One of Brazil's biggest private creditors is jeopardizing a debt-for-bond swap the government there is arranging with foreign banks and other holders of Brazilian debt.

The Dart family, owners of Dart Container Corp. and one of Brazil's biggest private creditors, said the government had rejected the family's offer to swap the debt it holds for so called C bonds, or uncollateralized Brazilian government bonds. The swap would save Brazil some $200 million of collateral.

Dart's insistence on C bonds may scuttle the swap, to which foreign banks have already agreed. The Dart family did not disclose the size of its holdings but claimed it is now the government's fourth-largest private creditor.

Banking sources in New York and Sao Paolo estimated that the Dart family has purchased bank loans to Brazil worth between $1.3 billion and $1.5 billion, amounting to some 4% of the debt eligible for exchange under an agreement with banks.

The family is said to have purchased the debt at discounts of 66% to 68% from face value on the secondary trading market as an investment. For the debt-for-bond swap to go through, Brazil needs to obtain the approval from creditors holding 95% of some $34 billion in debt.

|Game of Chicken'

Should any other creditor refuse the options being offered by Brazil, the deal may not work.

Brazilian officials and representatives of the family were unavailable for comment on the stalemate. However, banking sources said the family's unwillingness to accept other types of bonds in a swap for the debt posed a stumbling block.

"It's getting to be the world's biggest game of chicken," remarked one banker.

"In simple terms, you've got a big creditor who wants a better deal than has been accepted by other creditors and is threatening to participate."

Brazil is one of the last big developing countries to swap its bank borrowings for bonds under a program launched three years ago by Nicholas F. Brady, then U.S. Treasury secretary.

Although banks continue to lead the negotiations with Brazil. they have for years been steadily selling off their loans to developing countries.

In a statement released Oct. 11, Frederick Abendroth, investment manager for the Dart family. criticized the banks' arrangements with Brazil and claimed equal rights to set the terms of any agreement.

Left Out of Negotiations

"Dart was never consulted during the negotiations that resulted in the Brazil Financing Plan or Brazil's reallocation request." Mr. Abendroth stated.

"In a number of countries undergoing debt restructuring, commercial banks as a group no longer hold a majority of the country's indebtedness," the statement added. "The negotiations, however, are still conducted exclusively by the banks in the absence of any meaningful consultation with the real owners of the debt."

Brazil reached an agreement with banks earlier this year to exchange some $34 billion in debt for government bonds at a discount on earlier principal or interest.

Investors have calculated that bonds issued at par value to bank loans but carrying a reduced interest rate offer more attractive long-term yields. Most investors, therefore, have opted to exchange the loans they hold for such bonds.

However, this has posed a problem for Brazil. Brazil would have to spend more money to collateralize such bonds than if the bonds swapped at a 35% discount on principal.

Creditors Asked to Reconsider

To overcome this problem, Brazil recently asked creditors to reconsider their choice of options and swap a greater portion of the loans for bonds issued at a discount on principal.

The Dart family, however, refused to go along, emphasizing in its statement that the deal could proceed at no loss to Brazil because Dart would accept uncollateralized bonds.

However, banking sources said Brazil is as much interested in reducing its outstanding debt as in saving on money it will have to put up as collateral.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.