Bankers have privately disclosed that Brazil will give its U.S. lenders bonds worth about $1.2 billion to settle overdue interest bills.
The size of the payout, which gained final approval from Brazil's Senate last week, is roughly in line with expectations.
But the disclosure could spur analysts to raise their earnings estimates for some giant U.S. banks because actual figures for individual institutions have now come to light.
The U.S. banks will get Brazilian bonds with a face value of more than $2 billion next month, senior bankers said. That's equal to the amount of unpaid interest that accumulated on Brazilian loans in 1989 and 1990.
However, the bonds' present market value is estimated at about 60 cents on the dollar - meaning they are currently worth some $1.2 billion.
In addition, Brazil has agreed to pay in cash the full $250 million to $300 million in back interest that has accrued since early 1991. when the country reached a preliminary agreement with its lenders over back interest.
Who Will Profit Most
Citicorp will receive $48 million of that total, according to one banker. Figures for other banks could not be learned.
The U.S. banks expected to profit most from the bond payments include Citicorp, Chemical Banking Corp., Chase Manhattan Corp., and BankAmerica Corp.
Aside from the positive impact on earnings, the impending payments are good news for banks because they could pave the way for completion of the restructuring, agreed to earlier this year, of $44 billion in Brazilian debt.
Profits Booked After Sale
Since the bonds will be booked as assets with zero value, bankers said they would be taken into income as nonrecurring profits only when they are sold.
Bankers said sales of the securities would represent pure profit, since they represent unaccrued interest and do not have any liability to offset their value.
"It's a bit of a pot of gold," said one banker.
It will be to each bank to decide when and how much they wish to sell or whether they prefer to retain the bonds and simply collect interest.
"They will have a large impact on income statements as they are disposed of," said one senior banker.
He and others added that most banks would likely spread out the sales over time to avoid depressing market prices.
Analysts have either not included the expected earnings from sales of the securities into their forecasts or have included only a portion of them for some banks and left them out for others.
David Berry, a banking analyst with Keefe, Bruyette & Woods Inc., said he has figured proceeds from the sale of securities into earnings for Chemical and into retained earnings for Citicorp.
But he added that he remains undecided on how to treat them for Chase, Morgan, and Bankers Trust Corp. because those banks have declined to disclose the amount of securities they will receive or to say what they plan to do with them.
In Chase's case, it also remains unclear whether earnings from sales of the securities will be used to increase dividends or to bolster reserves instead, he added.
"It's obviously good news and it will find its way into income statements some way," Mr. Berry said.
A Different Strategy
"But banks could sell and book it all at once, or hold them until they mature and collect a good operating earnings stream for next 10 years."
Raphael Soifer, a banking analyst with Brown Brothers Harriman & Co., said he has not included any potential earnings into his forecast because it remains to be seen when banks sell the securities, how much they earn on them, and whether or not they will be retained to improve capital.
Citicorp is expected to collect about $400 million in Brazilian bonds with a market value of about $240 million.
The bank recently told analysts it plans to sell the bonds as soon as possible as part of a plan to dispose of some $800 billion in assets in order to bolster capital.
Chemical, which is more strongly capitalized, will receive about $260 million in bonds.
Sources said the bank would likely sell off at least a portion of the securities and take them into earnings gradually.
Mr. Berry estimated Chemical could raise its dividend by as much as 40 cents if it sells the securities for at least $100 million.
But he cautioned that the bank may well stretch sales out to improve profits and could also retain a portion of the securities, collecting interest instead.
Payment for interest arrears is part of a broader debt reduction deal now awaiting approval from the Brazilian senate that covers some $44 billion in foreign bank' medium-term and long-term loans to Brazil.
Brazil owes U.S. banks about $15 billion before writedowns mandated by U.S. regulators.
The country agreed last year to pay U.S. and other foreign banks more than $7 billion in interest due for 1989 and 1990 with 10-year dollar-denominated bearer bonds in order to clear the way for negotiations on an overall debt-reduction package.