Fundo de Investimento em Direitos Creditórios BGNPREMIUM I - Crédito Consignado - Série - PDF

STRUCTURED FINANCE New Issue Report Fundo de Investimento em Direitos Creditórios BGNPREMIUM I - Crédito Consignado - Série CLOSING DATE: August 24, 2004 AUTHORS: Brigitte Posch Vice President Senior

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STRUCTURED FINANCE New Issue Report Fundo de Investimento em Direitos Creditórios BGNPREMIUM I - Crédito Consignado - Série CLOSING DATE: August 24, 2004 AUTHORS: Brigitte Posch Vice President Senior Credit Officer Structured Finance Group Latin America (212) Roberto Watanabe Analyst Structured Finance Group Latin America (011 55) CONTACTS: Susan Knapp Managing Director Structured Finance Group (212) INVESTOR LIASON: Brett Hemmerling Investor Liaison (212) WEBSITE: Description Amount (R$) % Original Amount Coupon Tenor (months) Global Local Currency Rating National Scale Rating 36 Ba2 Series ,000,000 85% 106% of Senior Shares CDI 1 Series Subordinated Shares 8,823,529 15% N.A. 36 Not Rated Not Rated Master Program(*) 200,000,000 Aug (*) Represents the maximum amount to be issued under the Master Program during the life of the Fund. OPINION 1 Moody's América Latina has assigned ratings of on its Brazilian National 2 Scale and of Ba2 on its Global Local Currency Scale to the senior shares issued by BGNPremium Series (the Fund or the Issuer ). The ratings indicate that the Series senior shares have a low credit risk compared to other local issuances in Brazil. The Issuer is a receivables' investment fund with the sole purpose of purchasing personal loans from the originator, and issuing of one or more Series of senior shares under the Master Program, with a maximum amount of R$200,000,000. The Fund's Series is the first series to be issued from the Master Program; it has a 36-month tenor, with redemptions occurring on 30 monthly installments following a 6-month grace period. The senior shares are backed by the cash flows arising from repayment of those personal loans, which in turn are deducted directly from the obligor's paycheck, also called the consignment of payroll deductions 3. The rating is based on the following factors: 1 The Brazilian Interbank Rate. 2 The National Scale rating is used within countries for issues that are strictly for the domestic capital markets and are denominated in local currency. While national ratings use Moody's familiar ratings also have a country modifier attached; in this case .br means the credit rating is a national rating for a Brazilian entity. 3 The consignment of payroll-deductions in Brazil is regulated, for federal government employees, by federal law (Law 8112 dated December 11, 1990, and Decree 4961 dated January 20, 2004), and for state & municipal government employees by their respective local jurisdictions. Under such provisions, the obligor irrevocably assigns a part of his/her salary to satisfy loan installments. Such installments are then withheld from the obligor s monthly paycheck. Hence, personal loans with the consignment of payroll deductions enjoy a first priority over any other debt that the obligor may have, as a portion of the obligor s available income is legally withheld by the employer. August 26, 2004 A minimum of 15% credit enhancement provided through subordination; A minimum of 22% excess spread (defined as the difference between the weighted-average coupon on the purchased loans and the coupon on the senior shares); Cash reserve of 1x monthly cash flows 4 to avoid commingling risks, in an event of bankruptcy of BGN as originator and primary servicer; Strict eligibility criteria for purchase of assets, which includes observance of concentration and delinquency levels measured at the jurisdiction 5 level, origination criteria, and maximum tenor of personal loans; The credit quality of the assets supporting the senior shares, which is 100% composed by personal loans to government employees that enjoy job stability mandated by law (cannot be fired unless for cause); The ability of Banco Itaú S.A (bank deposit ratings of on the National Scale; no servicer quality ratings assigned by Moody's) to act as master and back-up servicer; and The strong legal structure of the transaction, including the bankruptcy remoteness of the issuer. BACKGROUND Banco BGN S.A. Banco BGN S.A. (the bank or the originator) is a small-sized, niche regional financial institution specialized in providing personal loans to government employees at the federal, state, and municipal levels, primarily through the consignment of payroll-deductions. The bank is headquartered in Recife in the state of Pernambuco. Founded in 1994, the BGN was initially designed to operate as the financing arm of the Queiroz Galvão Group, which controls 99.85% of the bank's common shares. The bank redirected its focus to the personal-loan product following the financial turmoil observed in Latin America in the period of 1998/1999. The Queiroz Galvão Group (the Group) is a closely-held, diversified conglomerate with a strong presence in the main