Also in fixed income, opportunities arise when the majority does not want to – 03/04/2023 – From Grain to Grain

In recent pronouncements, fixed income managers point out that a sequence of news in the private credit market led investors to behave irrationally and opened a window of opportunity for those most attentive. I explain what happened and what to do with this asset class.

At the beginning of the year, we were surprised by the fraud at Americanas. This event can be compared to a plane crash. It causes great trauma, but it occurs rarely.

The proof of this is in the words of Carlos Simonetti, manager of Capitânia Investimentos.

According to him, in the last two decades, they have had only 8 credit events out of the 1050 credit assets they have already invested and disinvested. In none of these was the loss close to that observed in Americanas.

Additionally, Simonetti recalls that most of the above cases occurred in the years 2015 and 2016 when the Brazilian economy, measured by GDP, fell by more than 7%.

We are experiencing a year of economic slowdown, but the country grew 2.9% in 2022 and should grow 0.8% in 2023, according to market expectations in the Central Bank’s Focus report.

The Americanas event left investors sensitive to any news. And they came.

Shortly thereafter, there was news that Light had hired financial advisors to restructure its debt.

As manager Pierre Jadoul, from ARX Investimentos, explains, the Americanas and Light cases are completely different. In 2026, Light’s concession contract expires and the granting authority needs to return R$ 11 billion to Light. As Pierre says, that amount would be more than enough to pay off the company’s entire debt.

To complete the sequence of announcements, news appeared about financial difficulties at Oi, Marisa and Tok Stok. However, these companies have been experiencing financial problems for years and are no longer part of the investment scope of the vast majority of funds.

The manager completes that investors are not knowing how to separate the wheat from the chaff. This has led to a window of opportunity that has only been seen in the pandemic.

In a simplified way, it is possible to separate the credit market into two parts: high grade It is high yield. The first is formed by issues of companies with high credit quality. The second is constituted by high-return issues that occur in companies with worse credit quality.

Investors do not know how to separate these two segments and consider only one, that is, private credit.

The fear caused the demand for private credit assets to drop so that credit spreads rose to a level similar to that observed in July 2020, that is, still at the height of the pandemic.

The graph above shows the evolution of the IDEX, which is a private credit fixed income index maintained by the manager JGP. The index points out that the average credit spread is currently at 2.8% per year. That is, on average, private issuances of liquid and relevant debentures have an average term of 2.6 years and yield 2.8% above the CDI.

As Simonetti has already warned, Pierre reinforces that the moments (2020 and 2023) are very different. As Pierre remembers, in 2020, we were all inmates and there was huge uncertainty about how the economy and companies would work if everyone was at home.

The alert about the opportunity is unanimous and Pierre claims that those who are taking advantage would be the bank treasuries. These have already noticed the return asymmetry and have already started buying.

Daniel Varajão, an executive at Porto Asset Management, recalls that those who maintained their investments achieved a strong performance in the following months after the stabilization of the credit spread in 2020.

Porto Seguro’s daily liquidity credit fund, which historically yielded 103% of the CDI until 2019, began to yield above 200% of the CDI in the months following April 2020 and yielded 148% of the CDI in 2021.

Pierre agrees with what I’ve already written recently. We live in a moment when two factors combined provide a great opportunity. Interest rates and credit spreads are very high and are unlikely to stay that way for long.

As he states, earning above IPCA + 7% per year, exempt from income tax, in AAA qualifying companies and for the long term is something that does not happen often and should be taken advantage of.

Michael Viriato is an investment advisor and founding partner of Investor House.

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