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Bank financing deal of the quarter century: Banco do Brasil

Sep 1, 2013

$1bn perpetual hybrid tier one, 2012

Overhauling capital and liquidity standards for lenders in the wake of large-scale bank failures in European and the US has been a complex process. By January 2012, new rules from the global standard-setter, the Basel Committee on Banking Supervision, were mostly clear on hybrid capital – securities that are given equity-like treatment for regulatory capital purposes, but carry the tax advantages of debt. But the Brazilian regulator, the Banco Central do Brasil had not yet ruled over its local application.

However, keen to press ahead, Banco do Brasil impressed bank capital structurers globally when it sold a $1 billion hybrid tier one with a unique structure: the instrument granted scope to amend the terms once the final Basel rules were in place to make it qualify as a tier one instrument. Tthe fact that the bank worked around regulatory uncertainty with a globally unprecedented structure, the extent of the changes it allowed to the instrument, and the overwhelming investor interest earns Banco do Brasil LatinFinance’s bank financing deal of a quarter century.

Most daringly, it allowed for a clause to be introduced – if final rules required it – that would write the bond off altogether if the bank needed the capital. Despite the risks, investors placed $6 billion of orders for the deal, which lead managers Banco do Brasil, BNP Paribas, Citigroup, HSBC and Standard Chartered priced to yield 9.25%. "We perceived some commitment that implementation in Brazil would be similar to the Basel guidelines," says Daniel Maria, executive manager at the bank. "We took the guidelines and gave comfort to investors saying the amendments would be to adapt it to Basel III, and would be capped by some parameters."

Now Brazil’s rules have been finalized, the bank is working to incorporate, among others, a clause for the security to be completely written off if Banco do Brasil’s common equity capital slips below 5.125% of its risk weighted assets. It hopes to have that in place by October 1, 2013, when Brazil’s Basel rules come into force, allowing it to be treated as tier one capital. LF

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