areas of Brazil. Founded in 1953 as a family business involved in real estate construction, the Group has grown to include a wide range of activities, including oil and gas exploration, steel manufacturing, engineering services, agriculture, financial services, and concessionaire of public services including water and wastewater treatment, electricity, and transportation. As of 2002, the Group's consolidated annual gross revenues were R$1.9 billion (US$633 million), and it ranked as the 101 st largest economic group in Brazil. It is the Group's policy to conduct, whenever possible, most of its treasury and depositing activities through BGN, although the Group is prevented from arms-length borrowing activities with BGN according to the Central Bank of Brazil. The bank as of June 30, 2003 had an asset size of R$192 million (equivalent to US$ 64 million), ranking it among the 130 th largest financial institutions in Brazil. The bank's loan portfolio is 74% composed of personal loans to government employees. The remaining loan balance consists of working capital lending primarily to middle-sized corporations located in the Northeast of Brazil (see Figure 1 for more detail). BGN's funding comes primarily from deposits and from the local development agencies, such as the BNDES, and loan programs such as FINAME 6. The bank currently has a solid franchise in the Northeast, Mid West, and Southeast regions of Brazil, which are responsible for respectively 28%, 32%, and 40% of the bank's personal loan portfolio. BGN currently operates thirteen branches in these regions. As of June 30, 2003, the bank had 220 employees, divided between Banco BGN (40 employees) and BGN Mercantil (the personal loan origination division, with 180 employees). BGN's direct competitors in its franchise area are currently limited to Banco BMG, Banco Cruzeiro do Sul, Paraná Banco, Banco Bonsucesso, Banco Pine, and Banco BMC. BGN has also benefited from the recent, fast-paced privatizations of state-owned banks in its franchise area, as the consignation of payroll-deductions to state employees prior to the privatization was only allowed to the respective state-owned bank 7. 4 Defined as the ratio of the total outstanding portfolio of receivables, divided by the average tenor of the senior shares outstanding (in months), times one month. 5 Jurisdiction is defined throughout this report as the Federal, State, or Municipal Government entity ultimately responsible for paying the salaries of public service employees. 6 FINAME is a local agency dedicated to providing equipment and machinery financing for middle-sized corporations. 7 Following the privatization of a state-owned bank, state governments are mandated to release to other competing banks the license to provide to government employees the personal loan product backed by the consignment of payroll deductions. Currently, the only state bank that has yet to be privatized in BGN's franchise is Banco do Ceará, in the Ceará state, although BGN already offers the product to municipal employees of the City of Fortaleza, which is the capital of the Ceará state. 2 Moody s Investors Service Fundo de Investimento em Direitos Creditórios BGNPREMIUM I Other private banks that offer the personal-loan product (among other products) are Banco Rural, Banco Schahin, Banco Cacique, BicBanco, and ABNAmro. Large Brazilian private banks such as Bradesco, Itaú, Unibanco and Santander have traditionally focused on the private-sector. Large government-owned banks such as Banco do Brasil and Caixa Economica Federal have historically targeted primarily federal government employees because of payroll volumes (as the average salary for federal workers is significantly higher than that of state and municipal workers). Figure 1 Loan Portfolio Composition (6/30/03) Total balance R$114.8MM Figure 2 Credit Quality - Personal Loans 26% 2.9% 3.8% 74% A and AA Personal Loans Corporate 93.3% B and C D Source: BGN Provisioning levels are defined by the Central Bank of Brazil, and are as follows: AA (0%), A (0.5%), B (1%), C (3%), and D ( 10%) Moody's believes that BGN has a conservative approach to credit and market risks, exemplified by the relative historically low levels of delinquency, as amortizations are payroll-deducted and expected to be remitted directly from the employer to BGN (See Figure 2 for an overview of the credit quality of the bank's personal loan portfolio). In addition, the bank operates with low leverage (14.4% Tier-One capital ratio 8, increased from 13.8% as of 12/ 31/02), high levels of liquid assets (37%), and is currently in the process of diversifying its deposit base away from affiliates of its parent holding group (having reduced it from 90% in 12/31/01 to 51% in 12/31/03). However, asset quality has recently suffered from increases in delinquent loans 9 (see more detail under Pool Characteristics and Performance). BGN has already experience in securitizing personal loans from its portfolio, having launched in December 2003 BGNMax, an R$35 million receivables investment fund. BGN's senior management is composed of the chairman (who is a member of the family that controls BGN), by the CEO, and by the senior treasury officer; the CEO and the senior treasury officer have, altogether, over 50 years' experience in banking services. BGN's senior management decisions are ratified by BGN's Board of Directors. 