When last we checked in on BTG Pactual, “people were afraid.”
Why? Because the once proud investment bank that billionaire Andre Esteves boasted would be “better than Goldman” is scrambling to raise cash after Esteves’ arrest prompted investors to pull nearly half of their money from the bank’s fixed income funds and triggered a harrowing decline in the company’s equity and debt.
As we reported earlier this month, “the cash crunch caused the firm to sell its stake in Rede D’Or Sao Luiz SA, Brazil’s biggest hospital chain, for some BRL2.4 and has prompted the bank to seek a buyer for its private banking arm, BSI.” Ultimately, BTG tapped a $1.6 billion lifeline from Brazil’s deposit guarantee fund in order to help the bank buy time as it liquidates assets.
Both the stock and the bank’s 2020s rallied on Friday as the FGC lifeline is expected to help the bank avoid unloading assets at firesale prices. “The loan gave BTG enough confidence about liquidity that it passed up a chance to sell a 40 percent stake in Banco Pan SA at its market value to Banco BMG SA,” Bloomberg noted on Sunday, adding that while “[FGC] used to only pay creditors of bankrupt banks , it now tries to prevent crises from developing, providing financing and guarantees to avert bank failures.”
While the credit line helps, it’s no panacea. “Wholesale funding is apparently drying up,” we warned more than a week ago. In a testament to how acute the cash crunch is (or at least “was”), the firm sold its stake in Rede D’Or Sao Luiz SA, Brazil’s biggest hospital chain, for some BRL2.4, and is seeking a buyer for its private banking arm, BSI.
Bloomberg goes on to note that other items on the auction block are BTG’s commodities business, the rest of its 22 billion-real credit portfolio, stakes in retailer Uniao de Lojas Leader SA, physical-fitness chain Bodytech Participacoes SA, distressed-asset-management firm Recovery do Brasil, and the bank’s stake in parking-lot company Allpark Empreendimentos Participacoes e Servicos SA, which Bloomberg says “is attracting private-equity firms including KKR & Co. and Gavea Investimentos Ltda.” That sale could bring in some BRL1.5 billion.
Additionally, BTG may look to sell its flagship hedge fund, global emerging markets and macro. As Reuters reports, “BTG Pactual is writing to GEMM investors and will extend a deadline for redemption notices by a month to Jan. 16 “to give all investors adequate time to understand the strategic options being evaluated,” the source said. The deadline for March 1 redemptions had been previously set as Dec. 16.”
On Monday, BTG Pactual and BTG Participations approved the cancellation of 19.9 million in common and 39.8 million in preferred of BTGPactual, as well as 19.9m class A preferred shares and 39.8m class B preferred shares of BTG Participations with the aim of “demonstrating confidence in the capital structure.” Meanwhile, Reuters says “Brazil’s securities industry watchdog has rejected a proposal by Grupo BTG Pactual SA to repurchase up to 41 percent of shares in circulation to stem a price slump.”
Also on Monday, we learn that the bank has dumped some $250 million in CLO exposure. According the the ubiquitous “people familiar with the matter” who spoke to Bloomberg, “BTG mainly offloaded debt secured by loans to junk-rated companies [and also] got rid of commercial mortgage bonds.”
That should tell you a little about just how risky some of the assets on the bank’s books truly are/were. Investing in CLOs backed by pools of junk bonds can be a lucrative strategy in a world where yield is scarce thanks to ZIRP, but if something should go wrong (like say if HY were to blow up, as it’s doing at this very moment) and spreads should blow out, you might find yourself in trouble (which raises the question of who BTG sold the CLO exposure to).
Even with the FGC lifeline and a bevy of asset sales, there are still quite a few questions about the firm’s liquidity position and about what the wider implications of the firm’s troubles will be. Below, find Goldman’s FAQ list and accompanying graphics.
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1. What is BTG’s liquidity position? Based solely on the reported operations of the standalone Brazilian business, BTG Pactual has R$1.6 billion more in funding maturing in 4Q2015 than securities and loans. Using the same metric, the bank has R$9 billion more in funding maturing in 9M2016 than securities and loans in 9M2016, and R$7 bn thereafter. On November 4, BTG Pactual secured R$6 billion in funding from the Brazilian deposit guarantee fund.
2. What assets could BTG consider selling to bolster liquidity? Management has already taken steps to shore up liquidity by disposing of its stake in a hospital group (Rede d’Or) on Dec 2, which yielded R$2.4 billion. There are other non- core investments, both in private equity and direct, that could be sold. The new management team could also consider potentially selling part of its loan portfolio in Brazil (R$23.7 billion as at 3Q2015), of which over 75% are rated “AA” or “A”. These loans are more valuable than lower quality loans given the higher quality borrowers and absence of provisions.
3. How are redemptions in the asset management business tracking? From November 24 (the day prior to the arrest) to November 30, AUM across a cross-section of funds declined 15%, equivalent to around R$4 billion. Notably, redemptions peaked on the day of the arrest, amounting to R$4.0 billion by November 30, which represents 16% of the AUM on the day prior to the arrest. (Source: Brazilian securities regulator CVM)
4. How has the shareholder structure changed? Mr. Esteves was effectively removed from any decision making power after the seven largest equity partners had their nonvoting shares converted to voting shares at a 1:1 ratio (and vice versa for Mr. Esteves). The share swap was executed in the holding company that houses the partners’ shares (BTG Pactual Holding S.A.), which sits one level above the listed entity (Banco BTG Pactual S.A.).
5. Under what conditions could the Central Bank step in? The Central Bank has already stated that it will be monitoring BTG Pactual’s liquidity and operations. According to local bank regulations, the Central Bank could step in if BTG Pactual does not meet minimum liquidity/solvency requirements. Notably, the Central Bank has previously revised its regulations to boost liquidity for certain parts of the financial system. If BTG Pactual’s liquidity significantly deteriorates, there are two potential options the Central Bank could consider if it wanted to intervene, both of which would involve replacing the current management team and potentially result in liquidation.
6. How important is BTG to the Brazilian financial system? BTG Pactual is the sixth largest bank in Brazil by assets, deposits and equity, with a market share of between 3% and 5%. However, as an investment bank it has an active presence in primary/ secondary markets and asset management, having advised on the 2nd largest number of M&A transactions in Latin America over the past three years and the largest number of IPOs.
The near term outlook continues to be uncertain, with concerns over BTG Pactual’s liquidity position. At this stage, the outlook beyond the 3Q2015 financials is uncertain given the potential for disruption to the business. Management has indicated it is focused on improving liquidity of the bank, possibly through divestments of some investments.
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We close with the following from Max Bohm, an analyst at Sao Paulo-based consulting firm Empiricus Research:
“They need to show they’re selling quickly to calm markets and stop the free fall of their shares. For that to happen they need to accept the price buyers want to pay.”