COEs struggle in Brazil, but experts still see room for growth

Apr 17, 2024

Structured Operations Certificate (COEs), also known as the Brazilian version of “structured notes,” entered the Brazilian market in 2016 with high expectations but have yet to “take off.” Over the past four years, the trading volume has been increasing, which explains the assessment of some market participants who see potential for the product to gain traction. However, COEs have also been the target of many criticisms and complaints.

From December 2022 to December 2023, the total trading volume nearly doubled, from R$ 1.2 billion to R$ 2.1 billion, according to a survey conducted by Fipecafi with data from B3. By March 2024, the total volume of COEs reached R$ 2.56 billion, with an average volume per operation of R$ 129,116. The record amount reached by the product in May 2023 was R$ 3.09 billion.

“The instrument allows for both guaranteed capital (more common) or at risk (less common) modalities. In other words, in the worst-case scenario, the investor either exits with the same invested amount (if guaranteed) or faces the chance of losing value compared to the principal invested (if at risk),” says Felipe Nasciben, a Finance professor at Fipecafi and a specialist in the financial market.

Luciana Maia Campos Machado, a Finance professor at Fipecafi and author of the study on COEs over the past four years, points out a trend of growth in the industry, with a greater distribution of these products. However, the decrease in the average volume per operation over the years suggests greater investor access to products with a more affordable minimum investment.

For Itaú Unibanco, the decline in the average ticket size is positive as it allows for the exploration of other investor profiles and the popularization of the product.

“With a lower ticket, we can even access investors who now have access to products that they would have had difficulty investing in before. It’s one thing for a high-net-worth investor to invest directly in offshore markets or indices, or occasionally make compositions. When you go to a more retail investor, this access is a bit more difficult, although it is more democratized today,” says Marcio Kimura, superintendent of Itaú Corretora.

Currently, there are numerous COE options in the market, tied to indices, stocks, or commodities. Since the issuance of the first COE in Brazil, the industry has become more diversified and accessible.

Among the COE trends, Nasciben from Fipecafi observes an increase in products tied to international assets, especially from foreign banks with local units, emissions referenced in international assets, and trigger conditions for coupon payments and/or early termination of operations.

Itaú, one of the main issuers of the product, corroborates this information. “We have a significant portion of two main families of COE: one of fixed income, whose strategy is associated with inflation, usually IPCA, or the futures interest rate market, with a more conservative profile because they usually have a minimum income, at least a minimum guaranteed return.

“Historically, we have always had a significant portion of this type of product at Itaú,” says Luciano Diaferia, Itaú Unibanco’s Product superintendent. “The second important portion for us today is what we call international indices, which are linked to giving investors access to markets outside the country, for example, accessing the American stock exchange or the European stock exchange.”

In addition to foreign assets, there is a trend of COEs related to corporate debts and an increase in the at-risk capital modality. According to the Fipecafi specialist, the vast majority of COEs are still issued in the ‘protected capital’ modality, which guarantees the investor at least the invested amount back, but it is already possible to observe an increase in offerings available on brokerage platforms in the ‘at-risk capital’ modality, where there is the possibility of total or partial loss of invested capital. “It is an important change for the Brazilian market still with a relatively low level of financial education of the investor,” Nasciben points out.

For Itaú, the product has shown some expansion at a “considered adequate pace.” “The COE is meant to be an additional class among investment alternatives, it is a portion of the investor’s portfolio. It is not meant to be a product of the same size as the CDB in the market, for example,” says Diaferia.

According to Nasciben from Fipecafi, the possibility of diversification of exposure in a single instrument and the potential return above traditional fixed income, but with possible guarantees of no loss of principal, are positive factors, but he notes that, being a hybrid of fundraising plus a derivative, it brings with it the idea of opportunity cost plus the cost of entry into derivatives (like an option premium), two variables that are not commonly known and easily priced.

For the specialist, there are serious institutions in the market that offer correct products to investors with suitable profiles, who end up having good experiences with COE and, in many opportunities, good profitability. However, the industry has not ‘taken off’, especially because many investors did not see real returns, and this may have occurred due to different factors. “Such as the fact that the business ideas of the issuers were not successful in terms of market analysis accuracy, the rejection of some investors to invest in products they do not know, the eventual abuse of spreads that compromised the profitability of operations, biased commissions that put inappropriate investors in certain products, or the lack of market liquidity that prevents a quick exit from the position.”

