Funds that buy overdue debt expect a year full of opportunities

by

The combination of interest rate hikes by the BC (Central Bank) to fight inflation and a weak growth in economic activity this year should make a number of people and businesses face more difficulties to honor their debts in the coming months.

What is bad news for many, however, should be a business opportunity for others.

In the balance sheet season, the large banks were unanimous in signaling the expectation for an increase in default, a trend that is already beginning to appear in the most recent data from the BC.

In addition, a survey by FGV Ibre (Brazilian Institute of Economics of Fundação Getulio Vargas) shows that one in three Brazilian families has debts in arrears.

In this scenario, investment fund managers operating in the overdue debt market expect a year full of opportunities.

These operators are dedicated to buying assets considered problematic in the market, especially loan portfolios of companies and individuals in default, which are in the hands of large banks.

Banks often prefer to dispose of bonds in exchange for less than what they would receive if the debts were paid later in an attempt to recover the amounts owed.

In possession of overdue credits, acquired with a good discount margin, managers then set out to try to recover at least a portion of the debts.

For this, they use a collection team and a reinforced legal body, to go after debtors and sew possible agreements, which guarantees the investment made in the purchase of papers.

Guilherme Ferreira, partner responsible for the areas of origination and structuring of investments at the manager Jive Investments, expects to disburse around R$ 4.5 billion in the acquisition of credits in arrears this year, twice the amount spent in 2021.

“We will still have much more volatility ahead, which tends to be favorable for the emergence of opportunities in stressed assets”, says the expert.

He makes reference to the uncertainties both on the global stage, with the war in Ukraine and the increase in interest rates in the United States, and internally, with a low GDP (Gross Domestic Product), the Selic rate back to double digits and electoral uncertainties.

The real estate, consumer and retail sectors, which are the most sensitive to the increase in interest rates, are pointed out by the manager’s partner as among those that can generate a greater number of opportunities for the funds. “It has increased the likelihood that companies in these sectors have financial difficulties.”

With around BRL 8.2 billion in assets under management, Jive began operations in mid-2010, when it took over what was left of Lehman Brothers’ operations in Latin America, a bank that went bankrupt in 2008 and became one of symbols of the American housing crisis.

Among the investments already made by Jive in the local market, Ferreira points out the construction company Viver and the waste treatment company Orizon, both with shares listed on the Stock Exchange, B3.

Ferreira explains that, in addition to overdue debts, it is common in the so-called “stressed assets sector” to invest in companies that are going through a complicated phase, but show the ability to restructure through the application of strategic capital.

“Viver and Orizon were businesses that were going through a difficult time from a financial and operational point of view when they received our investments, but they managed to recover with this help”, says Ferreira.

Due to the degree of complexity and level of risk assumed, the first three Jive funds were intended only for investors classified by market legislation as professionals – those with at least R$10 million in financial investments. The expected return on funds is around 20% per year.

At the end of last year, after an investment led by XP, Jive raised around R$ 400 million with the launch of the multimarket fund Bossanova High Yield, of a slightly more accessible nature – aimed at qualified investors, with at least R$ $1 million in financial investments.

The fund is opened from time to time to receive new contributions, but is currently closed with no opening date.

As the risk of the securities selected for the fund’s portfolio is lower, the expected return also decreases, to approximately 5% annually, in addition to the CDI. The management fee is 2% per year, with 20% of performance on what exceeds the benchmark.

It is in the manager’s plans to launch a new fund this time, this time a pension fund. As it follows the rules for the pension category with a more conservative profile, the product can be distributed to any investor interested in the strategy.

With a similar performance, the manager Starboard Restructuring Partners is in the process of closing the process of raising its third private equity fund, which is expected to raise around R$1.5 billion by mid-June.

Oil and gas, energy, retail and even agribusiness are pointed out by the director of Starboard, Marcus Bitencourt, among the sectors on the manager’s radar, founded in 2017 by executives from Banco Brasil Plural.

