Corp Group bankruptcy leaves tough lessons, little solace for creditors

Creditors of Corp Group Banking SA have been left in limbo since the Chilean holding company, owned by one of the country's wealthiest people, filed for bankruptcy.

Itaú Corpbanca announced Oct. 22 the sale of certain rights by Corp Group, which owns a 27% stake in the Chilean bank. Corp Group will offer for sale 10.6% of its rights in an auction in Chile, and the remaining 16.56% will be transferred to creditors of Corp Group, including affiliates of Itaú Unibanco Holding SA, Itaú Corpbanca's controlling shareholder. The auction is expected to close Oct. 26.

The sale of its subscription rights to Itaú Corpbanca should allow the holding group to raise money it needs to pay its creditors. Banco BTG Pactual SA and asset manager LarrainVial SA, who have debt claims with the group, will serve as the brokers for the auction. Corp Group, brokers, and creditors have held talks to refine the process, according to Chilean newspaper Diario Financiero. Corp Group Banking and Itaú Corpbanca did not respond to queries from S&P Global Market Intelligence.

"Corp Group's bondholders and those for other businesses will have to get a big haircut, which I'm guessing will be around 60%," Ivan Weissman, a political scientist who has reported on Corp Group for about 10 years, said.

In June, billionaire Álvaro Saieh filed for a Chapter 11 bankruptcy in the U.S. for Corp Group and four other affiliate companies. The group said that it has assets of between $500 million and $1 billion, and liabilities of between $1 billion and $10 billion.

News of the bankruptcy filing caused the share price of Itaú Corpbanca to accelerate its downward trajectory to reach a 52-week low on Oct. 13, S&P Capital Pro IQ data shows.

The move to file for bankruptcy was catalyzed by a lawsuit from a group of 37 Chilean bondholders — including Consorcio companies Compañía de Seguros de Vida Consorcio Nacional de Seguros SA and Banco Consorcio, Fratelli Investments Ltd as well as companies linked to LarrainVial — claiming that Corp Group had failed to meet payments of up to $244 million for its sole $500 million bond due 2023. Banco Consorcio did not respond to queries from S&P Global Market Intelligence. Fratelli Investments declined to comment when asked about the matter.

In a publicly available court document, the bondholders alleged that Saieh withdrew funds from Corp Group's related companies through multiple operations "of little or no economic rationality," resulting in the deterioration of the company's capitalization and fracturing its ability to pay debt. Corp Group had run out of cash after purchasing "illiquid assets," the claimants said, adding that the group had done all of the transactions with the knowledge of the poor condition of its operations.

"$500 million is a big issue for a company that has no operating income," said Weissman, who is also the founder of Chilean digital publication El Mostrador Mercados. But by filing for Chapter 11, the group has essentially put a stop to all legal cases in Chile, he added.

Saieh will have difficulty returning the money as he would make a big effort to pay his debt out of his personal societies and businesses, Weissman added.

Corp Group's recent move to request permission to sell its rights in Itaú Corpbanca seems to reinforce this view.

The main incentive of Corp Group to reach an agreement is to maintain ownership of the shares in Itaú Corpbanca, Alvaro Moraga, a lawyer and professor at the Universidad Adolfo Ibañez, said. Since the bank is the sole revenue source of Corp Group, the company would be forced to dispose its shares to pay its creditors under less favorable conditions, he added.

Foreshadowing

Challenges of meeting obligations are not new for the Saieh group. In 2014, the group had to sell a stake in lender Corpbanca to Brazil-based Itaú Unibanco due to debt issues with its supermarket business, leading to the formation of Itaú Corpbanca.

As part of the merger six years ago, Itaú Unibanco granted a credit line worth $1.1 billion to Inversiones Corp Group Interhold Ltda., which is still being paid with the proceeds of the dividends from Itaú Corpbanca, according to S&P Global Ratings analyst Ivana Recalde. Chilean media reports said the group still owes Itaú Unibanco about $843 million.

