The billion-dollar share offering completed in early September by reinsurance company IRB shed light on an operation known in market jargon as a “short sale.”
In this type of operation, instead of buying a stock in the expectation that it will rise in price, the investor makes a contrary bet, hoping that the stock will depreciate in future trading sessions.
To do this, the investor who bets on the fall of a certain stock, known as the borrower, rents it from another investor who has the paper in his portfolio, the giver, in exchange for a variable remuneration rate.
He then sells the stock, based on the prediction that it will fall in price, to repurchase it later at a lower price and return it to the donor, earning the difference between the price he sold and later repurchased the stock for.
The service is offered by stockbrokers, through which the investor informs which assets he wants to lend or rent.
The main related cost refers to the rental fee paid to the donor for the sale of a certain asset, which varies according to demand.
In the case of IRB shares, with increasing investor demand for leasing securities in recent weeks, the average rate of return reached 260% on September 2, according to data from the TradeMap platform.
Just as a basis for comparison, the second highest rate on the date, referring to TC (former Traders Club) shares, was 50.3%.
“After the announcement of the share offering, many investors wanted to borrow the shares of the IRB to sell. When that happens, the rental rates on the paper go up very, very fast”, says Yves Salomão, a rental and options operator at Genial.
Product Manager at B3, Gabriela Shibata says that the market structure for this type of strategy in Brazil is more robust than in other countries, which protects the process of stock price formation and guarantees the solidity of the market.
“In the case of asset lending, by default, the limits established by investor and by market cannot exceed 5% and 25%, respectively, of the share’s free float (total assets in circulation)”, says the expert.
However, with the offer announced in August by the IRB, and the majority bet on the market that it will not be enough to put the company back on track, B3 even increased the percentage limit of shares of the company from 25% to 30%. reinsurer that can be leased in relation to the total in circulation on the market.
In any case, as it is a low-liquidity role in comparison with the largest stocks on the Stock Exchange — from large commodity exporters and financial institutions—, IRB’s were not among those with the highest financial volume in leased stocks.
The reinsurer’s securities totaled a financial volume of R$ 725 million on September 2, while Petrobras and Vale, with much greater liquidity, totaled around R$ 6.3 billion each, with remuneration rates of 0.03% and 0.17%, respectively.
Availability of shares for rent and financial guarantee are important points highlighted by experts
Órama’s head of equity analysis, Phil Soares says that, in order to be carried out, the share loan operation depends on having enough donors willing to rent their shares in exchange for the remuneration rate.
In this type of operation, he adds, there is a risk that the donor may request the return of the share before the previously agreed date, which can result in the forced sale by the borrower without the share price having reached the expected value to profit from the deal.
“This is a relevant factor that must be in the minds of investors before carrying out the operation”, says Soares.
Salomão, from Genial, also says that, to carry out the operation, the investor also needs to have a financial volume in the brokerage account that works as a kind of guarantee (margin), to ensure that he will be able to bear any losses.
The margin varies from stock to stock and tends to be higher the more volatile the history of the chosen asset.
According to the operator of Genial, with the massive entry of individual investors on the Stock Exchange in recent years with low interest rates, the presence of this public in short operations on the Stock Exchange also increased – data collected by Genial indicate that, in the accumulated of the year, until the beginning of As of September, individual investors were responsible for around 14% of stock lending operations on the market, which handled a total volume of R$400 billion in the period, between borrowers and lenders.
IRB shares, which, after the IPO in July 2017, were among investors’ favorites for some time, entered a negative spiral in mid-2019, after the company was accused by the manager Squadra of making up the numbers on the balance sheets. quarterly, in order to present a better picture of what was, in fact, their real situation.
In a letter published on August 13, the manager states that, at the end of the first half of the year, she still held a short position in IRB, but to a lesser extent compared to previous periods, given the devaluation already suffered by the shares.
“We will continue with the same focus on short opportunities [vendidas]but it will not be trivial to come across another story like this”, recognizes the manager in the document.
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