Starboard has around R$5 billion in assets under management, with a focus on identifying businesses in a delicate financial situation, needing a financial breath to reestablish themselves.

For this, the manager assumes relevant holdings in the chosen companies, which give her the ability to suggest recovery strategies.

“We are looking for companies that need a capital restructuring. We entered the ‘management’ [gestão] of the company to make a management shock and lead to governance”, says the director, who says he has identified, in the recent volatility of the exchange rate, commodity exporters that had problems to make adequate protections in order to protect themselves from market bumps.

The fund’s return target, aimed only at professional investors, starts at 5% per year, in addition to the variation of the IPCA (Ample National Consumer Price Index), but Bitencourt says that there has already been investment in which the return was up to nine times the amount applied.

Because of the level of risk taken, however, there are examples of businesses that did not exactly live up to expectations. One of them was the bet made on Grupo Máquina de Vendas, controller of retailer Ricardo Eletro, of which Starboard became one of the main creditors at the beginning of 2019.

Bitencourt recalls that the company even showed some improvement in results after the investment, but, with the pandemic, development did not go as planned.

The impact of the social isolation measures led to an early departure from Starboard in August 2020, shortly before Ricardo Eletro’s Judicial Recovery (RJ) application.

“We believed that the business would work out, otherwise we would not have invested, but the future is unpredictable”, says Bitencourt, adding that the manager structures all operations with guarantees, tax credits in the case of the retailer, in order to protect itself from any intercurrence. .

A case considered as a success structured by the manager was that of 3R Petroleum. The company is the result of some investments by Starboard in the sector, including Ouro Preto Óleo e Gás, an oil company founded by Rodolfo Landim, president of Flamengo. Landim was even appointed by the Jair Bolsonaro (PL) government to preside over the Petrobras board, but gave up the position to dedicate himself to the club.

Taking advantage of the state-owned company’s divestment plans to acquire a series of mature oil exploration fields, 3R went public (IPO) on the Brazilian stock exchange in November 2020 and currently has a market value of approximately R$ 8.5 billion.

In the wake of the surge in oil prices due to the war in Ukraine, the company’s shares have risen by around 26% in the year.

Starboard continues with a relevant stake in the company, close to 10%, through the Esmeralda Equity Investment Fund (FIP).

“With the interest rate hike by the BC, the money that the most leveraged companies [endividadas] they need to take to finance operations and rolling over debt becomes more expensive and they may start to need a financial breather. These are opportunities that arise”, says the director of Starboard.

On March 30, BTG Pactual informed the market in a communiqué that it committed to acquire the shareholding control of Banco Econômico, which had its extrajudicial liquidation decreed by the BC in 1996.

“The operation is part of the investment strategy of the Special Situations area [situações especiais] of BTG Pactual, focused on the acquisition and recovery of non-performing loan portfolios and the purchase of alternative financial assets, which accumulates expertise in ‘turnaround’ [reestruturação] of financial institutions under special regime”, says the document from BTG Pactual. The value of the operation was not disclosed.

In September of last year, the bank acquired at auction for R$ 937.7 million a loan portfolio from Econômico that was held by BNDES (National Bank for Economic and Social Development) and by the FGC (Credit Guarantee Fund). According to a statement from the BNDES released at the time, the credits owed by Econômico amounted to approximately R$ 14.88 billion.

Founded in 1834 in Salvador, Bahia, Banco Econômico began to face difficulties after the implementation of the Real Plan in 1994, according to businessman Ângelo Calmon de Sá, former controller of the financial institution, said at the time.

​In 1996, Econômico was acquired by Banco Excel, becoming Excel Econômico, an institution that two years later was purchased by Bilbao Vizcaya. In 2003, the Spanish bank sold its operations in the country to Bradesco.

In 2014, Calmon de Sá was sentenced to prison for the crimes of foreign exchange evasion and fraud against the financial system, which would have generated losses to the shareholders and account holders of Econômico, according to the complaints.

You May Also Like

Recommended for you

Immediate Peak