Diaferia from Itaú points out that the bank is aware of the criticisms of the product and states that COE is not a “single thing,” but rather a family of products with various strategies, situations, negotiated and offered by different market agents. “Like any financial product, if it is not properly priced, it may not be beneficial to the investor. A specific COE strategy may not be considered good,” says Diaferia. “There are COEs in the market that we have seen, that I understand criticisms. But I cannot generalize that all COEs that were issued were bad.”

For Itaú executives, it is necessary to be careful with the evaluation of each type of COE and to look at the performance of COEs in the market as one evaluates investments in general. “If there is an offer of a COE indexed to B3, for example, and the stock exchange falls in that month, the COE also does not have a good performance. Am I going to say that the COE is bad because it was worse than the CDI? Not necessarily, because perhaps my COE performed better than the Ibovespa for the period, despite the Ibovespa falling. So, for that investor who made an allocation in the stock exchange, the COE may have been well thought out for an allocation in the stock exchange,” says Diaferia. For this reason, the Itaú product superintendent sometimes considers that “the criticisms are exaggerated”, since it is necessary to be careful with the type of comparison made.

Kimura from Itaú Corretora believes that “any product can be bad if it is not suitable for the investor’s profile. Even a super conservative fixed income product in a super aggressive client’s portfolio is poorly allocated.” For him, pricing, asset class, and suitability for each investor’s profile make the product suitable. “I think the criticism is very linked, because perhaps the product sales strategy in the market is not the most suitable, the pricing is not the most suitable, but you cannot criticize that the product is bad.”

According to Itaú executives, the COE product still has room for growth amid a maturing curve, “but it has had a healthy pace of market vision” and “given the flexibility, it fits in all scenarios and will always be on the bank’s shelf” to bring diversification alternatives to the investor.

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Everything ready at B3 for the start of the Bitcoin futures market

Apr 16, 2024

The digital assets market is relatively new but has gained relevance worldwide not only due to the interest of individual investors but also institutional ones, which attracts regulators’ attention. Since Bitcoin entered the Brazilian market, dozens of other cryptocurrencies have begun competing for space in investors’ portfolios. The emergence of crypto funds and BTC ETFs, approved by the SEC earlier this year, are significant milestones in this market. Brazil is following the trend of institutionalizing crypto assets. The latest initiative is the creation of the Bitcoin futures market at B3, which begins operating this Wednesday (15). Analysts consulted by Capital Aberto discuss expectations for this new form of trading and also the major event of the week, the BTC halving.

For the director of new business at Mercado Bitcoin, Fabrício Tota, the Bitcoin futures market at B3 validates for more conservative investors. “Perhaps it was the boost that was missing, as it is not obvious to most people.”

From a classical point of view, the futures market is nothing more than an environment that allows hedging positions in the stock exchange, that is, protecting investments.

“This new derivative instrument will provide investors with an additional way to diversify their strategies and protect against Bitcoin volatility,” explains the head of cryptocurrencies at Hurst Capital, Francis Wagner.

According to him, by using the Nasdaq Bitcoin Reference Price index as a reference, the Bitcoin futures contract will be cash-settled, without involving the direct buying and selling of cryptocurrencies. “The presence of market makers initially will help ensure liquidity and reliability in price formation. This move by B3 reflects the growing demand for regulated instruments in the Brazilian crypto market,” says Wagner.

In the view of the head of cryptocurrencies at Hurst Capital, Bitcoin futures contracts at B3 will contribute to popularizing Bitcoin investment in Brazil, although they should not be seen as a revolutionary change in the game. “It will represent a significant evolution in the Brazilian financial ecosystem, offering investors more options to diversify their strategies and protect against Bitcoin volatility.”

However, Wagner warns that Bitcoin ETFs, already traded on B3, may be more interesting in certain aspects, especially considering managers’ commitment to holding the asset in their portfolios, which can affect supply in the market.