"Corp Group Banking has many arms," Recalde said. "SMU SA, the retail arm, is doing much better than before. But that was the origin of the problem... when [Corpbanca] had related party transactions with these supermarkets."

S&P Global Ratings has held Corp Group's ratings in default after the conglomerate missed the second interest payment on its bond in 2020. A major driver of Corp Group's inability to meet its obligations has been its reliance on one entity, Itaú Corpbanca, as a dividend source. Faced with the pandemic's impact and lingering social and political unrest in the country, the bank did not pay dividends for the 2020 fiscal year.

The lender has also seen a significant fall in its share price, in part due to the undervaluation of Chile's stocks due to cyclical reasons, but also as a result of the bankruptcy proceedings.

Corp Group's overreliance on a single source of revenue and its highly leveraged position have complicated matters for all of the parties involved.

"Given this leverage, all the money that exceeds the payment of the coupons will go out from [Itaú Corpbanca] and will be upstreamed to the parent," Recalde noted. This will not make things any easier for other creditors, who could be left on the sidelines.

Meanwhile, Itaú could come in "to make the deal less bad," according to Weissman, as the Brazilian parent is both the majority holder of Itaú Corpbanca and the creditor of Corp Group.

A 'complex' history

For Mike Lubrano, a corporate governance analyst and senior adviser at U.K-based Nestor Advisors Ltd., the Saieh group's track record serves as an indicator to its current predicaments. Lubrano was co-founder and managing director of Cartica Management LLC during Itaú Corpbanca's merger, with the firm fighting a legal battle with the Saieh group over allegations that the latter was receiving favors from Itaú Unibanco to hasten the merger process and that the deal was done at the expense of the bank's minority shareholders.

Loans granted by Brazil's Itaú Unibanco to Interhold were priced at lower rates than they should have been given the credit risk of the Saieh conglomerate, according to Lubrano.

Little information has come out from ongoing negotiations between the parties following the bankruptcy filing. But for S&P Global Ratings' Recalde, Corp Group's low liquidity and its history handling previous obligations could be a bad combination for creditors waiting to collect. "Holding companies, not many have a cushion of liquidity. But this one, even less so, because they have to upstream to pay all the things that they have above," the analyst noted, pertaining to the Itaú debt.

However, Weissman said some of the creditors also made lapses along the way. Consorcio, known for being a savvy investor, bought a total of about 20% of the Corp Group bonds in the secondary market. "I mean, that's ridiculous, and the exposure! Especially given the wide knowledge of Saieh's track record," Weissman remarked.

Regulatory lessons

Lubrano said the Saieh group's continued debt problems offer "lessons" for both Chilean regulation and investment stewardship alike. With Saieh facing financial struggles in his supermarket business during the run-up to the Itaú Corpbanca merger, regulators had been "conflicted" in calling a decision on the matter, ultimately leading to an approval that was "at the cost....of minority shareholders," the analyst said.

"If you are a supervisor, you don't like to see weak controllers of a bank. You might have a bank failure, which is a terrible thing for a financial supervisor to put up with. And in a concentrated market like Chile, any bank is an important bank, and there might be some systemic risks," Lubrano noted.

In the U.S. courts' perspective, Corp Group's situation holds ground given its financial issues, as judges there tend to be more understanding on how it is to issue debt and bonds, Weissman said. They could be more flexible when a company has trouble paying its debts due to issues beyond their control unless there was some fraud or crime.

"Having said that, it does leave open the question that, as good as the Chilean regulatory system is and has been over the last 30 years, this is another example of some vulnerabilities or open space," given that the Saieh group has millions in debt spread throughout the Chilean system, Weissman said. This leaves Corp Group's Chilean debtors "little room to go and claim," the journalist added.

Corp Group has had a "a bumpy ride for many years," Lubrano said. "What is not good is that it reinforces the impression that there is a class of folks in Chile that gets special treatment. It is a country that is, by its own people recognized as oligarchic in nature, even if it is, by Latin American standards, a well-functioning democracy."

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