Interbolsa: game over

It’s all over for Interbolsa. Less than a week after financial regulators took over the troubled Colombian broker, the government has ordered the company to be liquidated.

Mauricio Cardenas, Colombia’s finance minister said on Wednesday that Interbolsa would be wound down and its assets sold to pay investors and other financial obligations.

According to Cardenas, the decision to liquidate Interbolsa was made because there were “no viable alternatives” – including finding buyers for the cash-strapped business.

“There is a lack of confidence on the part of agents that provide liquidity to Interbolsa,” he told reporters in Bogota. “This is the best form of protecting the interests of Colombia’s financial market.”

Regulators intervened last Friday after Interbolsa failed to make a 20bn peso payment on a bank loan and warned that it was suffering from a “temporary” liquidity squeeze. Although Interbolsa insisted that it had “plenty of safety and solvency”, the market was awash with rumours that the group had become overly dependent on cash generated from repos – or reverse purchase agreements – to fund its day-to-day operations.

“It’s margin trading,” one former Interbolsa employee told beyondbrics. “Repos were basically being used to raise more money so that they can own more stock than their own resources allow.”

While this magnifies the gains when the stock is going up, the person said, using repos to fund trading activities also exposes the borrower to much higher losses if the value of the stock being used as collateral for the loan goes down.

Interestingly, shares in Interbolsa started sliding earlier this summer in July, around the same time that rumours began circulating that Interbolsa was doing repos on its own shares, according to the ex-employee. And here’s more food for thought: Raul Gallegos over at Breakingviews, citing data from brokerage Ultrabursatiles, noted in a recent column that as of late September, outstanding repos on Interbolsa shares made up nearly 30 per cent of the firm’s market value.

Interbolsa, for its part, blamed its liquidity crunch on a repo trade involving shares of a local textile company called Fabricato. It is not clear what the exact trade was and under what conditions it was made. But the trade, according to Rodrigo Jaramillo Correa, Interbolsa’s president, began to sour when counterparties began to doubt whether the value of the Fabricato shares being used as collateral would hold, and closed their positions.

But the speed with which Interbolsa has collapsed (it told Bloomberg only last month that it planned to expand into Chile and Peru) naturally raises questions over the health of the wider Colombia equity market.

Cardenas was quick to stress that Interbolsa’s cash flow problems were the fault of poor management and that investors’ money in the system was safe. (Beyondbrics guesses he must have forgotten about the liquidation of another brokerage Proyectar Valores only last year.)

The government on Wednesday also said the central bank would provide extra liquidity to brokerages via repurchase agreements backed by corporate debt holdings to ensure that the market does not become illiquid. This comes after it transferred Interbolsa’s Cop1,600bn ($875m) local bond operations to Bancolombia on Tuesday.

So how concerned should investors be about the collapse of Colombia’s biggest brokerage? On one level, if all the counter-parties get paid and no clients lose money, then not a whole lot.

As Barclays explained:

Despite being the biggest brokerage house in the country, Interbolsa represents a limited portion of Colombia’s financial system. It has assets if approximately COP1.95trn (USD1.1bn), which represents less than 0.5% of the system. This could certainly limit the effect on the rest of the system. Moreover, the rapid intervention of the authorities should help minimize the uncertainly that the case could create.

But for investors in Colombia’s booming stock market, what has happened at Interbolsa is probably cause for unease. The biggest loser in all of this will be Interbolsa’s shareholders. Equity investors would be wise to see if Colombian regulators do anything to ensure that a collapse like Interbolsa’s is really a one-off.

Related reading:
Interbolsa: from boom to bust, beyondbrics
Colombia’s Interbolsa: crash and burn, beyondbrics
[snap]: Colombia regulator seizes Interbolsa, beyondbrics