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. Berry, a banking analyst in New York with Keefe, Bruyette & Woods Inc.
Analyst present widely varying estimates of how much individual banks will gain from a deal with Brazil.
First Boston estimated that Chase Manhattan will gain $1.13 a share in annual earnings from lower provisions and after-tax interest income, J.P. Morgan 84 cents, Chemical 58 cents, BankAmerica 26 cents, and Citicorp 31 cents.
Help for the Bottom Line
In a separate analysis, Mr. Berry said that Chase, Chemical, and Citicorp stand to gain as much as 40 to 50 cents a share in annual earnings, and BankAmerica about 15 cents, excluding potential future gains to earnings from reserve reallocations.
Brazil halted interest payments to about 600 foreign banks on its medium- and long-term borrowing in July 1989.
The country has since paid back $2 billion in cash on its arrears and is current on about 30% of the interest due on its sovereign debts. It is in the final stage of negotiations for the medium- and long-term debt that totals $41 billion.
Banks hope to announce an agreement as early as today, said William Rhodes, vice chairman at Citicorp and head of the Brazil bank advisory committee.
Banks are expected to offer Brazil several options for reducing its debt, including exchanging the loans for bonds at a 65% discount on principal or at par for bonds with a below-market interest rate.