“The introduction of Bitcoin futures contracts at B3 has the potential to increase visibility and acceptance of Bitcoin in the Brazilian market, including for institutional investors. Opportunities for arbitrage between Bitcoin futures and ETFs traded in the local market may arise, which usually attracts more of this type of investor,” analyzes the manager and investment director at QR Asset Management, Theodoro Fleury.

After the Brazilian Securities and Exchange Commission (CVM), the sheriff of the Brazilian capital market, approved the manual with the rules related to this type of contract, the new Bitcoin modality will start operating on the Brazilian Exchange this Wednesday (17).

Bitcoin halving, which occurs every four years and is responsible for reducing the issuance of new bitcoins, will have a new element this year that could help boost Bitcoin after the event. We are talking about the Bitcoin spot ETF in the US, introduced in early 2024, which could positively influence the digital currency’s price.

According to the head of cryptocurrencies at Hurst Capital, expectations for the Bitcoin halving, which occurs on April 19, are quite optimistic, both based on historical analysis and the company’s perspective.

“Historically, halvings have been followed by significant increases in the price of Bitcoin, reflecting the growing interest in Bitcoin. However, we must consider the current scenario, especially with the introduction of ETFs in the US, which could positively influence the results after the halving,” explains the executive.

Despite this new element, Wagner believes that the continuous reduction in the supply of Bitcoin and the increasing demand for the asset will continue to drive the price up after the halving. In his assessment, another relevant point is the All-Time High (ATH), which has never been surpassed before the halving, but that has already changed this year.

“Historical trends suggest that a rise in the price of Bitcoin is more likely. As we have seen in previous halvings, the market usually responds with a significant appreciation of Bitcoin, fueled by the reduction in supply and the increase in demand,” highlights Wagner.

Although it is impossible to predict market behavior, especially considering factors such as the introduction of Bitcoin ETFs in the US, the head of cryptocurrencies at Hurst Capital sees the increasing scarcity of Bitcoin, its disinflationary nature, and the constant rise in interest attracting investors, thus driving the price of Bitcoin upwards after the halving.

On the other hand, the founding partner of Wetrade, Raquel Vieira, states that the expectation is good for the event, but the market has already priced in this movement, thus being more of a psychological price increase mechanism, since more than 90% of bitcoins have already been mined.

“But the market continues to have this pattern of a high every four years. In this cycle, it had a particular behavior because Bitcoin started hitting all-time highs before the halving. So, it could be something positive, since Bitcoin grew before the halving and may continue to grow afterward as in previous cycles,” analyzes Vieira.

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Privatization of Sabesp attracts funds and industry groups

Apr 12, 2024

The long-awaited privatization of the São Paulo Basic Sanitation Company (Sabesp), a campaign platform of Governor Tarcísio de Freitas, is close to happening, as the public consultation ended last month. With this, the market’s expectation is to know who the interested parties are and who has the strength to make a significant investment.

According to estimates by Bradesco BBI, the value to be paid for the concessionaire should be around R$ 15 billion (U$ 3 billion).

The privatization model foresees the reduction of the State’s participation by up to 30%, a limit approved by the São Paulo State Legislative Assembly. The São Paulo government holds 50.3% of Sabesp’s shares, while the other 37.6% are traded on B3, and 12.1% are listed on the New York Stock Exchange.

According to analysts consulted by Capital Aberto, the auction is expected to attract companies from the sector, as well as private equity funds. Sabesp has the great allure in its concession, as it is mainly concentrated in the state of São Paulo, the largest consumer center in the country. The company serves nearly 60 million people, with 28.4 million receiving water and 25.2 million with sewage collection.

According to Phil Soares, head of stock analysis at Órama, the company is a reference in the Brazilian sanitation sector. “The market perception is that there is still a lot to be done in terms of efficiency.” He adds that the capitalization obtained through privatization will allow for a faster expansion of the network.

The sale of Sabesp will be similar to that of Eletrobras, with the government selling part of its shares. However, the model envisaged by Tarcísio de Freitas establishes the idea of a reference shareholder.

“The main difference between the two is that, in the case of Sabesp, the governor of São Paulo is seeking one or more strategic partners who are already in the business, who are interested in bringing expertise and aligning the interests of the private sector,” says Soares.

