Restructurings, corporate distress and Middle East war widen spreads, while managers say opportunities are starting to emerge, caution remains essential
The repricing of risk premiums, which began in February and intensified in March, reflects uncertainty and a loss of investor confidence amid a string of cases involving troubled companies and court-supervised and out-of-court restructurings, a trend worsened by the war in the Middle East, said Alexandre Muller, a partner at JGP Asset Management, and Jean-Pierre Cote Gil of Vinland Capital.
In the past, when corporate financing was far more concentrated in state-owned banks, market adjustments were not as swift. Now, with capital markets playing a much larger role in funding companies, “there is no longer any tolerance for a deviation from the path,” Muller said.
“Spreads widened sharply because uncertainty increased as a result of these events, which undermine confidence and hurt capital markets,” Muller said at an event hosted by Bradesco BBI.
According to him, the sense is that the country is taking “steps backward,” citing uncertainty over how the legal system functions and major fraud cases in the banking sector. “But looking at the historical pattern, confidence is restored and premiums normalize.”
Bankruptcy framework under scrutiny
For Cote Gil, Brazil’s current Bankruptcy Law encourages controlling shareholders, and “companies are losing their embarrassment” about turning to out-of-court restructuring. “The country needed a more creditor-friendly bankruptcy regime. Our average investor has limited appetite for risk,” he said.
He also criticized the fact that liabilities in Brazil’s private-credit industry are now extremely short-term, with many funds offering same-day or next-day redemptions, forcing managers to hold high cash balances to meet withdrawals. “The industry’s average term should be D+5 [meaning investors would receive their money five business days after requesting a withdrawal]. We have tried to build products with longer lockups, but I don’t think that will become relevant for the sector as a whole.”
Cote Gil said the expectation had been for a calm first half and more volatility in the second, but that view has now reversed. He sees the widening in spreads as a technical adjustment followed by an exaggerated reaction, “which fed on itself, and the Iran war made it worse.”
He added that he does not believe the adjustment is close to over, though he noted that a significant correction is already visible, especially in infrastructure debentures, which at one point traded well below Brazil’s inflation-linked Treasury bonds, known as NTN-Bs. He recommended caution.
“The market became complacent and just accepted it. We need to understand this move before increasing allocations.”
More opportunities with caution
Spreads on tax-exempt infrastructure debentures, which had reached 80 basis points below NTN-Bs in September, widened by 34 basis points in March. The median spread moved from 53 basis points below NTN-Bs to 19 basis points below. Corporate debentures without tax incentives, meanwhile, ended March at a median spread of 118 basis points above the CDI, Brazil’s interbank deposit rate.
Victor Tofolo, head of credit management at Bradesco Asset, said on the same panel that the repricing is affecting both tax-exempt infrastructure debentures and regular corporate debentures. “We are already starting to find more opportunities, including in high grade, but we will need to study these names carefully.”
He said the adjustment in infrastructure debt is bringing the risk-return ratio back to more appropriate levels and, above all, increasing dispersion. Previously, he said, spreads were clustered too closely together, which made it harder for managers to generate value.
Cote Gil said his cash position was high, between 25% and 30%, so he could seize opportunities. “But it is a challenge. At the same time an opportunity appears, redemptions come in because the change in prices hurts fund performance, and part of that cash has to be used to meet withdrawals.”
Muller of JGP said the firm’s Idex index, created to track private-credit rates and regarded as one of the market’s main benchmarks, will soon release a report that already captures the recent widening in spreads. He said the index has returned to the first quartile, signaling a recovery in fund returns, including performance above the CDI.
*By Liane Thedim — Rio de Janeiro
Source: Valor international
https://valorinternational.globo.com/