Brazil's Shrewd Banking Strategy

June 25, 2012 - PRLog -- Last year when Brazil’s second largest bank, ITAU Unibanco, sold 400 million reais (USD$200 million) of bundled corporate loans (technically referred to as CLO’s or Collateralized Loan Obligations) to foreign investors, the news media viewed the move as a signal that Brazil’s lending capacity was drying up.  Just like a business that sells its receivables to raise cash quickly, Brazilian banks were replenishing their lending capacity by selling their attractive loan portfolios at a discount to foreign investors. To date, sales of CLOs have been brisk exceeding 50 billion reais (USD$25 billion).  Should investors be concerned that Brazilian banks might be unloading their inventory of corporate loans to avoid a liquidity crisis?  If not, what is really going on?

Brazil’s commercial and industrial backbone consists of over 14,000 mid-cap size companies that range in sales between USD$30 million and USD$200 million. These companies are mostly privately-held, which makes buying and selling equity shares for foreign investors that much more challenging. Funding resources for these companies are limited, and the Brazilian government believes that the bulk of financing for these mid-cap companies, going forward, will have to come from outside sources.  For these and other reasons, the Brazilian government has deliberately used the sale of its double-digit interest rate CLOs, ranging between 12% and 16% per year, to entice hedge funds, private equity firms, and investment banks worldwide to consider Brazil as their next port of call. Compared to the 1% and 2% returns earned back home, it is no surprise that these CLO sales have generated a strong buying demand from foreign investors. Brazil banking authorities hope that these transactions will catalyze a comprehensive consolidation of its mid-cap companies through cross-border mergers and acquisitions activities. In preparation to receive foreign investors, Brazilian companies have started to hire professionally-trained  management teams. Their CEO’s realize that unless they conform to internationally accepted best practices, their firms could either miss out on a huge funding opportunity or be left behind.  It is not up to foreign investors individually to decide where their funds can be invested but rather their shareholders who, by design, require sound investments that include third-party auditing, financial transparency, and evidence of proper governance practices.

At a recent breakfast meeting titled ‘Brazil Investment Management’ sponsored by the Brazilian-American Chamber of Commerce, a distinguished panel of experts shared their thoughts on viable approaches for Brazilian investments.  One of the panelists, Mr. Pedro Soares from Eurovest S.A., highlighted one of his company’s success stories, namely, the Brazilian clothing manufacturer, Hering. By restructuring its high interest debt and installing a professional management team, Eurvest unleashed Hering’s true growth potential from an initial valuation of USD$50 million to that of a public company currently valued at $7.5 billion.

Hering’s huge success was in large part attributed to Brazil’s growing domestic market which included over 40 million new consumers that had been lifted from poverty and could afford to buy beyond their basic needs.  However, without the organizational and financial structural changes spearheaded by Eurovest, Hering could never have achieved this incredible milestone.

Eurovest’s success story prompts the following two questions:

Q1. - How many more ‘Hering-like’ potential success stories are hidden within Brazil’s 14,000 mid-cap firms?  ...probably a good number!
Q2. - If potential profits are so readily available in Brazil, why would Brazilian banks be so eager to sell their loan portfolios to foreign investors?

To view the rest of this press release please visit - http://brazilcham.com/articles/brazil’s-shrewd-banking-...