8 Defined by the Basle Capital Accord dated 1992, which stipulates a common risk-weighted, minimum capital of 8% for banks to address credit risk, which is the main risk incurred by banks. 9 According to the rules of Central Bank of Brazil, delinquent loans are defined as those loans one day or more past due. Fundo de Investimento em Direitos Creditórios BGNPREMIUM I Moody s Investors Service 3 Figure 3 Selected Financial Information - Banco BGN (R$'000) 06/30/03 (6 mos.) 12/31/02 06/30/02 (6 mos.) 12/31/01 Interbank Investments 13,178 15,779 15,321 19,663 Securities (ST + LT) 58,457 42,362 6,943 6,945 Gross Loans (ST + LT) 114, , ,833 65,377 Reserve for Loan Losses (3,475) (2,050) (1,196) (653) Total Assets 191, , ,395 97,372 Deposits 122, ,283 90,950 62,446 Shareholders' Equity 31,339 27,286 28,662 25,146 Total Liab. & Equity 191, , ,395 97,372 Income Statement Net Interest Margin 13,166 18,209 10,455 19,626 Non-interest Income 799 1, ,184 G&A expenses 8,640 10,871 5,206 15,075 Operating Income 3,727 5,407 4,618 3,367 Net Income 2,069 3,705 2,916 2,672 Ratios NPL ( 60 days) / Gross Loans 1.4% 0.2% 0.2% 0.3% LLP / Gross Loans 2.3% 1.2% 0.5% 0.6% Reserve / Gross Loans 3.0% 1.5% 1.1% 1.0% ROE 9.1% 13.6% 10.2% 10.6% ROA 1.5% 1.8% 2.1% 2.7% BIS Tier 1 Ratio 14.4% 13.8% 20.9% 29.7% Source: audited financial statements of BGN The Investment Vehicle Legal Framework - Receivables Investment Funds. The receivables' investment funds (fundos de investimento em direitos creditórios or FIDCs) were created by Resolution Number 2907 dated November 29, 2001, of Brazil's Central Bank. The rules of operation were regulated by the Commissão de Valores Mobiliários (CVM, the Brazilian Securities and Exchange Commission) Instruction Number 356 dated December 17, 2001, later amended by Instruction Number 393 dated July 22, FIDCs feature elements common to both traditional structured-finance vehicles and also of investment companies. FIDCs are bankruptcy-remote entities and afford beneficial treatment under the Brazilian tax code. FIDCs can be either open-ended or closed-ended, and the capital can be made up of both senior and subordinated shares, or by senior shares only. At least 50% of the assets purchased by an FIDC must represent credit rights (i.e. receivables and loans, and meet certain criteria stipulated in its manual, which describes the rules under which the respective FIDC operates). The remaining portion of a FIDC portfolio must be held in highly rated assets or must have positive exposure to highly rated swap counterparties. Every FIDC must have a sponsor who is civilly and criminally responsible for the acts by or on behalf of the FIDC. A custodian must be appointed to perform certain obligations in accordance with that FIDCs' particular statute. Given the nature of such obligations, the role of the custodian may be similar to that of a trustee and a servicer. 4 Moody s Investors Service Fundo de Investimento em Direitos Creditórios BGNPREMIUM I RATING SUMMARY Transaction Overview Description of the Fund. BGNPREMIUM (the fund) is a master program, closed-ended FIDC marketable in Brazil to qualified investors, including corporate and private banking investors, pension funds, insurance companies, and other investment funds. BGNPREMIUM will make revolving purchases of personal loans under the master program. Under such program, BGNPREMIUM may purchase, on an offering basis only, eligible personal loans originated by BGN and its network of permitted correspondent banking agents. As a closed-ended FIDC, the Master Program legal final will be 10 years, with each series having its own legal final ranging from 12 to 60 months from issuance. Nevertheless, in case of an early amortization the legal final will be extended by a period equal to the Series' legal final plus 90 days (please see Legal Aspects for more detail). Issuance of Additional Series Allowed. Similarly to a master trust concept, the transaction structure allows for other series of senior shares to be issued, backed by a common pool of personal loans. The Fund will issue series with maturities ranging from 12 to 60 months. The Fund's Series is the first series to be issued from the Master Program; it has a 36-month tenor, with redemptions occurring on 30 monthly installments following a 6-month grace period. Such additional series of senior shares, whose cash flows will rank pari passu with those of the Series , can be issued by the fund provided that specific criteria are met. Any additional series' issuance will need to have a rating. If such issuance is not rated by Moody's, we will then need to confirm the rating of the senior shares initially rated by us. In order to allow the issuance of new series, the liquidity-ratio