funding insured by Brazil’s bailout fund, known as FGC.
The Federal Deposit Insurance Corp-like backstop offers protection to those with exposure to a bank that goes under, including insurance on up to 250,000 reais of CDBs.
Master and the other liquidated institutions had around 1.6 million creditors that are owed roughly 41 billion reais, FGC said in a statement.
Still, it adds to a growing list of credit blowups across Brazil, from routs in the bonds of companies like Braskem SA and Ambipar Participações e Empreendimentos SA to the tumble in sugar and ethanol joint venture Raízen SA’s debt.
Fitch Ratings has compared the issues to early 2023, when the implosion of century-old retailer Americanas all but closed local credit markets.
“Banco Master is another example that adds concerns to the market,” said Sergio Rodriguez Garza, group credit officer for Latin American corporates and financial institutions at Fitch.
“If you remember what happened with Americanas and the shutdown in markets, so far it has not been similar, but we are seeing some developments that could lead to concern. Pressure is adding up.
“What’s going to be the breaking point for investors in the local market to demand higher yields or participate less? I don’t know, but we are monitoring that,” he said.
According to Alexandre Chaia, a professor at Insper business school in Sao Paulo, the central bank will now put together a list of creditors and holders of the bank’s instruments like CDBs and banking notes known as Letras Financeiras.
Publicly traded companies are not obligated to disclose their exposure, but they will need to provision for losses in their financial statements, as the CDBs will no longer be considered cash equivalents, he said.
In the case of Oncoclinicas, the company and Master agreed to follow a new schedule for redeeming the amounts invested in those CDBs in October.
The healthcare provider also said it plans to exercise its option to buy back shares held in two investment funds that own part of the company.
“If Banco Master defaults, the company may exercise this option, while the liquidation process will see a court-appointed liquidator selling assets and paying creditors according to legal priority,” JPMorgan analysts led by Joseph Giordano wrote in a note to clients.
JPMorgan analysts said Oncoclinicas’s weak cash position could be further endangered if none of the CDBs are recovered, a scenario the bank sees as “likely”, the note reads.
Oncoclinicas reported a cash balance of 495 million reais as of Sept 30. The firm, which provides outpatient medical services in areas including oncology, has been struggling with cashflow pressures and high debt levels.
“In a sound investment policy, they shouldn’t be putting their money into an operation like this,” Chaia said, speaking about exposed companies more broadly.
“The bank was artificially leveraged, raising a large amount of money through CDBs with high interest rates.” — Bloomberg
