Pimco Gets Dibs on Brazil Pension Fund Cash as Retirees Lose Out

(Bloomberg) -- Rio de Janeiro state's underwater pension fund says it'll pay bondholders on time when their next interest tab comes due. State retirees are a different story.

More than 240,000 pensioners -- including former teachers, police officers and prosecutors -- are still waiting for their June payments after the previous transfer was delayed by more than a month as Rioprevidencia grapples with a 12 billion-real ($3.7 billion) budget hole. What cash the pension fund does have is earmarked first for investors like Dodge & Cox and Pacific Investment Management Co. The next interest payment of about $72 million is due Wednesday.

Rioprevidencia joins borrowers across Brazil and emerging markets that tapped international credit lines when commodities prices were high and are now struggling after they collapsed. But in the case of Rioprevidencia, many observers were left wondering how a pension fund got approval to borrow so much cash in the first place. The fund securitized oil-royalty receivables granted by the local government and sold them in the bond market in 2014.

“Looking at it from a social aspect, it's a huge calamity,” said Ricardo Mollo, a corporate finance professor at the Insper Institute of Education and Research in Sao Paulo. “It's unbelievable they decided to issue this debt two years ago. A pension fund selling dollar bonds is a clear discrepancy, even though the structure allowed them to.”

Pimco's press office did not reply to a phone call and e-mail seeking comment. Dodge & Cox press office declined to comment.

Neuza Lemos, a 57-year-old who lives off her late husband's pension, knows nothing about the $3.1 billion in bonds issued by Rioprevidencia or the oil-price tumble that has helped slash the fund's revenue by about 75 percent between June 2014 and December.

Her days are consumed by a different kind of math: With her monthly 4,000-real pension delayed, she doesn't know how she'll be able to afford her blood-pressure medicine and sustain herself, her daughter and two grandchildren in the coastal city of Cabo Frio, 75 miles from Rio city. She's already borrowed money from family members and said unpaid bills keep piling up on her living room table.

"I'm getting sick and desperate," she said. "They kept saying they just don't have the cash in hand to pay us. They don't even pick up the phone anymore."

Rioprevidencia will use cash it got from royalties in the past quarter to service its debt as planned, Chief Executive Officer Gustavo Barbosa said in an interview. "We are not considering a restructuring of the bonds at this moment," he said, while declining to discuss when the fund will catch up on delayed payments to pensioners.

Bondholders granted Rioprevidencia a temporary waiver in November after its forward-looking debt-coverage ratio -- a measure of cash flow available to pay interest and principal -- fell below a minimum threshold. In exchange, the fund boosted the coupon on the securities by 3 percentage points to as much as 9.75 percent. Rioprevidencia's $2 billion in notes due 2024 dropped 0.7 cent to 84.01 cents on the dollar Wednesday.

That waiver expired earlier this year and, after a second round of talks that ended last month, bondholders agreed not to accelerate the debt until June 2017. The fund amended the terms to make it clear that potential litigation with investors would be decided in an international arbitration court should Rioprevidencia lose the right to its oil royalties and stop payment on its debt.

To make matters worse, Rio state is also facing a budget crisis because of falling revenue and the rising pension obligations. That's forced it to slash healthcare and education spending and limits assistance the state can offer to its embattled pension plan, even as Brazil gears up to host the Olympics in August. Even current workers of the fund aren't immune from cuts.

"The whole situation for Rio finances is just deteriorating," said Mollo, from Insper. "People don't expect a considerable recovery for oil prices anytime soon, and servicing this debt is going to become a bigger challenge for Rioprevidencia."

To contact the reporter on this story: Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Michael Tsang at mtsang1@bloomberg.net, Jessica Brice