Pinheiro Neto Advogados, Levy & Salomão Advogados and Felsberg, Pedretti e Mannrich Advogados have confirmed they are advising a number of creditors in the liquidation of Banco Cruzeiro do Sul, which has caused the Brazilian Central Bank to change the rules for sales of loan portfolios in a bid to boost funding for small and mid-sized lenders following a squeeze on credit caused by bank bailouts.
The liquidation was announced on 19 October after attempts to find a buyer for Cruzeiro do Sul failed, sparking what was described as Latin America’s largest corporate bond default in 10 years. The Central Bank had taken over the bank four months earlier as the result of an investigation that had found evidence that Cruzeiro do Sul had violated a number of banking rules. "There were certain irregularities committed by the administration, and certain banking rules and regulations were not applied correctly," explains Felsberg Pedretti partner Tomas Felsberg.
The liquidation has provoked widespread speculation that investor confidence in Brazil’s mid-sized lenders, and the ability of the Central Bank to supervise them, will be weakened. Pinheiro Neto partner Luiz Fernando Valente de Paiva, whose clients in the case include the Bank of New York Mellon and Comexbank, agrees, saying that the recent spate of bank bailouts in Brazil – six since 2010 – shows that there needs to be "stronger supervision of certain activities undertaken by banks", particularly in relation to funding.
These thoughts are echoed by Levy & Salomão partner Jorge Levy, who says that he believes Banco Cruzeiro do Sul's troubles began "with a gradual squeeze of its funding" following the other bank bailouts. He adds: "It should have been evident to management and other insiders that the bank was not viable at least one year before the liquidation decree."
The bank is handling legal matters internally, while the creditors have appointed a diverse number of firms: Pinheiro Neto, Levy & Salomão and Felsberg Pedretti have all confirmed involvement, while Souza Cescon, Barrieu e Flesch - Advogados is also thought to be working on the case.
The Central Bank-appointed liquidator, Sérgio Prates, is currently compiling a definitive list of creditors, during which period creditors are able to present their claim in order to be considered. The publication of the final list is scheduled for January, which will form the basis for the next step in the liquidation proceedings. "At the moment, the liquidator has the list of creditors in one hand, and in the other it’s evaluating the assets of the bank," says de Paiva.
Cruzeiro do Sul is still in the liquidation process, but if certain conditions aren’t found to have been met by the liquidator, then the case could turn into a bankruptcy. De Paiva explains that in Brazil the main difference between liquidation and bankruptcy is that one is an administrative procedure monitored by the Central Bank rather than a judicial procedure in which a judge takes charge of the case. The liquidation is conditional on a requirement that Cruzeiro do Sul has the assets to pay for at least 50 per cent of its unsecured debts – if it does not, the case will be brought to the courts for bankruptcy proceedings.
Felsberg says that the reason for enacting an extrajudicial liquidation rather than full-on bankruptcy boils down to time. "There was a hope they could be more efficient than a court liquidation," he says, while conceding that "it turns out that both proceedings take a long time."
Madrona Hong Mazzuco Brandão - Sociedade de Advogados partner Antonio Mazzuco, who is not involved in the case although has been consulted by a number of creditors, says that for the creditors, timing is their principal concern. "I think the expectation and the hope of all the creditors is to find a quick solution where they can get whatever credits are available, so I think from a market perspective what they’re looking for is efficiency in the liquidation. I don’t think they care one way or the other whether it’s before the courts or the Central Bank," he says.
However, he suggests that the current market expectation is that Cruzeiro do Sul will be forced to file for bankruptcy. The FGC, Brazil’s privately-owned deposit insurance fund which has been running the bank since the Central Bank seizure, has already said that the assets of the bank "are not sufficient", according to Mazzuco, who adds that "there is strong evidence of fraud".
There is even expectation that the case could go so far as to cause major upheaval in Brazil’s banking sector. "This is going to trigger a whole review of the regulations; in fact there is already a proposal before the CVM [Brazil’s securities regulator] to review regulations on new investments. [Cruzeiro do Sul] had been able to control the whole process of issuing and transferring credit, there were no checks and balances," Mazzuco says.
Levy counters that the Brazilian banking sector should be able to withstand Banco Cruzeiro do Sul’s liquidation. "Given its size, the bank was not systemically relevant," he says. Nevertheless, he adds that "it is expected that the market protection mechanisms will get more sophisticated, as every bank failure is different and provides new lessons."
Counsel to Cruzeiro do Sul
In-house counsel
Counsel to the creditors
Pinheiro Neto Advogados
Partners Luiz Fernando Valente de Paiva and Giuliano Colombo
Levy & Salomão Advogados
Partners Eduardo Salomão, Jorge Eduardo Prada Levy and Luiz Roberto de Assis
Felsberg, Pedretti e Mannrich Advogados
Partner Thomas Felsberg
