#NEWS Panamericano Fraud Probe Sinks Corporate Bonds: Brazil Credit

Nov. 24 (Bloomberg) -- Brazilian corporate bondss are trailing emerging-market debt for the first time since April as a fraud probe into Banco Panamericano SA undermines investor confidence in the country's banking system.

The 1.6 percent loss in Brazilian company debt this month is double the 0.8 percent decline in developing-nation corporate notes, according to JPMorgan Chase & Co.'s CEMBI indexes. U.S. corporate debt tracked by Bank of America Merrill Lynch indexes was down 0.6 percent in the same period.

Prosecutors are conducting a criminal probe of Panamericano after controlling shareholder Grupo Silvio Santos took a 2.5 billion real ($1.5 billion) emergency loan from the country's deposit insurance fund to boost the bank's capital on Nov. 9. The investigation into the Sao Paulo-based lender is curbing investor demand for bonds sold by Brazilian banks, whose record $16.9 billion of bond sales this year accounted for more than half of the country's corporate offerings.

"Everybody's initial response was that it's just a one-off kind of thing and solely focused on Panamericano, but let's not forget everybody could be wrong because nobody saw this one," Luz Padilla, who helps manage $6 billion in assets at Los Angeles-based DoubleLine Capital LP, said in a telephone interview. Padilla said Panamericano debt isn't among her Brazilian bank holdings.

The yield on Panamericano's 8.5 percent securities due in 2020 surged as much as 306 basis points, or 3.06 percentage points, since Nov. 8, the day before the capital injection, data compiled by Bloomberg show. Yields on bonds issued by Parana Banco SA, based in Curitiba, and Banco BMG, in Belo Horizonte, have jumped at least 75 basis points during the same period.

Pulled Offerings

Three banks have withdrawn bond offerings since the bailout of Panamericano, Brazil's 21st-biggest bank by assets, drove up borrowing costs.

Banco BVA SA, a Rio de Janeiro-based bank specializing in loans to mid-sized companies, delayed an overseas issue Nov. 12. Banco Bradesco SA, the country's second-largest bank by market value, pulled a sale of real-linked bonds overseas because global market "volatility" eroded demand for the debt, bank director Marlene Millan said in a Nov. 16 interview. Banco Industrial e Comercial, a Sao Paulo-based lender known as BicBanco, halted its planned offering of local bonds on Nov. 16.

The central bank uncovered about 2.1 billion reais in losses from accounting irregularities connected to the sale of loan portfolios, central bank President Henrique Meirelles said in an interview Nov. 18 in Brasilia. Silvio Santos, 79, is the Brazilian media mogul who controls Grupo Silvio Santos. He sought bailout funds after he discovered his own credit-card company owed it 400 million reais, Meirelles said.

Regulatory Oversight

"The system worked quite well and the problem was caught soon enough in a very successful way," he said.

Panamericano aims to become the country's biggest lender for individuals "in the segments it operates" as it markets products from Caixa, the national savings bank, according to a statement e-mailed Nov. 18 by the bank's press office. Grupo Silvio Santos and Caixa Economica Federal won't sell their stakes in the bank, the shareholders said a day later.

Meirelles, 65, said he favors regulatory oversight of the credit-card industry after Panamericano's rescue. A task force including officials from the central bank, Finance Ministry and Justice Ministry is studying whether the industry needs government supervision.

"There's a caveat out there that it could be greater regulation or greater governmental involvement due to the fact there could be other stories like this," Bevan Rosenbloom, an analyst with RBS Securities Inc. in Stamford, Connecticut, said in a telephone interview.

'Better Thing'

While stricter regulations may reduce earnings, the impact could be positive over the next couple of years, according to DoubleLine's Padilla.

"If the profits are reduced, but there's more information available then to me as a bond investor, it's a better thing," Padilla said. "There will be more certainty that I'll achieve my repayment. If this indeed turns out to be an isolated event, if the government continues to be as aggressive in dealing with this as they have been, then the bounce back can happen."

Brazilian banks more than tripled their international offerings from last year's $4.3 billion to help finance loan growth as Latin America's biggest economy expands at the fastest pace in two decades. The sales account for 54 percent of the $36.9 billion raised by Brazilian companies abroad this year, according to Bloomberg data.

Outstanding loans in Brazil climbed to 1.61 trillion reais in September from 1.35 trillion reais a year earlier, according to the central bank.

Debt Crisis

Concern Europe's debt crisis is worsening after a bailout of Ireland is also curbing demand for debt sold by Brazilian corporate issuers, according to Natalia Corfield, a corporate debt analyst at ING Groep INV in New York. Irish Prime Minister Brian Cowen announced Nov. 22 he will seek elections early next year. Over the weekend, the government said it would ask the European Union and the International Monetary Fund to bail out the nation's banking system.

"It's not only mid-sized banks that are not recovering," Corfield said in a telephone interview. "Everything else is not trading very well. We don't know if it's only Ireland or it's going to be Portugal as well. People are afraid of a big problem in Europe."

The real fell 0.8 percent yesterday to 1.7357 per dollar.

The yield on Brazil's overnight interest-rate futures contract due in January 2012 rose 6 basis points to 11.83 percent.

Default Swap

The cost of protecting the nation's debt against non- payment for five years with credit-default swaps climbed four basis points to 114, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries widened 6 basis points to 189, according to JPMorgan.

Maria Fernanda Ramos Coelho, president of state-owned Caixa Economica Federal, which owns 49 percent of Panamericano, said in an interview last week in Brasilia that Caixa will provide "all the necessary support" to keep the bank operating.

"While it seems like it's just a one-off thing, people want more reassurances," said DoubleLine's Padilla. "And you can only do that with time."

--Editors: Lester Pimentel, David Papadopoulos

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