Fitch Maintains Banco BTG Pactual and Subs' Ratings on Rating Watch Negative

SAO PAULO--()--Fitch Ratings has the Rating Watch Negative on Banco BTG Pactual S.A.'s (BTG Pactual) Issuer Default Ratings IDRs of 'BB-', as well as on all the other of its ratings and those of its subsidiaries previously placed on this status. See the full list of rating actions at the end of this release.

KEY RATING DRIVERS

BTG Pactual Group (BTG Pactual, BTG Investments and BTG Pactual Holding)

Fitch estimates that BTG Pactual's liquidity position has stabilized after its funding franchise experienced severe stress, following the impact on its reputation caused by the arrest of its former CEO and main shareholder, Andre Esteves. The bank's contingency measures taken to bolster its liquidity and withstand the substantial withdrawal of funds have proven effective - the bank's liquidity balance has reached even higher levels than those recorded prior to the crisis.

One important source of funding relief was a BRL 6 billion funding line obtained by BTG Pactual from FGC - Fundo Garantidor de Credito, the Brazilian Deposit Insurance Fund. This was aimed at easing liquidity pressure at the bank and helped it to implement its contingency liquidity plan to divest assets and monetize investments in an orderly manner.

Such measures included a divestment plan for up to BRL14 billion, which culminated with the recently announced sale of BTG Pactual's asset management subsidiary in Switzerland, BSI Bank S.A. (BSI), to EFG International AG, which is still waiting on regulatory approvals. BTG has stated that once the transaction is finalized and payment is received, it intends to fully repay the FGC funding line.

In addition, an active sale of loan portfolios and investment holdings was carried out at an adequate price, and have also reinforced the bank's liquidity while also reducing its credit risk exposure at an opportune time as credit profiles of several large corporate names have deteriorated over the last 90 days.

The reduction of BTG's global markets and merchant banking exposures at the group level were already part of the group's strategic plan and were accelerated by the push to improve liquidity levels.

Another important initiative was the formation of a Legal Counsel team hired by independent members of the group's Board. The team is composed of leading litigation law firms and consulting firms specializing in forensic analysis to conduct a thorough investigation and review of several transactions mentioned in the media where some type of wrongdoing could have occurred. The investigation is expected to be concluded over the next 90 days.

Fitch has maintained the Rating Watch Negative, which reflects the prevailing uncertainties surrounding the bank's future ability to originate new business and how its earnings generation and funding franchise will be restored amidst a very unfavorable operating and economic environment.

All the Long-term International- and National-scale ratings of BTG Pactual's subsidiaries (in Brazil and abroad) included in this review are based on the support expected from BTG Pactual, except for Banco Pan's, which are detailed below. Hence, the rating actions on the subsidiaries mirror those on their parent company.

SUBSIDIARIES AND AFFILIATED COMPANIES

PAN, BFRE, BM, BS

The IDRs of Banco Pan and its subsidiaries (Brazilian Finance & Real Estate S.A. [BFRE], Brazilian Mortgages Cia Hipotecaria [BM], and Brazilian Securities Cia de Securitizacao [BS]), are rated two notches below Caixa Economica Federal's (Caixa) IDR. In Fitch's opinion, after the difficulties BTG faced in the very recent past, Caixa is the most likely source of potential support for Pan, if needed, as has been stated by Caixa's management. However, BTG continues to share control of Pan (controlling share of 51%) meaning that further reviews of BTG's ratings can impact Pan's ratings too. Maintaining the Negative Watch reflects potential implications for Pan's financial flexibility from possible contagion to its reputation arising from its relationship with BTG. It also reflects challenges imposed by Pan's unusual shareholder structure.

Pan's Viability Rating (VR) at 'b' factors in that the bank's business plan has been largely constrained over the last years by the weak operating environment, which has limited a complete turnaround of its operating performance. Such constraints have overshadowed improvements in the company profile, its risk management framework and overall corporate governance, which are reflected in improved but still weaker-than-average asset quality ratios, and relatively weak capitalization reflected by the bank's still weak operating profitability.

An unfavorable market scenario has further deteriorated and not allowed the bank to grow as fast as necessary to achieve targeted profitability improvements. In fact, the economic recession scenario has led to additional cost control measures, such as the reduction of the number of executives on its executive board, aimed at matching the bank's team to a lower business volume, which should have a positive effect on the bank's results in the medium term.

Fitch believes that Pan's subsidiaries (BFRE, BM and BS) will also receive the same support from Caixa in case of need. This is justified by the subsidiaries' active role, synergies and full integration with Pan. BFRE, BM and BS are fully owned subsidiaries of Pan that operate in an integrated manner with the bank and are fully consolidated in the bank, being subject to same regulatory oversight.

RATING SENSITIVITIES

BTG Pactual Group

BTG Pactual's ratings could be removed from the Negative Watch once Fitch is comfortable about the stability of the financial aspects of the company, its liquidity, and franchise. Important steps toward a more stable business include the bank's ability to rebuild its funding base, originate business in its core business areas, and have a clear, reviewed business model and strategic plan to rebuild the bank's franchise. The bank's ability to demonstrate that it has restored its debt refinancing capacity in the financial markets is also considered a critical step in the removal of the Negative Watch. The Rating Outlook assigned once the Watch has been resolved could be Negative, depending on the entity's prospects at the time and also considering any developments in the operating and economic environment.

