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SAO PAULO, Nov 27 (Reuters) - The reliance of Brazil's Grupo BTG Pactual SA on market funding may pose an immediate challenge for new boss Persio Arida, who sought to calm clients on Friday after its shares fell for a third straight day.
The São Paulo-based investment bank tapped Arida, a former president of Brazil's central bank, as acting chief executive officer following the arrest of founder and controlling shareholder André Esteves in a sweeping corruption probe earlier this week.
Shares and bonds in Latin America's largest independent investment bank have slumped and some clients have pulled money from the bank's asset management unit since Esteves' detention.
Against that hostile market backdrop, BTG Pactual has to refinance 15.3 billion reais ($4 billion), or about 55 percent of its banking arm's funding, within 90 days. With long-term borrowing and equity covering only 23 percent of BTG Pactual's funding needs, Arida must convince investors to park their money in the bank for a longer period, even if that means paying more for it.
As a bank that makes most of its revenues from trading, including investments using the banks' own funds, solid funding is crucial for BTG Pactual to reassure trading partners and investors that it can thrive despite Esteves' arrest. Brazil's most savvy dealmaker, Esteves wanted to build BTG Pactual into the largest independent investment bank in emerging markets.
"The ability of BTG Pactual to fund operations, and at what cost, is among the most important things to monitor in the coming days and weeks," said Saúl Martínez, an analyst at JPMorgan Securities.
According to a source with direct knowledge of the bank's strategy, a conservative use of cash and a balance sheet with about 25 billion reais in highly liquid securities provide a buffer against short-term funding needs.
The source added that new loan origination has been halted to protect cash. External funding so far remains available and stable, said the source, who requested anonymity to discuss the issue freely.
The bank is not considering cutting sales of daily liquidity products that are chiefly financed with short-term borrowings, the source added. Some clients are redeeming those products, because they are more liquid.
"Their funding structure is closely linked to their liquidity management," said Eduardo Ribas, an analyst at Fitch Ratings.
BTG Pactual declined to comment.
Units, a blend of common and preferred shares in BTG Pactual's investment banking and private equity units, fell for a third day on Friday, shedding 4 percent. They are down about 23 percent this week.
Arida, 63, built his reputation on dealing with crises.
A former professor of economics, he is credited for helping devise a strategy that broke hyperinflation in Brazil and implemented a new currency in 1994. He helped found BBA Creditanstalt, which he sold to BTG Pactual rival Itaú Unibanco Holding SA in 2002 amid a plunge in confidence about Brazil.
In a letter sent on Friday, Arida, who chairs BTG Pactual's asset management arm, sought to calm clients and shareholders about the impact of Esteves' arrest.
In the letter, which was seen by Reuters, Arida said BTG Pactual was not the target of any investigation or accusation and pledged to cooperate with authorities.
"We continue running BTG Pactual and its businesses as we have always done," Arida said.
Esteves was arrested as part of "Operation Car Wash," a probe into links between ruling coalition politicians and company executives who traded contracts at state firms for bribes and campaign donations.
He was arrested on suspicion of obstructing a bribery investigation centered on Brazil's state-controlled oil and gas company Petrobras, an allegation his lawyer, Antonio Carlos de Almeida Castro, has denied.
Ratings agencies Fitch Ratings and Moody's Investors Service have put BTG Pactual's investment grade ratings on review for a downgrade after his arrest.
In the first two days after the police detained Esteves, clients pulled about 3.5 percent of the 230 billion reais that BTG Pactual oversees in third-party money, an amount smaller than initially feared, the source said.
Local pension funds and rival asset managers who have invested in BTG Pactual-backed, longer-termed securities, known in Brazil as "letras financieras" are sitting tight. They would incur significant losses should they seek early repayment or try to sell them.
"We are comfortable maintaining investments there," said Guilherme Benchimol, CEO of XP Investimentos SA, Brazil's No. 1 independent brokerage. BTG Pactual staff has reached out to clients to explain the segregation of assets between the bank's money management and credit divisions, he said.
$1 = 3.8135 Brazilian reais Additional reporting by Paula Arend Laier and Aluísio Alves in São Paulo; Editing by Tom Brown