Regarding potential buyers of Sabesp, the head of stock analysis at Órama says that Equatorial is exploring the operation, as well as Votorantim and Pátria. “This is a very positive point because with the action of the sector, you will have new ideas, new technologies that can be brought to the company.”

In addition to the well-known players in the national scene, Soares points out that there are foreigners in the game. “We are talking about GIC, a fund from Singapore, which can be a relevant player, it is a classic infrastructure investor in Brazil,” he explains.

Still regarding potential interested parties, Gustavo Mueller, director of Fitch Ratings and specialist in the sanitation sector, emphasized that there are rumors about various groups. “Among the main private clients active in the sector, we are talking about Grupo Águas do Brasil, BRK Ambiental, Iguá Saneamento, and Aegea, which have a reasonably leveraged balance sheet. It will be necessary to design to bring in new money or a partner.”

On the positive side, these companies already know the sector and know how to operate sanitation in Brazil, which mitigates potential performance risks. On the other hand, companies like Votorantim, Cosan, and Veolia, speculated for the tender, Mueller warns that they will need a learning curve in the sanitation sector.

Among the interested parties are Equatorial and Cosan, as well as asset managers such as Yvy Capital, led by former minister Paulo Guedes, and Aegea Saneamento.

Pátria Investimentos, a strong candidate to participate in the Sabesp tender, said it cannot comment on the subject but stated that the infrastructure sector in Brazil is excellent for investing. “Today, despite the sectoral challenges and in the different segments of the infrastructure industry, this sector in Brazil has been a focus of Pátria, as well as of other investors,” says Daniel Sorrentino, partner and CEO of Pátria Investimentos.

Other potential interested parties, approached by Capital Aberto, declined to comment on the subject. Vinci Partners, one of the largest private equity managers, stated that “it is not commenting.”

Equatorial, in turn, stated that “the Equatorial Energy Group does not comment on specific business or acquisition possibilities,” as does Cosan, which will not comment on privatization. At the time of publication of this article, Capital Aberto was unable to contact Veolia and YvY Capital.

The São Paulo State Public Services Regulatory Agency (Arsesp) approved a tariff adjustment for the São Paulo state sanitation company of 6.44%, above inflation, a factor considered positive for the company’s privatization, as it further enhances its shares.

On Tuesday (9), the day of the announcement to the market, the asset closed up 0.33%, at R$ 84.78 (U$ 16.52) . This increase made Sabesp reach its highest market value, reaching R$ 58.07 billion (U$ 11.61 billion)

“The adjustment is positive for the shares since it was a fair adjustment and there was no state interference in the calculations. The company’s demands were met, it came out as expected, which is good, especially at this specific moment of privatization,” says Leonardo Piovesan, an analyst at Quantzed.

Despite the upward trend throughout this year, Soares emphasizes that Órama has a buy recommendation for the asset since Sabesp has room for operational improvement.

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Two reasons weigh on foreign capital flight from B3

Apr 11, 2024

The flight of foreign capital in the first quarter of this year reached its worst level since the beginning of the pandemic. In March, investors withdrew a total of R$ 5.54 billion (U$1.108 billion) from B3 (Brazil’s stock exchange), leading to a negative result of R$ 22.89 billion (U$ 4.57 billion) in 2024. However, if we consider the month of April, up to the 8th, the most recent data from B3, the result is negative by more than R$ 23 billion (U$ 4.6 billion).

According to analysts consulted by Capital Aberto, two reasons explain this movement. One of them is the interest rate scenario in the United States, and the other is the economic policy conducted by the government of President Luiz Inácio Lula da Silva.

At the end of last year, with the Federal Reserve’s signaling of maintaining interest rates or starting a rate cut in 2024, there was a very strong flow of foreign capital into B3 in November and December, resulting from the significant gap in interest rates here and in the US.

As a result, at the turn of the year, the market positioned itself for the beginning of the cut, a fact that did not occur, as US data began to come in stronger than expected, with the interest rate cut being postponed by the Fed.

“The Fed needs inflation to start cooling down to deliver the magic number of 2%. With the worst macro scenario, the interest rate cut was postponed. At this moment, the expectation is that the cut will start from July onwards, becoming more towards the last quarter of the year,” explains VG Research’s chief analyst, Luan Alves.

