Fitch Affirms BTG Pactual Group's Ratings Following BSI Acquisition

SAO PAULO--()--Fitch Ratings has affirmed the ratings of Banco BTG Pactual S.A. (BTG Pactual) and its related parties: BTG Investments LP (BTGI) Banco Panamericano S.A. (PAN), Brazilian Finance & Real Estate (BFRE), Brazilian Mortgages Cia Hipotecaria (BM) and Brazilian Securities Cia de Securitizacao (BS) and of its holding company BTG Pactual Holding S.A. (BTGH). The Rating Outlook remains Positive. A full list of the actions taken is detailed at the end of this release.

RATING ACTION AND RATIONALE

The affirmation of BTG Pactual's ratings reflect Fitch's view that the acquisition in conjunction with the bank's capital plans will not have relevant impact on its leverage and its capitalization should remain within adequate levels. The proposed transaction, after its completion, will significantly expand BTG's income diversification and enhance its stability given the recurring nature of wealth management fees: the largest business engaged by BSI. In addition to that, Fitch observes that BSI may help to geographically diversify its assets and operations outside Brazil (around 35% of expected combined assets), which will bode for its growing franchise.

In terms of the strengthening of BTG Pactual's franchise, the BSI acquisition should further expand the bank's distribution capabilities by almost doubling its Assets Under Management to roughly USD200 billion and strengthening mainly its Wealth Management business unit and to a lesser extent its Asset Management business. Cost synergies should be limited as BSI's structure and team should be maintained. In Fitch's opinion, the lower margin wealth management business would not enhance BTG Pactual's current above average profitability levels, but it will reduce its expected volatility.

According to information provided by BTG Pactual's management, this transaction will not encumber its capital base with intangible assets as goodwill, while the bank remains committed to preserve an adequate cushion in their regulatory capital ratios. The transaction valued in around USD 1,700 million, will be paid 20% via the issuance of new units (stapled shares of the bank and BTGI) and the rest with resources of the bank. The bank remains committed to preserve adequate cushions on their regulatory capital compared to current minimums and the changes in place due the BIS III implementation in Brazil.

Fitch understands that the bank manage several financing options (own resources, additional capital increases and the issuance of BIS III complaint securities) that will allow BTG to limit the possible impact of this transaction on its capital ratios.

Even when integration risk of the intended acquisition exists, as it does in any other M&A transaction, a solid history of successful integration and management of M&A process in Brazil and abroad and the good financial profile of BSI suggests that these risks are manageable for BTG Pactual. Alternatively, a failure to complete the proposed acquisition or a large use of debt for its financing may result in negative implications for the bank credit profile and ratings.

Measured on a consolidated basis, BTG Pactual's capital and leverage ratios are expected to slightly deteriorate following the acquisition even considering the plans to strengthen its capital base by accessing the market. In Fitch's view, BTG Pactual's gross leverage measured as tangible assets over equity should remain around 10x; a level similar to its March 2014 level. Also, the adjusted leverage ratio and net adjusted leverage ratio should also remain similar to their current levels and not increase more than 10x-12x; which are deemed as appropriate for its current rating and considering its business model.

Regulatory capital ratios are ample and well above the minimum required, albeit, benefited by the low risk weight of its large portfolio of government securities. The bank aims to keep a buffer of 100/200 basis points (bps) compared to the required minimums during the phase in period of the BIS III rules in Brazil; a policy Fitch views reasonable.

The Issuer Default Ratings (IDRs) and National Scale Ratings of its related parties: BTGI PAN, BFRE, BM and BS are driven by the expected support from BTG. Under Fitch Rating criteria, these companies are considered 'strategically important' to the parent, and its ratings are notched once from BTG's IDR.

BTGH is a pure holding company and its long- and short-term IDRs and National Scale Ratings are equalized to those of BTG thanks to its moderate leverage levels and favorable regulatory framework towards financial groups in Brazil.

PAN's Viability Rating (VR) remains limited by its still weak operating performance, even though some improvements in asset quality have been observed. Counterbalancing these aspects, the bank enjoys a stable funding base, explained by committed funding and liquidity lines from its other controlling shareholder: Caixa Economica Federal (Caixa; foreign currency LT IDR of 'BBB'/Outlook Stable) and an improved business model, derived from the experience of the new management appointed by BTG since 2011. The unfavorable market scenario has not allowed the bank to grow as fast as it would expect and this has delayed some profitability improvements. Some cost controls measures taken recently as well as two capital injections confirmed by its two controlling shareholders and announced this year should benefit the bank's results in the coming periods.

