Early redemption of debentures totaled R$76.4bn from January to September, nearly ten times the amount from the same period last year

10/22/2024

---

Amid a rush by investors and issuers into the corporate debt market, and consequently, a sharp reduction in risk premiums, companies have already repurchased R$76.4 billion in debentures from January to September, a record amount in Brazil’s market, according to a survey by fintech Bamboo commissioned by Valor. The total is nearly ten times higher than the R$8.3 billion repurchased during the same period last year and more than double the R$28.9 billion in 2022. On the one hand, companies are taking advantage of favorable conditions to improve their capital structure; on the other hand, investors and asset managers face an unprecedented wave of early redemptions.

Buybacks are provided for by law, and the terms are specified in the offering rules, including the date from which it can occur and the additional payment the issuer must make to the buyer on top of the remuneration and interest established in the transaction. However, until recently, this option was rarely used by companies. Since the start of this year, demand from investors for funds that allocate to these securities, as well as direct purchases, particularly tax-exempt ones, has surged.

With the increase in demand, prices in the secondary market have risen significantly, which affects the final spread. By paying more for the security, it effectively yields less—resulting in a lower spread. Depending on the acquisition price, the buyback can lead to losses.

Ricardo Nunes, credit and high-net-worth investment director at Paramis Capital, explained that many debentures are below the breakeven point. “There are likely asset managers incurring losses because they didn’t consider the calculations or didn’t think the risk of a buyback was significant.” He noted that if the volume remains high for another two or three months, “it will start to cause a stir,” as funds are required to update the daily value of their units based on the value of the securities in the market, and the buyback can impact the unit value, Mr. Nunes said.

One example of a debenture below the breakeven level in the secondary market is Equatorial Energia’s EQTL15, issued at the Interbank Deposit Certificate (CDI) rate plus 1.55% and maturing on December 15, 2026. It can be redeemed starting December 15 of this year with a 20-basis-point annual premium. According to one fund manager’s calculations, the breakeven is at CDI plus 1.26%. However, market transactions now range between 0.9% and 1.20%, thus below that threshold. Equatorial declined to comment.

Jean-Pierre Cote Gil, credit manager at Vinland Capital, agreed that there is a potential loss in fund value but stressed that it is limited since there aren’t many securities with a close buyback window and a price gap of over 0.5% from the market value. He explained that when evaluating secondary-market securities, he considers the buyback price and the likelihood that issuers will exercise the option. “In some cases, it makes sense to buy at a price above the buyback price if the early redemption period is still in its grace period.”

To mitigate the challenge of difficult allocation, where secondary and primary issuance spreads are very low and early redemptions are high, many asset managers have opted to increase the portion of their funds in liquid assets, often dominated by LFTs (fixed-rate treasury bonds). This is the case for Vinland, which manages over R$1.5 billion in credit. “In general, we have opted to hold more cash rather than acquire securities with the risk of losses from buybacks,” Mr. Cote Gil noted.

Paramis, in addition to increasing cash holdings, has raised the share of bank securities in its portfolio, such as CDBs (Bank Deposit Certificates) and senior financial bills (LFs), which cannot be repurchased—only subordinated and perpetual LFs allow early redemption. The company has also allocated more to credit rights investment funds (FIDCs), which offer higher rates. “Nearly half of the corporate debt portion of our DI [Interbank Deposit] fund is now in bank securities. In our high-grade fund, we have one-third, and in the high-yield fund, 28%. In these adverse conditions, we remain selective,” Mr. Nunes said.

Juliana Tomaz, head of structured credit strategy at AMW, Warren Investimentos’s asset manager with R$1.9 billion in credit, noted that the cash level in her funds has risen from a typical 10%-15% to between 20% and 30%, waiting for a market correction. She mentioned that banks have recently started to exercise early redemption of perpetual LFs. “For fund managers, with reduced spreads and early redemptions, allocating resources is a challenge. We are filtering and managing to purchase securities, but the flow of opportunities is low,” she said.