test was created to ensure that there will be always enough cash to redeem the senior shares in full. The liquidity ratio is a forward looking trigger and is measured pro-forma, for all series outstanding. The liquidity ratio will be calculated daily and excludes from its determination any loan that is not current (i.e., that is one day or higher past due; its formula is shown under the Trigger Events section). Description of the Shares. The Fund will issue senior and subordinated shares, at a price of R$25,000 per senior or subordinated share, in the master program. The senior shares shall constitute a maximum of 85% of the Fund's shareholder's equity at closing. These shares will be backed by monthly cash flows originated at the bank's portfolio of personal loans, which as of January 31st, 2004 amounted to R$115.6 million, representing 93,679 active accounts, with an average ticket of R$3,915 (face value). The subordinated shares, representing a minimum of 15% of the total share balance will be held by the seller. Interest Payments on the Shares. BGNPREMIUM will pursue a total return to shareholders equivalent to 106% of the Brazilian Interbank rate (CDI). The subordinated shares do not carry a fixed appreciation rate, however they are the ultimate beneficiaries of any excess cash after senior shares from all the series are paid in full. Because CDI is a floating rate, this transaction was analyzed by Moody's assuming that the maximum return promised to investors is 120% of the future CDI rate (based on the portfolio turnover period plus a spread), as of the day preceding any trigger event. Fundo de Investimento em Direitos Creditórios BGNPREMIUM I Moody s Investors Service 5 Principal and Interest Payment. The payment of interest and principal will be allowed only on permitted payment dates as follows: (i) Principal: Senior Shares: the master program allows for different amortization schedules, such as target principal, soft bullet, or hard bullet; Subordinated Shares: provided that certain triggers (i.e. excess spread, overcollateralization test and liquidity trigger) are not hit, on a pro-forma basis, the fund will allow the redemption of subordinated shares following 60 days from request 10. Series will have target principal payments on the following months: [to be determined at the time of initial subscription]. (ii) Interest: is paid monthly and reinvested to purchase more loans. In each payment date, all cash flow collected will be used to pay sequentially as shown as Figure 4: Normal Amortization Available Cash: Figure 4 Early Wind-Down Event Available Cash: Fees, taxes, and expenses: auditor, rating agency, trustee, sponsor, legal & administrative expenses Reimbursement of the amounts occasionally advanced by shareholders related to judicial collection process Principal and interest payments of senior shares; Eligible personal loans' purchase price; Payment to the subordinated shareholders. Fees, taxes, and expenses: trustee, sponsor, legal and administrative expenses; Reimbursement of the amounts occasionally advanced by shareholders related to judicial collection process; Principal and interest payments of senior shares; Fees of rating agency; Payment to the subordinated shareholders. Excess Spread Provided that the Fund does not hit any trigger event on a pro-forma basis, excess spread will be released to the seller (BGN) in the form of subordinated shares' redemption. The Fund benefits from substantial excess spread as the purchased personal loans carry interest rates ranging from 35% to 55% per annum (average of 40% per annum). The total return on senior shares, assuming a maximum CDI rate equivalent to 120% of the CDI rate at closing (16.5% as of March 23, 2004), could reach 19.8% (which is the promise to investors that Moody's is basing its rating decision). The annual net excess spread, considering 0% CDR (constant default rate) and 0% CPR (constant prepayment rate), would be 22.16% per annum, as shown in the Figure 5 below: 10 The possibility of FIDCs to redeem subordinated shares prior to the fund's maturity was introduced by CVM's Instruction Number 393 dated July 22, 2003, and it was aimed at reducing the excess spread carried by FIDCs on their books. The redemption works as follows: 1) in open-ended funds, subordinated shares can be redeemed following 60 days of the request, provided that senior shareholders are advised of such redemption request, and, in the case the senior shareholder also decide to redeem his/her shares, that the senior share redemption occurs prior to that of the subordinated shares; 2) in closed-end funds, the redemption can only occur if allowed in the fund's statute, and it does not cause the fund to remain undercollateralized following such redemption. 6 Moody s Investors Service Fundo de Investimento em Direitos Creditórios BGNPREMIUM I Figure 5 Available Excess Spread (A) Annual Coupon on Purchased Assets 40.00% Less: - CDI Rate 16.5% - Stressed CDI Rate (120%) 19.8% - Average Liability Cou
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