Magazine article American Banker

Brazil Pact Promises Windfall for Big Banks

Magazine article American Banker

Brazil Pact Promises Windfall for Big Banks

Article excerpt

Several U.S. banks stand to post substantial gains from the debt-restructuring agreement with Brazil now nearing completion.

Brazil's medium- and long-term debt to U.S. banks, totalling some $7.6 billion, has been in arrears for three years. Under the current debt accord, U.S. banks could get bonds worth 65% of that amount. That's good news for many U.S. banks that had already taken writedowns of 50% or more on Brazilian loans.

Among the beneficiaries of the new debt agreement are J.P. Morgan & Co., Citicorp, Chemical Banking Corp., Chase Manhattan Corp., and BankAmerica Corp. These banks could reap not only one-time paper gains if they take the new Brazilian bonds, but also hundreds of millions of dollars annually from interest on those bonds.

Brazil is now paying only 30% of the interest it owes banks on sovereign borrowings.

According to estimates by First Boston analyst Thomas Hanley, major money-center banks will gain at least $3.7 billion in additional earning assets and $238 million in annual pretax interest income.

They also stand to recover hundreds of millions of dollars in excess reserves allocated against possible losses on those loans.

These reserves can be reallocated to general reserves against domestic or other loan losses, helping banks to avoid digging into future earnings to cover problem loans.

"This means that banks may not have to take as big a provision [against new problem loans] later and that Brazil will be paying substantially more interest than it is currently paying on its sovereign debt," said David S. …

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