Felipe Moraes, CEO of Bamboo, said the strong growth in corporate debt—totaling R$423 billion in issuances from January to September, compared to R$395 billion last year—has driven many asset managers to invest in this segment, increasing competition. Many are actively seeking companies to offer debt restructuring services, swapping shorter, more expensive debt for longer, cheaper options. This allows them to secure the mandate for offerings in the market with better terms for the issuer.

“We look for companies that have issued at least once in the capital markets and have a good payment history. A swap from two-year to five-year securities, for example, with a one-year grace period for repayment, provides breathing room for the business,” Mr. Moraes explained. The platform, which facilitates access for companies with revenues between R$20 million and R$200 million to capital markets—structuring and distributing primarily real estate receivables certificates (CRIs), debentures, and commercial notes—expects to end the year with R$500 million in originated transactions, a 300% growth compared to last year. “Many first-time clients from last year have returned.”

The Bamboo survey considered only corporate debentures, which are mostly bought by institutional investors, such as mutual funds and bank treasuries. The movement is even larger, as tax-exempt securities, like incentivized debentures, CRIs, and agribusiness receivables certificates (CRAs), which are favored by individual investors, are also being redeemed early.

This year, the most notable deal in the market was JBS’s repurchase of R$3.9 billion in CRAs in September, while its subsidiary Seara raised R$1.5 billion in October across three series of 5, 10, and 20 years. The shortest was adjusted by the exchange rate plus 5.3%, but the longer securities had the lowest spreads over the NTN-B (government inflation-linked bonds) in JBS’s history (0.3% and 0.45%, respectively). In May, the company had already raised almost R$1.9 billion under highly favorable terms. The CRAs were issued at 6% in the first series (in U.S. dollars) and at the IPCA official inflation plus rates between 6.6% and 7% in the other three. For comparison, JBS’s average debt term in May was 11.1 years, at a cost of 5.78%.

“Investors were not used to this; it’s something new, as individuals tend to hold the security until maturity,” said Raphael Vieira, co-head of investments at Arton Advisors, a multifamily office managing R$8 billion, R$3 billion of which is in corporate debt. However, he noted that early redemption, while potentially disappointing for those planning to hold the debenture, creates opportunities for asset migration. “Some reinvested in the company’s new issuance, while others chose to switch. However, investors who bought in the secondary market may face a loss on the principal.”

Mr. Vieira explained that the taxation of exclusive or restricted closed funds led to the dismantling of these structures. In their place, it has become common to form a managed portfolio with tax-exempt securities and credit funds. Furthermore, the poor performance of multimarket funds has triggered many redemptions, with that money flowing into fixed income. Compounding this, in February, the National Monetary Council (CMN) imposed restrictions on real estate and agribusiness credit notes (LCIs and LCAs), increasing their minimum maturity from 90 days to nine months.

“The market has grown significantly, but it’s limited in terms of company size and debt issuance capacity,” a report from BTG Pactual’s research division highlighted. The allocation of individual investors in debentures, CRIs, and CRAs reached R$317 billion in July of this year, compared to R$261 billion in December 2023. This volume represents 4.5% of the total assets under private and retail management, up from 4% in December 2023.

Mônica Araújo, an allocation strategist at InvestSmart XP, one of the country’s largest offices in terms of advisors, said that due to reduced risk premiums and the high volume of buybacks this year, they do not prioritize these securities. “We have to respect the client’s profile and preferences, but if they are interested in corporate debt, we recommend funds that offer diversification and professional management. Direct investment in securities doesn’t offer a return that justifies the risk.”

Thiago Giantomassi, a partner at Demarest Advogados, noted that new transactions are still expected this year, as companies continue to approach the firm. He explained that when buybacks are coupled with new issuances, a mix of solutions is considered. The acquisition of a company’s own debentures, he said, is part of its “liability management,” which involves managing risks to avoid mismatches between assets and liabilities.

*By Liane Thedim — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/