Private credit starts to show signs of recovery – 06/11/2023 – Market

The private credit market seems to finally be starting to breathe a sigh of relief. After the stress caused by the episodes involving Americanas and Light, which paralyzed the issuance of debt securities by companies and increased the average rate (spread) paid in the negotiation of securities so that investors would accept to buy them, over the last few weeks it has already been possible to some cooling is observed.

According to data from Anbima (Brazilian Association of Financial and Capital Market Entities) compiled by resource manager Sparta, whose expertise is the private credit market, the average spread of debt securities in relation to the CDI traded on the market, which came in an almost uninterrupted upward climb since the beginning of the year, reversed the trend in mid-May and started to fall.

Sparta’s CEO, Ulisses Nehmi says that there wasn’t a single event that most contributed to the closing of rates, but rather a set of factors that improved the market environment.

The progress of the rules of the new fiscal framework in Congress, the above-expected GDP (Gross Domestic Product) data and the deceleration of inflation, which reinforces the perspective of a fall in the Selic in the second half, are pointed out by the manager among the reasons that opened way for the private credit market to begin to show the first signs of recovery.

“In the middle of May we saw a turning point” in private credit, says Nehmi.

The more positive environment, added to distorted debenture rates, led to an increase in bond purchases in the market, with some normalization of spreads, says the CEO of Sparta, adding that, following this same more positive trend, the outflow of funds from the segment’s funds has decreased considerably over the last few weeks.

After monthly net redemptions of between R$7 billion and R$8 billion between February and April, in May, the volume of withdrawals dropped to around R$4 billion, according to market data monitored by Sparta. “Redemptions are at a pace that no longer generates the need for the forced sale of assets”, says Nehmi.

With the improvement in the sentiment of financial agents in relation to opportunities in private credit, large companies that traditionally access investors’ pockets are beginning to return to structuring fundraising operations via the issuance of debt securities.

According to sources, electric power companies and concessionaires such as Copel, Cemig, Ecorodovias and CCR are offering offers in progress with the potential to move volumes above R$ 1 billion each.

Data from Anbima also show that fixed income offers moved R$ 20.2 billion in May, which corresponds to growth of 71% compared to April. About half of the amount was through debentures, which totaled R$ 9.8 billion in issues last month.

“After the increase in volatility, we started to have a lull and the market manages to separate the wheat from the chaff and realizes that not everything is problematic”, says Luis Miguel Santacreu, an analyst at Austin Rating.

Financially solid companies, with a good history of payment of obligations, are the ones that already find demand from investors to carry out issues again, adds Santacreu.

Private credit manager at AZ Quest, Laurence Mello says that, even with the prospect of a drop in the Selic ahead, the market’s expectation is that interest rates will remain at high levels —in the Focus bulletin on the 2nd, the median of forecasts for Economists consulted by the BC (Central Bank) point to a rate of 12.5% ​​in December, compared to the current level of 13.75% per year.

Therefore, even with the beginning of the interest rate cut cycle, debt securities of good quality companies that offer a spread in relation to the CDI will still offer an attractive return in the double digits over the next few months, says Mello.

“The private credit market is little by little returning to normality”, says Bruno Mori, economist and founding partner of the financial planning consultancy Sarfin.

Mori says that, for individual investors, the recommendation is that investment in the niche market be made through funds, with managers who carry out the evaluation and exchanges in portfolios according to the risk and return of each company.

Mello, from AZ Quest, also states that, although spreads on private credit have experienced some cooling, they are still at levels above those observed at the end of last year, when they were around 1.5% above the CDI, compared to the current 2%.

There is, therefore, room for the recovery in bond prices to continue, if the macroeconomic scenario remains on a positive trajectory, says the manager. “We’ve already gone through rock bottom and we’re seeing a light at the end of the tunnel again.”