Investment funds operating in this segment report that supply of credits has been growing

07/14/2022

The rising interest rates and fast inflation cycle in Brazil, which makes credit more expensive and negatively impacts companies’ revenues, has driven alternative investments, especially distressed debt – loans in arrears or at risk of default. Investment funds that operate in this segment report that the supply of these credits has been growing in recent months, which increases the discount paid for the assets and, as a result, their potential return.

What puts pressure on companies is the high Selic rate, which increases the debt service, while inflation compresses cash generation and the companies’ margins, says Luiz Prado, with Makalu Partners. But, in his opinion, the improvement of the banks’ credit recovery departments and the growth of the capital markets contribute to contain defaults. “I still don’t see a distressed scenario, but we will certainly have restructurings,” he says.

Strategi Capital has been much sought after by banks sitting on nonperforming loans – those greater than 90 days in arrears –, many of them resulting from loans taken even before the pandemic, founding partner Cristian Lara says. The fund, which raised R$75 million by December, is managing to allocate these funds 50% faster than projected because of the largest offering of these assets, Mr. Lara says.

“In many cases, the banks have already rolled over and restructured the debt, but the company has reached a situation where it will not be possible to recover the credit, or the asset no longer makes sense for the bank,” he said. These assets being considered nonperforming are the result of loans to companies of different sizes and sectors. But Mr. Lara sees a relevant presence of restaurant chains, as well as companies in the real estate industry. “These are companies that were helped by the government during the worst period of the pandemic, and that could not survive when these incentives came to an end,” he says.

On the other hand, faced with a more hostile environment, banks feel greater pressure to eliminate assets in arrears from their portfolios. This is different from the situation seen during the worst moment of the pandemic, when there was still a perspective of normalization of economic activity and, consequently, of credit recovery. By selling the asset, the credit is no longer part of the bank’s default statistics.

At the same time, if the bank sees that the situation can take a long time to be resolved, the higher interest rates favor a higher discount on the sale of that asset, Mr. Lara says.

Guilherme Ferreira — Foto: Carol Carquejeiro/Valor

Banks’ first-quarter financial statements already showed around R$100 billion of nonperforming debt – with 90 to 180 days in arrears – , up 20% compared with the final quarter of 2021 and a record volume, says Guilherme Ferreira, the founding partner of Jive Investments. But for him, these figures still refer to the debts of companies that were taken on before the pandemic, and which were renegotiated or restructured at the worst moment of the crisis.

“We are not seeing anything that happened in the last six months,” Mr. Ferreira says. In other words, the negative impact of high inflation on the capacity to consume and, consequently, on the companies’ revenues, besides the higher key interest rate, has not yet been reflected in the statistics. “The availability of new credit has shrunk because everyone knows that the quality of this credit has worsened. And this tends to generate more defaults,” he says. This situation will be perceived more clearly in companies’ ability to pay off debt this year and throughout 2023, Mr. Ferreira says. “The supply of credit portfolios has not yet increased significantly, but we believe that next year will be extraordinary for this type of asset,” he says.

For now, the asset manager says there is a gradual increase of stressed asset sales, but still contained by debt restructuring by banks. At the same time, Jive has been more sought after by companies that have a hard time accessing the capital markets or obtaining bank credit, and that need solutions. “Some good companies are facing this kind of difficulty,” he says.

Möbius Capital has also noticed such demand. The firm works with two strategies: litigation assets and structured credit, which has also grown driven by the more challenging economy. “We can enter restructuring debt but also financing companies that are doing very well and want to take advantage of the challenging moment to make acquisitions,” says founding partner Murilo Moura.

Mr. Moura sees an increase in the supply of litigation assets – receivables linked to lawsuits that, according to him, have been a relevant source of liquidity at this moment. The fund usually looks at more than 300 assets to buy just one, such is the rigor that is needed when selecting this type of credit. But in recent weeks, using the same criteria, Möbius has managed to close four purchase options, which reflects the fact that more companies are turning to these types of assets to raise funds. “At the current moment, companies face less liquidity and want to sell these assets soon, which ends up improving the quality of the assets and reducing the discount paid for them,” he says. “This is a peculiar moment because no large company went bankrupt despite the pandemic crisis, but trying to project this scenario forward is dangerous. We can’t work with a scenario where the credit will be smooth.”

In the last two years, the distressed market was marked by a lack of assets or very high prices thanks to the higher number of funds focused on this segment, which increased the demand, says Rafael Fritsch, founding partner of Root Capital. But there was also a certain optimism about the recovery of the economy and, consequently, the situation of the companies. “Now, with reality knocking at the door, the companies’ need for liquidity is going to grow, which is causing a certain repricing of these assets,” he says.

A good example is the negotiation of writs known as “precatórios” – securities that represent government debt from loss of a court dispute. Four years ago, these securities were traded at around 70% of face value, he says. In the past two years, they started to be traded at 94% of face value. Now, they have already gone through a correction, being negotiated close to 50% of face value. “A year ago, we saw law firms, medium-sized banks, brokerage houses buying precatórios. These players are now gone,” he says, recalling that a proposal to amend the Constitution (PEC) allowed the government to pay in installments, which contributed greatly to the change in this market.

Another sign that there is a scenario of worsening credit quality for companies, Mr. Fritsch says, is that the fund has been sounded out by banks interested in selling their portfolios, given the risk that part of this credit will default. “Banks won’t be able to roll it over, as they have done up to now,” he says.

“We see many embattled companies trying to raise capital through litigation assets,” says Luiza Oswald, a partner and head of structured credit funds at JGP. She says that this market, previously very incipient, has been gaining strength in recent months and the companies themselves have started to recognize and see value in this type of asset. This helps the funds’ allocation efforts and widens the discount to be paid for the assets, she added.

*By Lucinda Pinto — São Paulo

Source: Valor International