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By Guillermo Parra-Bernal
SAO PAULO, July 7 (Reuters) - Goldman Sachs Group Inc and JPMorgan Chase & Co are among the global banks looking to invest in Brazilian distressed loans, an area some are calling the flavor of the month in Latin America’s largest economy.
With unemployment spiking and inflation eroding disposable income, households are defaulting on their loans at the fastest pace in six years. Toxic debt is also increasing for companies, which are succumbing to flagging sales and rising borrowing costs.
Some funds acquire a large portfolio of credit from a bank at a steep discount and then rework each loan individually, profiting after repackaging them into securities, taking over the collateral or restructuring the debt. For banks, bad-loan sales help them clean up their balance sheets in times of economic hardship.
Industry players estimate sales of toxic loans will exceed 23 billion reais ($7.3 billion) this year, up 35 percent from 2014. State-controlled lender Caixa Econômica Federal, which only entered this market last year, targets the sale of 9 billion reais in bad loans this year alone.
Taking advantage of that trend, Goldman, Credit Suisse Group AG and Cerberus Capital Management LP are picking up soured consumer and corporate loans, joining local companies to pay record amounts for distressed assets.
Credit Suisse Hedging-Griffo, the Swiss bank’s private-banking unit in Brazil, and São Paulo-based Jive Investments Holding Ltd are raising money for a bad-credit fund from up to 50 investors, two sources with knowledge of the plan said. Goldman is also teaming up with Jive to invest as much as $200 million in the area, another two sources said.
In May, JPMorgan-controlled Gávea Investimentos paid 100 million reais for 46 percent of debt collector Paschoalotto Serviços Financeiros Ltda to gain expertise in credit recovery.
A public relations executive working for RK Partners said the São Paulo-based restructuring adviser would help Cerberus find distressed assets in Brazil.
Goldman, Credit Suisse, Jive and JPMorgan declined to comment.
Goldman and Credit Suisse’s bet on Brazilian soured credit should deliver hefty profits for both them and their clients.
Returns on such assets are about 8 percentage points above Brazil’s benchmark interbank CDI rate, currently at 13.6 percent. That is about twice the spread of junk-rated local notes.
“We view distressed credit as less of a bargain opportunity lasting a couple of years, and more like a structural play,” said Alexandre Nobre, founding partner of São Paulo-based distressed loans firm RCB Investimentos. “The ongoing downturn only accelerates the process and validates a long-term bet on the sector.”
While the rise in non-performing loans poses no systemic risk to Brazil’s top banks, market woes for lenders look rougher and may last longer than in previous cycles, Moody’s Investors Service said in a report last week.
Loans in arrears at Brazilian banks are now at the highest level in two years, while household debt now equals 44 percent of income, a decade high, central bank data showed. The approximately 74 billion reais in defaulted debt accounted for 4.7 percent of outstanding loans in Brazil’s banking system, central bank data showed last month.
“Our segment will keep growing, only that we are bracing for a rather tough debt-collection cycle out ahead,” Paschoalotto Chief Financial Officer Bruno Villela said in an interview.
Brazil’s downturn has especially hit the quality of credit card, auto and low-ticket working capital loans. Collateralized loans such as payroll or mortgage credit have performed relatively well, although signs of deterioration are showing.
According to RCB’s Nobre, banks at some point will be pressed to sell pulverized mortgage loans as builders grapple with a cash squeeze, declining property prices and flagging demand for new homes.
Caixa, Brazil’s largest mortgage lender, is in the final stages of selling two pools of distressed consumer and mid-sized corporate loans to investors. The bank sounded out specialized investors for the deal, including Grupo Recovery do Brasil SA, Graça Participações and RCB, sources told Reuters last week.
Caixa confirmed the plans.
$1 = 3.1674 Brazilian reais Editing by Lisa Von Ahn