RATING SENSITIVITIES/KEY RATING DRIVERS - VRs and IDRs

BTG Pactual's VR and IDRs may be upgraded if the bank is able to maintain its consolidated net adjusted leverage within an acceptable range (net adjusted leverage below 9.0x); maintain its operating ROAA around 2%, reflecting continued revenue growth and diversification into recurrent fee income. A failure to achieve this target may trigger the review of the Rating Outlook to Stable.

The ratings may be negatively affected if the bank leverage and capitalization levels deteriorate more than 15% compared to its current levels and/or if its operating ROAA is reduced in a sustained manner below 1.5%. In addition, sudden deterioration of the operating environment, leverage, profitability or a troublesome performance of one or some of its subsidiaries may negatively affect BTG Pactual's ratings.

A possible failure of the BSI transaction with effects on BTG Pactual franchise and/or funding may not only trigger a change on the Outlook to Stable but also a review of the ratings with possible negative implications.

PAN's VR may be upgraded after a sustained improvement of its operational results (operating ROAA above 0.5%), that helps to maintain its Fitch Core Capital Ratio in levels superior to 7% and its funding profile remains aligned with the tenor and characteristics of its assets. A negative rating action may be triggered by a longer than expected breakeven point of its operations and a backdrop of capital ratios reducing to low levels.

RATING SENSITIVITIES/KEY RATING DRIVERS - Support and Support Rating Floors

Given its nature of merchant/investment bank and relative small deposit base; Fitch believes that there is a possibility of government support, but it cannot be relied upon; hence BTG Pactual Support Rating is a '5' and its Support Rating Floor remains in 'NF'.

RATING SENSITIVITIES/KEY RATING DRIVERS - Subordinated Debt and Other Hybrids Securities

Subordinated debt and other hybrid capital issued by BTG Pactual are all notched down from the banks' VRs; as such these securities are notched twice from BTG Pactual's VR: one notch lower due to Loss Severity features and its subordinated status, and a one-notch deduction due to moderate risk of non-performance. The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VR of the bank.

RATING SENSITIVITIES/KEY RATING DRIVERS - PAN, BFRE, BM and BS

PAN, BFRE, BM and BS are 'strategically important subsidiaries' for BTG Pactual and hence, notched once from the parent IDR. Fitch believes that despite its current relative small size and incipient earnings generation compared to the parent revenue source; these entities are part of the business plan of BTG Pactual and the tools to implement their diversification plans in the medium term towards consumer banking, real estate financing and other capital market related activities. The IDRs and National Scale Ratings of BTG Pactual's subsidiaries may be affected if their strategic importance and ability to provide support from BTG Pactual changes; even though this scenario has a low probability of occurrence.

RATING SENSITIVITIES/KEY RATING DRIVERS - BTGI

BTGI's long-term IDR rating reflects its role as an integral BTG Pactual group and the implicit support BTGI receives from BTGH. According to Fitch's criteria, BTGI is deemed as a core part of BTG Pactual group. Despite its evident links with the group (franchise, common management, relevance of its revenue stream and completely aligned business model); BTGI is not a direct subsidiary of BTGH; hence, its rating its notched once from the rating of BTGH, the primary source of support to the entity.

Changes to the rating of BTG Pactual or BTGH may lead to changes to BTGI's ratings. A material deterioration of BTGI's financial profile where sustained losses and/or a significant increase of its leverage may hinder the overall financial profile of BTG group, may trigger a rating downgrade.

RATING SENSITIVITIES/KEY RATING DRIVERS - BTGH

BTGH's long and short-term IDRs and National Scale Ratings are equalized to those of its sole operating subsidiary, Banco BTG Pactual S.A.'s (BTG Pactual, IDR 'BBB-'/Outlook Stable). BTGH is a pure holding company and directly controls 71.9% of BTG Pactual. The equalization of the ratings is based on the high correlation between the probability of default for BTGH and the bank. Both are incorporated in the same jurisdiction, being overseen by Brazilian authorities.

