BTG Pactual scrambles to contain Esteves arrest fallout

By Guillermo Parra-Bernal, Tatiana Bautzer and Aluísio Alves

SAO PAULO (Reuters) - Brazil's Grupo BTG Pactual SA (BBTG11.SA) scrambled to contain fallout from the arrest of its billionaire boss on Wednesday, tapping cash reserves to cover client redemptions and announcing a stock buyback to prop up plunging shares.

The moves highlighted investors' concerns whether Latin America's largest independent investment bank can thrive without savvy founder André Esteves, Brazil's most influential dealmaker.

Clients withdrew funds equivalent to less than 1 percent of assets under management at BTG Pactual, according to a source with knowledge of the bank's strategy. The bank had to tap around 5 percent of its roughly 40 billion reais (£7 billion) in cash reserves to cover those redemptions, the source said.

The arrest of Esteves, who is chairman, chief executive and the controlling shareholder of BTG Pactual, sent shares plunging as much as 39 percent and prompted the central bank to issue a statement saying it was monitoring developments. BTG Pactual has robust liquidity indicators, the central bank said.

Ratings agency Moody's Investors Service warned the credit rating of BTG Pactual could be at risk if Esteves' absence from the helm is prolonged.

Bond prices slid sharply, raising BTG Pactual's cost of funding and underlining investors' view that the bank's fortunes are heavily dependent on Esteves' dealmaking skills, including his ability to sell investments and renegotiate loans to clients. The bank's shares ended the day down 21 percent.

"Esteves is a key manager at BTG and a prolonged absence could be credit negative for the bank," said Alcir Freitas, a senior bank analyst at Moody's Investors Service in São Paulo.

Esteves was arrested in his home in Rio de Janeiro on suspicion of obstructing a sweeping corruption investigation at state-run oil giant Petroleo Brasileiro SA, or Petrobras. He can be held for five days, with a potential extension of another five.

Esteves' lawyer, Antonio Carlos de Almeida Castro, told reporters that the banker "certainly" had not acted to obstruct the investigation.

Board members tried to act quickly and tapped Persio Arida, chairman of the bank's asset management unit and a former president of the country's central bank, to replace Esteves on an interim basis. The bank also announced a repurchase of up to 10 percent of shares in circulation to prop up prices.

Still, the source with knowledge of the bank's strategy said it might be too early to think about Esteves making a permanent exit.

Over the past year, Esteves, 47, steered BTG Pactual through Brazil's deepest recession in a quarter century. The purchase of Swiss private bank BSI Group last year aimed to reduce BTG Pactual's revenue reliance on Brazil, and he invested heavily in global commodities trading while keeping a tight lid on costs.

Shareholder returns have outdone those of Wall Street rivals and internally, the long-standing joke has been that "BTG" stands for "Better than Goldman."

BTG Pactual's balance sheet could come under strain if Esteves' legal position worsens and the bank has to mark down or sell at a loss the value of assets connected to companies and industries involved in the Petrobras scandal.

One such firm, oil-drilling rig supplier Sete Brasil Participacoes SA, 27 percent-owned by BTG Pactual, faces an uncertain future as Petrobras is refusing to enter a long-term ship leasing contract with it, sources with knowledge of the situation have told Reuters.

The bank took a 900 million-real ($240 million) charge on failed oil and gas investments last quarter.

BTG is also Brazil's largest hedge fund manager with $15.5 billion in assets under management. And with a great portion of the bank's revenues generated by its trading arm, reputation among counterparties is key.

POWERFUL CONNECTIONS

Esteves' powerful connections in finance and politics have helped establish BTG Pactual among Latin America's top three mergers and acquisitions and equity underwriting advisors over the past three years.

Since founding BTG Pactual in 2009, Esteves had become a symbol of Brazil's growing economic might, as he competed head to head with global investment banks across Brazil and Latin America for investment-banking, money management and lending deals for some of the world's top companies.

Known for his informal style and long hours, Esteves, who grew up in a middle class neighbourhood in Rio de Janeiro, stood out in Brazilian financial circles long dominated by influential families.

Still, the bank's deals with Petrobras, the state company at the centre of the probe, have drawn the attention of investigators. BTG Pactual bought a stake in the Africa unit of Petrobras in 2013, while the Sete Brasil deal has been severely hampered by the corruption probe.

Esteves' own deals have sometimes gotten him into trouble. In 2012, Italy's financial regulator fined him 350,000 euros for alleged insider trading when he was a senior banker at UBS AG. BTG Pactual and Esteves disputed the charge and in an appeal the fine was later cut in half.

A mathematician by training, Esteves started as a computer technician at BTG Pactual's predecessor, Banco Pactual SA, at age 21. He is now worth about $2.2 billion, according to Forbes Magazine.

(Editing by Carmel Crimmins, Christian Plumb and Andrew Hay)