(Bloomberg) — Five Brazilian banks recorded a total of R$20 billion (US$3.6 billion) in losses as part of an agreement relating to the largest bankruptcy ever recorded in Brazil.
The five — Itaú Unibanco Holding SA (), Banco Bradesco SA (), Banco Santander SA (), Banco do Brasil SA () and Banco Nacional de Desenvolvimento Econômico e Social SA (BNDES) — granted loans to the bankrupt conglomerate Odebrecht SA, now called Novonor SA. As part of the agreement, the banks agreed to accept derivatives with uncertain recovery prospects in exchange for R$20 billion in loans.
In a deal announced on Monday, after five years of contentious negotiations, the defaulted loans will be sold to a fund managed by IG4 Capital Investimentos SA, a Brazilian manager specializing in debt restructuring.
As for the R$20 billion in loans, it will be seized and transferred to another IG4 fund, according to people familiar with the matter who requested anonymity to discuss non-public information. The derivatives give banks the right to receive part of the proceeds when IG4 decides to sell Braskem shares in the future, the sources said. Novonor’s five creditors will not have a stake in Braskem.
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To sell a defaulted loan in Brazil, according to Central Bank rules, banks need to provision the amount in full and write it off as a loss. Lenders have been increasing provisions for losses on Novonor’s loans over the years, so the losses are likely already fully accounted for. And, if Braskem’s shares rise due to the restructuring that IG4 is expected to promote or better prices in the petrochemical sector, the banks would profit from this and recover at least part of their losses.
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A BNDES representative said that the bank does not comment on matters involving companies listed on the stock exchange, while Bradesco, Banco do Brasil, Santander and IG4 preferred not to comment. Itaú did not respond to messages requesting comment.
The Odebrecht holding company filed for judicial recovery in 2019, seeking to restructure R$98.5 billion in debt, intercompany loans and guarantees. The bankruptcy was the culmination of the difficulties in recovering from the consequences of Operation Lava Jato in Brazil. The investigation, which began in 2014, paralyzed the construction industry by cutting off access to government projects and sending executives to prison. Odebrecht paid millions in fines in other Latin American countries and saw its pipeline of new projects dwindle.
At the time, banks such as BNDES and Itaú tried to take possession of the Braskem shares used as collateral, but a judge blocked this measure. Since then, creditors have been pressuring Novonor to sell its stake in Braskem to another company or on the public market and use the proceeds to pay off the debt, but these attempts have been unsuccessful.
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In Monday’s deal, Novonor and IG4 signed a binding contract with creditor banks for IG4 to buy all of Novonor’s debt backed by Braskem shares, according to a document. The parties also agreed to a 60-day exclusivity period to negotiate a transaction involving Braskem shares that, if completed, would give IG4 control of the petrochemical company, with just over 50% of the voting shares and around a third of the total capital.
IG4 would share control of Braskem with the company’s other controlling investor, Petrobras, while Novonor would maintain a 4% minority stake without voting rights.
At its peak, in September 2021, Novonor’s 38% stake in Braskem was valued at R$20.5 billion, more than enough to pay off its entire debt with the banks. Now, this same stake is worth around R$2.3 billion.
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