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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: md1derful who wrote (15241)	5/12/1999 11:18:00 AM
From: wl9839	Read Replies (1) \| Respond to of 22640

Proposed Foreign Debt Swap Gets Mixed Reviews in Brazil By SIMON ROMERO (New York Times 5/12/99) SAO PAULO, Brazil -- Brazil is proceeding with a plan to swap debt issued abroad by dozens of the country's largest private companies for safer securities partly backed by the government, despite widespread criticism of the idea. The plan, engineered for the government by Goldman, Sachs, would allow holders of foreign-currency-denominated debt sold by 92 Brazilian companies to exchange these securities for billions of dollars in new bonds. These would be issued by an offshore company supported by Brazil's national development bank. The plan's proponents say it alleviates concern over the possibility of default by some companies that are short of cash, and in doing so, strengthens Brazil's credibility among foreign investors. "We're cleaning up imperfections in the market by providing more liquidity," said Jose Luiz Osorio, superintendent of investment banking at the Rio de Janeiro-based national development bank. Osorio said the plan should ease the re-entry of a wider range of Brazilian companies into global debt markets after a drought in financing for emerging markets the last two years. There has been only a trickle of recent Brazilian corporate bond issues sold abroad as the nation recovers from a financial crisis set in motion by currency devaluation in January and Russian default the summer before. If the swap succeeds, it could work as a model for other nations faced with a decrease in short-term financing after a crisis of confidence. South Korea, Mexico and Brazil have grappled with such a problem. By performing a "bail-in" of private business, fears of a cascade of defaults by borrowers would presumably be lessened. But opponents of the plan -- a widely varied group that includes powerful corporations and outspoken leftist politicians -- have emerged. They include the Globo media group, which runs Brazil's dominant television network; Votorantim, an industrial conglomerate, and Gerdau, a multinational steelmaker. These companies have shown reluctance to take part in the plan, saying their creditworthiness could be affected if investors perceive the chance of default. The currency devaluation has made it costlier for companies to service debt denominated in dollars. Political opponents of President Fernando Henrique Cardoso's government have questioned the transaction because in their view it uses a public institution to protect big private borrowers. "Private risk is being nationalized with the people footing the bill," said Guido Mantega, a top economist with the Workers Party. If the government is willing to shield dollar-indebted companies from default, then it should protect smaller ones that have not had access to foreign markets, Mantega said. According to the Small Business Union of So Paulo, an estimated 700,000 businesses carry $78 billion of domestic debt, a figure that has ballooned in recent years because of high interest rates. That compares with $19.6 billion in foreign bonds, issued by 92 companies, that are eligible for the swap under the Goldman, Sachs plan. Osorio of the national development bank said the debt swap should free his institution to lend to smaller companies if some of their larger counterparts are relieved of concerns about redeeming their debt with foreign creditors. "Fewer of the big, distressed companies will come knocking on our door," he said, adding, "Of course, we'd like to lend in the most democratic way, but our budget is limited." The development bank is already the largest source of financing to Brazilian companies. Brazil's improving economic outlook could determine whether the debt swap will succeed. Buoyed by optimism, some companies like Globo are already succeeding in renewing credit that just three months ago, with the country in economic panic, seemed impossible to obtain. If more companies are able to refinance their debts, it would be less likely that many investors would seek the protection provided by the swap. Interest in the new securities must be expressed by holders of at least $1 billion worth by May 24, the closing date of the deal, for the development bank to decide whether to continue.