SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has revised the Rating Watch on Banco Panamericano's (Panamericano) 'A-(bra)' Long-term National Rating and its 'F2(bra)' Short-term National Rating to Positive from Negative. The rating action follows the announcement of the sale by the controlling shareholder, Silvio Santos Group (GSS), of its participation of 51% common shares and 37.64% total shares to Banco BTG Pactual S.A. (BTG Pactual).
Simultaneously, Fitch has affirmed the following ratings for Panamericano and BTG Pactual:
Panamericano
--Support Rating at '3'.
BTG Pactual
--Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-'; Outlook Stable;
--Short-Term Foreign and Local Currency IDRs at 'F3';
--Individual Rating at 'C'
--Support Rating at '5'
--Support Rating Floor at 'No Floor'
--Long-Term National Rating at 'AA(bra)'; Outlook Stable;
--Short-Term National Rating at 'F1+(bra)'.
The revision of the Rating Watch to Positive reflects the potential support of the new shareholder, BTG Pactual (BRL43 billion in assets as of end September 2010), which will control 51% of Panamericano's voting stock and Caixa Economica Federal (Caixa, Long-Term National Rating 'AA+(bra)' and BRL401 billion in total assets), which controls the remaining 49% of Panamericano's voting stock. The transaction is still pending approval of the Brazilian regulatory bodies as well as BTG Pactual's and Caixa's shareholders. Once the transaction is finalized, Fitch expects that Panamericano ratings will be upgraded by several notches, however it should not match those of its controlling shareholders.
On Jan. 31, 2011, GSS entered into an agreement with BTG Pactual, in which the later committed to acquire the totality of Panamericano's stock held by GSS. The present value of the sales price is BRL450 million, indexed to 110% of the Brazilian DI rate. The final maturity of this obligation is July 2028; however, BTG Pactual might prepay the amount due at any time and without any penalty. Additionally, the total debt has a cap of BRL3.8 billion. At the same time, the agreement between the parties sanctioned the transfer of BTG Pactual's obligation of BRL450Mi with GSS to the Fundo Garantidor de Credito - FGC (Deposit Insurance Fund, the Brazilian equivalent of the US FDIC).
This debt refers to the financial support provided by GSS to Panamericano in view of accounting irregularities announced at that time. The agreement also contemplates GSS' additional payment obligations, estimated to be around BRL1.3 billion, to support other irregularities recently identified at the bank, which led to a new capital injection of that same amount into the bank.
After conclusion of due diligences conducted by two well-known audit firms and under the administration of new executives appointed by Caixa and by Fundo Garantidor de Credito (FGC) and based on Panamericano's economic feasibility, BTG Pactual decided to enter the retail banking market, mainly with vehicle financing, creating its fourth business line. For this purpose, Panamericano will rely on a funding facility of BRL10 billion from Caixa for eight years, which will reduce its high funding cost (one of its main shortcomings), besides largely benefiting liquidity and funding stability, important points of attention in small- and medium-sized Brazilian banks. Fitch believes in the development of the bank, due to the quality of BTG Pactual's administration and in view of the clean up promoted by the new shareholders, who identified a number of severe operational inefficiencies the resolution of which should allow the bank to obtain returns in line with peers. Panamericano will become a subsidiary of BTG Pactual, which, jointly with Caixa, will be responsible for any eventual contingencies after conclusion of the transaction. The accounting method used to consolidate the financial statements is still under discussion with the Brazilian authorities.
Albeit not yet published, Panamericano's balance sheet, excluding the accounting inconsistencies, should present assets and liabilities well below those published in June 2010 (BRL12.5 billion), which should impact the recurring operational results. However, the new management is expected to increment credit production with better margins, based on lower funding costs, which should improve the profitability of the institution over time. The quality of the new credit portfolio, concentrated in the long term, should still be tested over the time, although Fitch believes in the capacity of the new executives and shareholders.
Panamericano's ratings had been placed in Rating Watch Negative in November 2010 due to the announcement that its controlling shareholder, GSS, made a capital injection of BRL2.5 billion in the bank to absorb the effects of accounting irregularities in the same amount identified in the bank. That rating action was driven by the fact that the support came solely from GSS, raising doubts, at that time, about Caixa's propensity of support, one of the assumptions of the Support Rating assigned to Panamericano on July 29, 2010.
On Feb. 2, 2011 Fitch published a rating action commentary on Silvio Santos Group ('Fitch Revises Rating Watch for Silvio Santos Participacoes to Positive') which is available in Portuguese at 'www.fitchratings.com' and at 'www.fitchratings.com.br'.
Acquired by GSS in 1969, Panamericano operates in vehicle financing and retail stores, and in consumer credit, mainly with payroll deductible loans. The group owns the third largest TV network in Brazil, the Sistema Brasileiro de Televisao (SBT), also operating in retail commerce and capitalization certificates.
The affirmation of BTG Pactual's ratings reflects Fitch's opinion that the proposed transaction enhances the bank's businesses with the addition of a subsidiary operating in the growing Brazilian retail bank segment, adding diversification to its business lines, which had been focused on Investment Banking, Asset and Wealth Management. However vehicle financing is a novelty to both BTG Pactual and Caixa, and the success of the implementation of this new strategy is yet to be proven. Fitch believes that the structure of the proposed transaction shall provide the necessary protection to prevent significant additional losses in Panamericano's reduced remaining credit portfolio after the adjustments completed. The recent capital injection of USD1.8 Billion from a group of well regarded international investors also provides a significant boost to BTG Pactual capital base, helping strength its balance sheet.
BTG Pactual ratings are driven by its Individual Rating. This reflects its franchise as one of the leading investment banks operating in Brazil, success in the development of its business, and a good track record of results. The ratings also consider the well-defined structure and philosophy supported by experienced executives, strong risk controls tested along different crises, and the stream of recurring revenues which consistently cover its fixed operational costs. The ratings are restrained by the limited although increasing diversification of balance sheet and revenue flow. The present transaction is a positive step towards this, and as a focal point, Fitch shall monitor the expansion of its third-party funding, its cost, diversification and, mainly, stability and tenor. Originated in 1983 and controlled by Andre Esteves, BTG Pactual is one of the major investment banks in the country, enjoying a strong reputation in its segments.
Caixa's ratings reflect the support of its controller, the Federal Union; its strong institutional image, being considered a safe harbor during crises; and its importance and action as an agent of social policies and urban development. It relies on a good funding and liquidity base, with easy access to stable funds through a large retail depositor base. Like other state-owned banks, Caixa is more exposed to potential lack of continuity in management, presenting a high volume of contingencies and low quality of capital. Created in 1861, it is the fifth largest Brazilian bank in assets and the second largest in deposits.
Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'.
Applicable Criteria and Related Research:
--'National Ratings Criteria' (Jan. 19, 2011);
--'Short-Term Ratings Criteria for Corporate Finance' (Nov. 2, 2010);
--'Global Financial Institutions Rating Criteria' (Aug. 16, 2010).
Applicable Criteria and Related Research:
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Short-Term Ratings Criteria for Corporate Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685
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