Changes to the rating of BTG Pactual may lead to changes to BTGH's ratings. Also, an increase of its double leverage ratio above 120% or a deterioration of its debt service metrics may result in a downgrade of BTGH's ratings.

Fitch has taken the following rating actions:

BTG Pactual

--Long-term foreign and local currency IDRs affirmed at 'BBB-', Outlook Positive;

--Short-term foreign and local currency IDRs affirmed at 'F3';

--Viability Rating affirmed at 'bbb-';

--Support Rating affirmed at '5';

--Support Rating Floor affirmed at 'No Floor';

--Long-term National Rating affirmed at 'AA(bra)', Outlook Positive;

--Short-term National Rating affirmed at 'F1+(bra)';

--Senior unsecured notes, due in March 2016, foreign currency rating affirmed at 'BBB-';

--Senior unsecured notes, due in July 2016, foreign currency rating affirmed at 'BBB-';

--Senior unsecured notes, due in September 2017, foreign currency rating affirmed at 'BBB-';

--Senior unsecured notes due in January 2020, foreign currency rating affirmed at 'BBB-';

--Senior unsecured notes due in January 2034, foreign currency rating affirmed at 'BBB-';

--Subordinated notes due in September 2022, foreign currency rating affirmed at 'BB'.

BTGI

--Long-term foreign and local currency IDRs affirmed at 'BB+'; Outlook Positive;

--Support Rating affirmed at '2';

--Senior guaranteed notes affirmed at 'BBB-'.

BTG Holding

--Long-term foreign and local currency IDRs affirmed at 'BBB-'; Outlook Positive;

--Short-term foreign and local currency IDRs affirmed at 'F3';

--Support Rating affirmed at '5';

--Support Rating Floor affirmed at 'NF';

--Long-term National Rating affirmed at 'AA(bra)'; Outlook Positive;

--Short-term National Rating affirmed at 'F1+(bra)'.

PAN

--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook Positive;

--Short-term foreign and local currency IDRs affirmed at 'B';

--Viability Rating affirmed at 'b';

--Support Rating affirmed at '3';

--Long-term National Rating affirmed at 'AA-(bra)', Outlook Positive;

--Short-term National Rating affirmed at 'F1+(bra)'.

BFRE

--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook Positive;

--Short-term foreign and local currency IDRs affirmed at 'B';

--Long-term National Rating affirmed at 'AA-(bra)', Outlook Positive;

--Short-term National Rating affirmed at 'F1+(bra)'.

Brazilian Mortgages Cia. Hipotecaria (BM)

--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook Positive;

--Short-term foreign and local currency IDRs affirmed at 'B';

--Long-term National Rating affirmed at 'AA-(bra)', Outlook Positive;

--Short-term National Rating affirmed at 'F1+(bra)'.

Brazilian Securities Cia. de Securitizacao (BS)

--Long-term foreign and local currency IDRs affirmed at 'BB+', Outlook Positive;

--Short-term foreign and local currency IDRs affirmed at 'B';

--Long-term National Rating affirmed at 'AA-(bra)', Outlook Positive;

--Short-term National Rating affirmed at 'F1+(bra)'.

Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'.

Applicable Criteria and Related Research:

-- 'Global Financial Institutions Methodology' (Jan. 31, 2014);

-- 'National Scale Ratings Criteria' (Jan. 19, 2011);

-- 'Securities Firms Criteria' (Jan. 31, 2014);

-- 'Assessing and Rating Bank Subordinated and Hybrid Securities' (Jan. 31, 2014);

-- 'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

-- 'Investment Manager and Alternative Funds Criteria' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725057

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843297

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Contacts

Fitch Ratings
Primary Analyst
Eduardo Ribas
Director
+55-11-4504-2213
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7th floor -
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Claudio Gallina
Director
+55-11-4504-2216
or
Committee Chairperson
Franklin Santarelli
Managing Director
+1-212-908-0739
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Eduardo Ribas
Director
+55-11-4504-2213
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7th floor -
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Claudio Gallina
Director
+55-11-4504-2216
or
Committee Chairperson
Franklin Santarelli
Managing Director
+1-212-908-0739
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com