According to him, this postponement of the cut in the US led foreign capital to withdraw not only from Brazil but also from emerging markets as a whole. “Brazil was worse off marginally, despite weak data in China as well. Brazil has a correlation with China, Fespecially in commodities.”

As an example, he cites steel and mining stocks, which have accumulated a significant decline in 2024. In the year, shares of Vale (Brazilian multinational corporation engaged in metals and mining), which dominate the trading volume of the Ibovespa, fell by 16.64% until the close of Wednesday (10), while CSN had an astonishing drop of 27.01%.

“In general, this foreign flight is related to the macro scenario, mainly due to the interest rate policy in the US, which is less permissive with inflation,” explains Alves.

Asked about the possibility of a reversal of this scenario in the short term, VG Research’s chief analyst believes that there should not be an improvement in sentiment at least until June or July. “An improvement should happen from October onwards.” The US inflation released this Wednesday (10), for example, corroborates with this perception, with a rise of 0.4% in March, above the market’s expectation of 0.3%, reinforcing the difficulty for price deflation in the country.

In addition to the interest rate differential between Brazil and the US, Warren Investments’ multi-market manager, Eduardo Grübler, states that most of the foreign investor outflow was to realize profits after the strong gain in 2023. “We are very small on the global scale, so the inflow and outflow of foreigners have a significant impact on the Brazilian stock market,” analyzes Grübler.

Until April 10th, the Ibovespa, the main index of B3, accumulated a decline of 4.57% this year.

Although the US has a large share in this foreign capital flight from the Brazilian stock exchange, due to the interest rate differential with Brazil, the economic policy of the Lula government also contributes to the movement. According to Murillo Torelli, professor of financial and tax accounting at Mackenzie University, the government’s interference in state and private companies has been crucial.

“The instability generated by these interventions negatively affects investor confidence, harming the performance of the stock market. This uncertainty about government policies creates an unstable environment for business, discouraging potential investors and contributing to the outflow of capital from the stock exchange,” emphasizes Torelli.

Alves, from VG Research, has the same perception about the Brazilian government. According to the analyst, greater government interference in the first quarter of this year, in addition to the loss of popularity, led to political noise in companies like Petrobras and Vale.

This intervention, however, seems not only in the two giants of the commodities sector. The Mackenzie professor also mentions Eletrobras, which is now in the spotlight, as the government expresses its intention to reverse the privatization established in Jair Bolsonaro’s government.

“It is crucial that the government reevaluates its approach to state and private companies, adopting a more transparent and pro-market stance. Stability and predictability are essential to attract investments and promote sustainable economic growth. Otherwise, we run the risk of seeing more foreign investors distancing themselves from the Brazilian market, further aggravating our economic situation,” concludes Torelli.

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Analysts point out positive factor that may aid Sabesp privatization

Apr 10, 2024

The 6.44% tariff adjustment in Sabesp (Brazilian water and waste management company) rates is seen as a positive move by analysts consulted by Capital Aberto, as it is expected to assist in the process of privatizing the concessionaire, since it surpasses the inflation of the last 12 months, which stood at 4.50%. The new rates will come into effect from May 10th.

For the adjustment, the Regulatory Agency for Public Services of the State of São Paulo (Arsesp) took into account factors such as economies of scale and the elimination of past adjustments, typical for this type of regulation. However, the regulatory agency omitted a request from Sabesp, which sought to include in the adjustment the effect of tariff discounts given to large consumers.

In a report published this Tuesday (09), Bradesco BBI emphasizes that the adjustment above inflation is positive for a public company like Sabesp, especially as it is on the verge of privatization, as it is expected to increase the value of shares.

Flavio Conde, an analyst at Levante Investimentos, shares a similar view. “(With this adjustment) privatization becomes more attractive, since those evaluating privatization imagined a 4% adjustment. This adjustment will be factored into valuation models, allowing for a higher bid for the company.” According to him, with this adjustment, Sabesp’s revenue will be higher, as will cash flow. “Everything is very well-rounded, very well-done. I am very excited (about privatization).”

