Bondholders face steep discount in Brazil's Cruzeiro buyback

SAO PAULO (Reuters) - Bondholders of Brazilian troubled bank Banco Cruzeiro do Sul CZRS4.SA will receive about half of their investment as part of a bond repurchase program to save the lender from bankruptcy, an executive said on Tuesday.

Cruzeiro do Sul was seized by Brazil's central bank on June 4 and put under the administration of privately held deposit guarantee fund FGC the same day. Under the global bond buyback plan, FGC will receive tenders until September 12, said Celso Antunes, the FGC executive currently in charge of Cruzeiro do Sul.

The repurchase is the best solution for Cruzeiro do Sul, since it would help lower the bank's debt load and boost its allure among potential suitors, Antunes said. FGC, which offered to repurchase the bank's bonds at a 49.3 percent discount, has a mandate to find a buyer for the lender by year-end.

"We are working hard to find a solution for Cruzeiro do Sul," Antunes said at a news conference. He reiterated that the tender requires the consent of at least 90 percent of Cruzeiro bondholders to succeed.

Despite the large discount, bondholders might agree to the repurchase or else risk seeing the bank forced into liquidation - a decision that would wipe out any remaining value for their bonds. With the tender, the FGC is also seeking to rule out a government- or banking sector-led bailout of Cruzeiro, investors told Reuters on Tuesday.

"In any case this is a first proposal and the FGC, should it want to spare the country from another fiasco, will have to make all creditors happy," said a São Paulo-based fund manager who is considering participating in the transaction. The investors declined to be quoted by name because of the sensitivity of the issue.

The price on Cruzeiro's 8.875 percent bond due in September 2020 fell to about 30.5 cents on the U.S. dollar on Tuesday. When the seizure was announced, the securities were trading close to 70 cents apiece.

Cruzeiro do Sul's senior note due in January 2016 is currently trading at about 60 cents on the dollar, down from 82 cents in early June.

Antunes said that, applying the discount on the bonds, the repurchase price could be almost similar to current bond prices.

The bank has $1.575 billion in outstanding bond debt.

MARKET SOLUTION

The tender is also conditional to a bid by a qualified suitor to buy control of Cruzeiro do Sul, Antunes added. According to Antonio Carlos Bueno, chairman of the FGC, there are only four qualified potential bidders in a group of 20 lenders the fund reached out to sell Cruzeiro do Sul.

Central bank director Anthero Meirelles told Reuters in a Tuesday interview that local rivals could bid for Cruzeiro do Sul, but warned that authorities will not hesitate to liquidate the bank if no buyer is found.

"These are isolated cases that do not impact the financial system. During the process of auditing, the central bank detected problems and because those problems were not addressed, we then moved to intervene," Meirelles said, speaking of the Cruzeiro do Sul intervention in June.

The future of mid-sized banks is key to the development of Brazil's banking industry not only because of the systemic risk their weakness could pose, but also for their ability to foster competition in a market that is becoming more concentrated.

Concerns about transparency standards, slow industry consolidation and eroding profits have led many investors to shed Brazilian mid-sized bank stocks since late 2010. Shares in that segment are down 18 percent in dollar terms since this year's peak in March, according to the MSCI Brazil Small and Mid Financials Index .MIBR0FND0PUS.

The Cruzeiro seizure was the third in the last year and a half, a sign that years of rapid growth have resulted in deteriorating funding and liquidity conditions as well as a relaxation of credit risk and accounting controls among some mid-sized lenders.

The FGC also helped the central bank take over consumer lender Banco PanAmericano in November 2010.

Antunes said a round of auditing at the bank detected 2.25 billion reais ($1.11 billion) in total losses, of which about 1.3 billion reais came from the flawed accounting of shares in a fund made of loan-backed securities on its balance sheet.

Cruzeiro do Sul, which was formerly controlled by the Índio da Costa family, specializes in payroll-deductible loans, a type of credit in which banks deduct monthly installments directly from the borrowers' paycheck.

(Additional reporting by Aluísio Alves in São Paulo and Alonso Soto and Luciana Otoni in Brasilia; Editing by Bernard Orr and Lisa Shumaker)