BTG bonds slump as Esteves arrest casts pall over Brazilian bank

By Guillermo Parra-Bernal

SAO PAULO (Reuters) - Grupo BTG Pactual SA's bonds slumped for a second day on Tuesday on concern about fallout from the arrest of its largest shareholder, André Esteves, despite management efforts to shore up cash reserves at Latin America's largest independent investment bank.

Since Esteves' detention on Nov. 25, managing partners at BTG Pactual have sped up sales of assets and pools of loans in an effort to restore confidence in Brazil's sixth-largest bank.

Prosecutors suspect Esteves, the bank's founder, took part in a plan to obstruct an investigation into corruption involving state-controlled oil giant Petroleo Brasileiro SA (Petrobras). Through his lawyers, Esteves has denied the allegations.

The banker, who remains in jail, quit his executive duties on Sunday. Newly appointed co-chief executives Roberto Saloutti and Marcelo Kalim have halted new loan disbursements and are seeking to reassure clients that operations stay normal.

A source familiar with the bank's strategy told Reuters late on Monday that client fund redemptions were slowing and that the bank's position was "solid."

BTG Pactual stands to earn 2.5 billion reais (£420 million) from the disposal of a 12 percent stake in Rede D'Or São Luiz SA, Brazil's No. 1 hospital chain, and another 4 billion reais from a planned sale of loans to larger Brazilian rivals Itau and Bradesco, sources told Reuters this week.

In a sign of belt-tightening at the bank, BTG Pactual said in a statement it was cancelling its Christmas party scheduled for Dec. 12 in Rio de Janeiro.

With investors gripped by uncertainty, the mid-price on BTG Pactual's $1 billion worth of 4 percent bonds maturing in January 2020 , the bank`s most widely traded dollar note, slipped 3.28 cents on the dollar to 68.79 cents on Tuesday.

The 8.75 percent perpetual bond tumbled to 56.5 cents on the dollar, from 70 cents on Monday.

"There is a lot of uncertainty, and when that happens, investors demand you pay a higher risk premium," said Alexandre Pavan Povoa, who oversees about $100 million in assets for Canepa Asset Management in Rio de Janeiro.

Units , a blend of common and preferred shares in BTG Pactual's banking and buyout units, shed 2.9 percent on Tuesday. They have fallen by one-third over the past week, slashing about $2.5 billion off BTG Pactual's market value.

BTG Pactual's woes weighed on broader stock market sentiment, with the benchmark Bovespa stock index <.BVSP> slipping 0.2 percent.

"BTG Pactual acts as an important provider of liquidity," said Arlindo Sá, head interest-rate futures trader at brokerage ICAP in São Paulo. "Although it may not contaminate the banking system, BTG Pactual's problems are bad for the market as a whole."

LOAN GUARANTEES

Media reports on Sunday said police had found documents linking BTG Pactual and Esteves to the payment of bribes to lawmakers from the ruling coalition. It was the first time the bank, whose fortunes have been closely tied to Esteves, has been implicated in the bribery scandal.

BTG Pactual has repeatedly denied any wrongdoing.

Traders said growing fears that peers might be shunning business with BTG Pactual have contributed to the drop in the bank's shares and bonds.

Valor Econômico newspaper reported on Tuesday that state development bank BNDES stopped accepting loan guarantee letters from BTG Pactual, saying risks had escalated in the wake of Esteves' arrest. The paper did not cite its sources.

In a statement, BNDES denied the report. BTG Pactual said in a separate statement that outstanding guarantee letters remain valid.

Four sources familiar with the matter told Reuters that BNDES stopped accepting letters from BTG Pactual in March, when it revised its list of permitted guarantors, due to a technical decision that had nothing to do with the investigation into Esteves.

Shares of BTG Pactual-backed companies, part of the bank's proprietary investments unit, were mixed.

Drugstore chain Brasil Pharma SA rose 2.6 percent on hopes a BTG Pactual-sponsored capital increase will take off. Commercial real estate developer BR Properties SA shed 1.9 percent after a bloc sale of shares by another, unnamed shareholder.

(Additional reporting by Tatiana Bautzer and Bruno Federowski in São Paulo; Editing by Frances Kerry)