China-Brazil infrastructure cooperation mutually beneficial

Infrastructure cooperation between China and Brazil is mutually beneficial and should be further strengthened, experts say.Brazil hopes to attract Chinese investment in highways, railways, ports, airports and other infrastructure projects, while the Chinese government regards infrastructure building key to bilateral cooperation, they say.

“The Brazilian government can count on infrastructure investment as a way to overcome the current economic recession, and promote economic and social development,” Xie Wenze, a visiting scholar from the Chinese Academy of Social Sciences.

A 1-percent increase in infrastructure investment can raise Brazil’s GDP by about 0.6 percent, he said.

Currently, bilateral infrastructure cooperation is mainly centered on one-off projects. Equity mergers and acquisitions around these projects are expected to bring long-term benefits for both sides, according to Xie.

Bilateral energy cooperation has yielded great results in recent years. China’s State Grid Corp. has expanded its business in Brazil as a result.

“The experience of equity mergers and acquisitions on the part of China’s State Grid Corp. could be promoted to other … projects in railways, highways, ports and other areas,” said Ivanildo Marcos Beltrao, a Brazilian company official.

To support cooperation projects between China and regional countries, the China-Latin American Cooperation Fund was launched in early January with a startup capital of 10 billion U.S. dollars.

A similar 10-billion-dollar fund was set up in September, 2015 to support China’s investment in an array of medium- and long-term projects in Latin America.

Brazil’s Vale Will Draw $3 Billion From Credit Lines

Brazilian mining giant Vale SA on Tuesday said it would borrow $3 billion in emergency financing, a sign of distress from the world’s largest iron-ore producer.Vale said the revolving credit line would “increase liquidity and bridge potential cash flow needs.” It didn’t disclose the interest rate it received and said another $2 billion was available.

The miner, which needs capital to pay for expansion projects, is tapping the line of credit partly because it hasn’t been able to garner as much as expected through the sale of assets. Banks have gotten cold feet about financing commodities deals amid a deep rout in prices, throwing a wrench into the plans of mining companies to shore up their balance sheets as they struggle to pay for mine expansions undertaken during the boom.

Vale has been unable to obtain project financing to complete a 2014 deal to sell a stake in its Mozambique coal operations to Japan’s Mitsui & Co. That transaction, originally scheduled for completion in the second half of 2015, would have boosted Vale’s cash flows by $3 billion.

“It doesn’t bode well for [Vale] to be using this line,” said Klaus Spielkamp, a bond analyst in Miami at Latin America-focused brokerage Bulltick Capital Markets.

In addition, Vale faces the stigma of being Brazilian at a time when international capital markets have largely shunned the South American country’s companies amid a sweeping corruption scandal and economic crisis. A major accident on Nov. 5 at Samarco, Vale’s local joint venture with BHP Billiton Ltd., further rattled investors.

Brazil’s Inflation Unexpectedly Slows as Recession Bites

Brazilian inflation unexpectedly slowed last month, beating forecasts from all analysts surveyed by Bloomberg, as food prices rose less than in the previous month amid a deepening recession.The benchmark IPCA inflation index moderated to 0.96 percent in December from 1.01 percent in November, the national statistics agency said Friday. That compares to the median 1.05 percent estimate from economists surveyed by Bloomberg.

“It’s good news in the near-term, but not something that shows clearly that core prices will be trending down,” Carlos Kawall, chief economist at Banco Safra, said about slowing inflation. “The fact that it came mostly from food prices doesn’t show that we can celebrate this.”

Brazil missed its 2015 target as annual inflation accelerated to 10.67 percent, the fastest for a full year since 2002 and more than double the midpoint of the official target range of 2.5 percent to 6.5 percent. As a result, central bank President Alexandre Tombini had to publish an open letter to the government explaining why he fell short.

Inflation isn’t expected to fall within range this year either, even as the deepening recession and higher borrowing costs chip away at Brazilians’ purchasing power. Leading economists forecast policy makers will redouble efforts to contain consumer prices by embarking on a new round of monetary policy tightening as early as this month.

Traders agree, as swap rates on the contract due in April 2016 rose 2 basis points to 14.66 percent on Friday. The real strengthened 0.5 percent to 4.0248 per U.S. dollar amid improved appetite for emerging-market assets. It dropped 33 percent last year, the worst performer among all 31 major currencies tracked by Bloomberg after the Argentine peso.

The real’s depreciation fueled inflation last year, as did the rising price of government-regulated items, Tombini wrote in his open letter to Finance Minister Nelson Barbosa. He reiterated his commitment to reach the 4.5 percent target in 2017, while Barbosa said in a statement that the government would contribute with fiscal policy and measures designed to boost productivity.

“No matter what happens with other policies, the central bank will adopt the measures needed to meet the target,” Tombini wrote.

Banco Safra’s Kawall expects a 150 basis-point tightening cycle this year, starting in January. Higher interest rates would be a bitter medicine for an economy headed to a deep two-year recession, forecast to be the worst since at least 1901. Fearing more job losses, members of President Dilma Rousseff’s Workers’ Party have publicly opposed additional increases to borrowing costs. December data strengthens the case for holding off, according to Enestor dos Santos, principal economist at BBVA.