On the other hand, BTG Pactual's ratings could be downgraded in the event of any new accusations and official investigations related to the bank's business and deals that could weigh on the bank's reputation and further weaken its franchise and financial profile. Similarly, a formal accusation of wrongdoing involving the bank's operations and transactions could also lead to an additional downgrade.

Pan and Subsidiaries

Pan's IDRs could be downgraded if Caixa reduces its willingness or capacity to provide support to Pan. Changes in funding limits and credit sales agreement limits provided by Caixa, or in Pan's shareholder structure could also trigger a negative rating action. Also, the emergence of any new risk event affecting BTG's image negatively could undermine Pan's capacity to generate new business and thus trigger a negative rating action.

A downgrade to Pan's VR could be triggered by successive net losses combined with a backdrop of capital ratios falling to even lower levels (Fitch Core Capital ratio stood at 9.3% in December 2015).

Any changes in BTG Pactual's ratings or its willingness to support its subsidiaries would affect the ratings of the subsidiaries.

BTG Pactual is a regional investment bank with a leadership position in Brazil and a growing franchise in Latin America, mostly focused on investment banking activities, asset management, and securities and commodities trading.

Fitch has maintained the ratings on Rating Watch Negative:

Banco BTG Pactual S.A.

--Long-term foreign and local currency IDRs 'BB-';

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

--Viability Rating 'bb-';

--Long-term National Rating 'A-(bra)';

--Short-term National Rating 'F2(bra)';

--Senior unsecured notes, due in March 2016, foreign currency rating 'BB-';

--Senior unsecured notes, due in July 2016, foreign currency rating 'BB-';

--Senior unsecured notes, due in September 2017, foreign currency rating 'BB-';

--Senior unsecured notes due in January 2020, foreign currency rating 'BB-';

--Senior unsecured notes due in January 2034, foreign currency rating 'BB-';

--Subordinated notes due in September 2022, foreign currency rating 'B';

--Perpetual non-cumulative junior subordinated notes, foreign currency rating 'B-'.

BTG Investments LP

--Long-term foreign and local currency IDRs 'B+';

--Support Rating '4';

--Senior guaranteed notes 'BB-'.

BTG Pactual Holding S.A.

--Long-term foreign and local currency IDRs 'BB-';

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

--Long-term National Rating 'A-(bra)';

--Short-term National Rating 'F2(bra)'.

Banco Pan S.A.

--Long-term foreign and local currency IDRs 'BB-';

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

--Viability Rating 'b';

--Support Rating '3';

--Long-term National Rating 'A+(bra)';

--Short-term National Rating 'F1(bra)'.

Brazilian Finance & Real Estate S.A.

--Long-term foreign and local currency IDRs 'BB-';

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

--Long-term National Rating 'A+(bra)';

--Short-term National Rating 'F1(bra)'.

Brazilian Mortgages Cia Hipotecaria

--Long-term foreign and local currency IDRs 'BB-';

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

--Long-term National Rating 'A+(bra)';

--Short-term National Rating 'F1(bra)'.

Brazilian Securities Cia de Securitizacao

--Long-term foreign and local currency IDRs 'BB-';

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

--Long-term National Rating 'A+(bra)';

--Short-term National Rating 'F1(bra)'.

BTG Pactual Colombia S.A.

--Long-term National Rating 'A(col)';

--Short-term National Rating 'F1(col)'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

National Scale Ratings Criteria (pub. 30 Oct 2013)

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000112

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst (BTG Pactual, BTGI and BTGH) and Secondary Analyst (PAN, BFRE, BM and BS)
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 (BTG Pactual, BTGI and BTGH)
Claudio Gallina
Senior Director
+55-11-4504-2216
or
Primary Analyst (PAN, BFRE, BM and BS) and Tertiary Analyst (BTG Pactual, BTGI and BTGH)
Raphael Nascimento
Associate Director
+55-11-3957-3664
or
Primary Analyst (BTG Pactual Colombia S.A.)
Andres Marquez
Director
+57-1-326-9999 Ext 1220
or
Secondary Analyst (BTG Pactual Colombia S.A.)
Jairo Espejo
Analyst
+57-1-326-9999 Ext 1980
or
Committee Chairperson
Alejandro Garcia
Managing Director
+52 81 8399-9146
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst (BTG Pactual, BTGI and BTGH) and Secondary Analyst (PAN, BFRE, BM and BS)
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 (BTG Pactual, BTGI and BTGH)
Claudio Gallina
Senior Director
+55-11-4504-2216
or
Primary Analyst (PAN, BFRE, BM and BS) and Tertiary Analyst (BTG Pactual, BTGI and BTGH)
Raphael Nascimento
Associate Director
+55-11-3957-3664
or
Primary Analyst (BTG Pactual Colombia S.A.)
Andres Marquez
Director
+57-1-326-9999 Ext 1220
or
Secondary Analyst (BTG Pactual Colombia S.A.)
Jairo Espejo
Analyst
+57-1-326-9999 Ext 1980
or
Committee Chairperson
Alejandro Garcia
Managing Director
+52 81 8399-9146
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com