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What a Sete Brasil bankruptcy could mean for Brazil's banks


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What a Sete Brasil bankruptcy could mean for Brazil's banks

Lessthan a year ago, Sete Brasil touteditself as being "sponsored by equity investments provided by the largest privateand government-owned financial institutions in Brazil."

Nowthe company has become a massive liability for those financial institutions.

Shareholdersof the oil rig producer, which was created in 2010 to assist state-runPetroleo BrasileiroSA in its offshore drilling operations, agreed earlier in April toa plan to file for bankruptcy, a move that could potentially knock several ofBrazil's major banks. According to OGlobo, the company intends to filea judicial recovery plan with a court in Rio de Janeiro on April 29.

Thecompany reportedly will look to extend its current debt for 15 years, whilealso seeking new investors to inject another 4 billion reais.According to Folha de S.Paulo, thecompany's debts total 19.3billion reais, most of which is owed to banks.

Thelikely bankruptcy presents a big risk for several of Brazil's state-run andprivate banks who are among Sete Brasil's major creditors. reportedly holdsabout 4 billion reais of Sete Brasil debt. Caixa Econômica Federal is owed roughly 1.7 billionreais, while a naval fund it operates holds another 4.5 billion reais, accordingto Bloomberg News.

Earlysigns in the first-quarter earnings season haven't been promising. on April 28posted lowerfirst-quarter net income as the company booked sharply higher provisions forloan losses. The bank noted that one particular client was responsible for 836million reais of its quarterly provisioning; and while the company didn't namethe client, Bloomberg, citing "a person familiar with the matter," reportedthat it was Sete Brasil.

, whichis scheduled to report its quarterly results on May 3, and are alsoamong the oil rig producer's creditors.

Anumber of banks are also among the company's shareholders. BTG Pactual,Santander and Bradesco were listed among a group that reportedly invested some8.25 billion reais in the company, according to presentationmaterials from August 2015, and who subsequently have had to invest evenmore after Petrobras slashed the number of oil rigs it would lease from SeteBrasil. Fohla puts theshareholders' investment to-date at 8.6 billion reais.

InOctober 2015, the banks that lent the company $3.6 billion — includingCaixa, Banco do Brasil, Santander Brasil, Itaú and Bradesco — extendedtheir repaymentdeadline into 2016. But that extension expiresin May, according to Bloomberg.

Thepossible losses come as banks are already reeling from rising delinquenciesamid Brazil's ever-deepening recession. All told, Bradesco booked 5.45 billionreais in loan-loss provisions during the first quarter, up from 3.58 billionreais a year earlier. In addition to the 836 million reais impact from itscorporate client, the bank also pointed to a broader increase in delinquenciesdue to Brazil's economic slowdown.

Andloan losses are expected to continue to rise through 2016 amid the country'srecession, accordingto an April 27 Moody's report.

"Asthe ongoing recession leads to rising unemployment, Moody's expects paymentdelays and defaults on mortgage debt to increase in coming years," therating agency said.

As of April 28, US$1 wasequivalent to 3.48 Brazilian reais.