Credit Default Costs Surge On Brazil’s $340 Billion Of External Debt

By Filipe Pacheco and Cristiane Lucchesi at Bloomberg

Brazilian companies that piled on $270 billion in international debt during the boom years are seeing their funding costs rise after the nation’s credit rating was cut to junk.

The spread for five-year credit-default swaps to protect against a government default, one benchmark for setting what Brazilian companies must pay for external funding, has jumped 7.5 percent to 400 basis points since the downgrade, the highest since 2009. Adding to the pain, the dollar surged to a 13-year high, making principal and interest on international borrowing more costly for local firms.

“Even very small, unknown companies issued international bonds when Brazil was considered one of the most promising economies after the 2008 financial crisis,” Salvatore Milanese, a partner at debt-restructuring adviser firm Pantalica Partners, said in a interview in Sao Paulo. “Now many of them are facing the consequences.”

Standard Poor’s last week lowered Brazil’s sovereign credit rating one level to BB+ and said it might cut it further in response to the administration’s inability to shore up fiscal accounts as the economy falters. President Dilma Rousseff has failed to win support for her initiatives amid an investigation into corruption at the state-controlled oil company, some of which allegedly occurred while she was its chairwoman, sending her popularity to a record low and generating calls for her impeachment.

Federal, state and municipal governments oversaw only modest increases in external debt during the seven years Brazil had an investment-grade credit rating, increasing it 4.5 percent from December 2007 to March 2015, to $69 billion, according to central bank data. For banks and non-financial companies, the story is different: They more than doubled their dollar-denominated debt to $154 billion and $114.7 billion, respectively.

“Investors and creditors know other rating agencies will probably follow SP and will try

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