“We should be more patient and wait for more data, but in my view it takes some pressure off the central bank,” Dos Santos said. “Inflation peaked in December and it will start to decline from January. I think this would not be the best moment for the central bank to tighten monetary policy.”

Deeper Recession

The central bank has held the Selic rate at a nine-year high even as Brazil’s recession deepened. The slump contributed to slower price increases for food and beverages as well as housing. The biggest single contributor to inflation in the month was the price of airfare, a volatile component that rose 37.07 percent.

A rate increase at the January meeting of the monetary policy committee known as Copom isn’t a foregone conclusion, with banks including BBVA and Banco Fibra expecting no change. Higher borrowing costs would hurt investment more than contain inflation, and Brazil should instead consider raising its inflation target, Workers’ Party President Rui Falcao said in a Dec. 28 interview.

“Any dovish decisions in the next Copom meetings will spur market suspicion that the central bank is facing greater political interference, even if technical reasons for a more moderate approach exist,” Chris Garman, managing director at political consultancy Eurasia Group, wrote in a note before the release of the data.

BTG Pactual Sells Distressed Debt Unit to Itau Unibanco

Brazil’s largest private sector banking group said on Thursday that it had agreed to acquire the distressed debt unit of the troubled investment firm BTG Pactual for about 1.2 billion reais, or about $307 million.The banking group, Itau Unibanco, will acquire 82 percent of the distressed debt unit, Recovery do Brasil Consultoria, for 640 million reais and approximately 70 percent of the firm’s nonperforming loan portfolio for 570 million reais. The portfolios have a face value of 38 billion reais, the bank said in a filing. Both stakes correspond to BTG’s entire ownership of each.

The International Finance Corporation, the World Bank’s private investment arm, will retain its minority stakes in both the firm and the nonperforming loan portfolios.

The price was less than the 1.7 billion reais than BTG had sought, according to multiple people with knowledge of the negotiations. Some in the market thought BTG could have fetched the higher price if it had been more patient. That suggests that BTG continues to face pressure to demonstrate liquidity and good financial health after the arrest of its founder and former chief executive, André Esteves, on Nov. 25.

Mr. Esteves faces charges by Brazil’s attorney general of obstruction of justice and interfering with the broad investigation into corruption involving the state-owned oil giant Petrobras. Although he was released from jail on Dec. 17, he remains under 24-hour house arrest awaiting trial and cannot return to work at BTG. He has resigned as its chief executive and chairman of the board.

BTG’s stock fell by about half in the weeks after his arrest and was still trading near its low at around $15 a share on Thursday.

BTG continues to grapple with turning a corner. In a December research report, Goldman Sachs said that it expected the firm’s cumulative funding gap — as measured by assets versus liabilities — to reach 1.6 billion reais by the end of this year and widen to 11 billon reais by the end of next year.

In a respite, BTG obtained a line of credit of six billion reais this month from the private credit firm Fundo Garantidor de Créditos, which is funded by Brazilian banks.

Yet it continues to be on an aggressive campaign to sell assets, and Recovery was one of its most prized.

“They were putting a lot of pressure to get it done quickly,” one of the individuals with knowledge of the negotiations said of the speed of BTG’s sale of Recovery. That turned off some potential buyers, he said, as BTG “did not want folks to be able to check under the hood” before reaching an agreement.

If BTG had been more patient, that person said, BTG may have fetched as much as two billion reais for Recovery. “There was no reason to push for a close by the end of the year,” he said, other than demonstrating financial health in the calendar year.

Initially, Itau Unibanco was neither BTG’s preferred buyer nor the most likely candidate, according to several people who spoke on the condition of anonymity. BTG was close to reaching a deal this month with the American investment firm Lone Star Funds, according to two people.

Lone Star was widely seen to be the favorite as it had been talking to BTG well before the arrest of Mr. Esteves.

“Lone Star was the pretty obvious buyer from the beginning,” said one of the people, adding that, “I did not think anyone was ahead of them.”

Recovery was particularly attractive to foreign buyers because it allowed them a way to enter Brazil’s lucrative distressed debt market without having to build their own operation here.

Yet talks with Lone Star broke off last week for reasons BTG Pactual has yet to disclose. One individual said the two parties were apart on price by about approximately 300 million reais. Sam Loughlin, Lone Star Funds president of the Americas, did not respond to an email requesting comment.

Before these negotiations, more than 20 firms had expressed interest in Recovery. BTG gave a deadline of Dec. 16 for submitting nonbinding final offers.

Clint Kollar, a managing director with TPG Special Situations Partners, the dedicated credit platform of TPG Capital, met with BTG at its São Paulo headquarters this month, according to one person with knowledge of his plans.

The Fortress Investment Group showed interest until Dec. 16, but was told its bid would be too low, so it backed out. Although Fortress recently closed its macro funds, having faced huge losses in Brazil, according to an article in The Wall Street Journal in October, its credit business, which includes distressed and special situations, continues to have interest in Brazil.

Apollo Global Management had also taken interest in Recovery. Cerberus initially looked at it but balked at a price of more than one billion reais.

The terms of the deal with Itau are subject to regulatory approval.