Sabesp’s common stock closed the session up 0.33%, at R$ 84.78 (U$ $16.96). Earlier, when the market was still digesting the tariff adjustment, shares rose nearly 1%.

The São Paulo state government is the majority shareholder of Sabesp, with 50.3% control of the company. The remainder is dispersed in the market. The privatization project envisages the sale of most of these shares, but with the government retaining veto power.As the company is listed on the stock exchange, the amount to be pocketed by the government will depend on the stock price at the time of the auction. According to Conde, the auction is expected to take place in June. With privatization, the state government expects investments of R$ 68 billion (U$ 13,6 billion) in sanitation by 2029, and R$ 260 billion (U$ $52 billion) by 2060.

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Retailers offering financial services end year with decline in delinquency

Apr 9, 2024

Major Brazilian retailers that operate financial services saw a reduction in delinquency in the last quarter of 2023. According to Fitch Ratings, this could indicate a gradual trend for the coming quarters, which will be essential for these companies to preserve their credit profiles and recover cash flows from 2024 onwards. The improvement, although moderate, interrupts a trajectory of severe deterioration that began in late 2021.

According to Renato Donatti, director at Fitch Ratings, the reduction in delinquency is due to a combination of two variables. “The first, a somewhat more macro variable, is that we are already beginning to feel a bit of additional income in people’s pockets, whether through increased employment rates or the partial reduction captured in interest rates. We have come down from the peak of almost 14% to 10.75%, which already brings an improvement,” he says. “The second variable, as important or even more important, was the fact that companies are also a bit more disciplined in controlling credit granting, with two exceptions, MercadoLibre (Argentine e-commerce company) and C&A (multinational chain of retail clothing stores), which continued to offer credit in a somewhat more robust manner,” Donatti adds.

The average of delays exceeding 90 days in the financial services of C&A, Carrefour (French multinational retail and wholesaling corporation), Grupo Casas Bahia (Brazilian retail chain specializing in furniture), Guararapes, Magazine Luiza (one of the biggest Brazilian retail companies), MercadoLibre (Meli), and Lojas Renner(one of the largest Brazilian fashion retail companies) decreased to 15.3% in the fourth quarter of 2023, compared to 16.7%, 17%, and 16.6%, respectively, in the third, second, and first quarters of the year, but it remains significantly above the 13.4% recorded in 2022 and the 9.8% in 2021.

The additional income from the thirteenth salary is a seasonal factor that may have favored delinquency rates at the end of the year, but this trend was not observed in the last two years, which also contributes to the expectation of a downward trend throughout 2024.

“The 15.3% represents a drop compared to the very high numbers we saw, especially throughout 2023 and the end of 2022, but if we look at the historical average, they are much lower than that. Historically, these numbers were between 9% and 11%, excluding the pandemic period,” Donatti points out. “They rose significantly since 2021, remained high for a good period, reflecting higher inflation levels in the past and the sharp increase in interest rates.”

Despite the improvement in delinquency, in terms of stock performance, 2023 was unfavorable for the retailers analyzed by the credit rating agency. Of the 6 companies, 4 of them had a negative total return—stock performance plus dividend payments—during the year.

Only Guararapes, owner of Riachuelo, and Lojas Renner ended 2023 with a positive return.

Among the companies classified by Fitch, MercadoLibre showed the greatest reduction in delinquency in its financial services, to 18.7%, from 24.5% on average in the first three quarters of 2023. C&A, on the other hand, showed a more moderate reduction, to 18.8%, from 21% previously, and still faces the challenge of presenting a more significant improvement in its financial activity results. In turn, Guararapes recorded a slight decrease, to 18.4%, from 18.7% in the third quarter, but still above the average of 17.8% for the first three quarters. Nevertheless, it ended 2023 with the lowest indicator of the three companies.

According to Donatti, Meli comes from a stronger growth in the portfolio, along with C&A, which are the most recent companies in this credit granting segment.

“They reached a delinquency peak of almost 30% in the fourth quarter of 2022, and we believe that, at this moment, growth rates remain high but are lower than in the past. They already have a relatively well-established credit portfolio, which allows the company to be more assertive in granting credit,” says Donatti, adding that the statement also applies to C&A, which has been increasing the portfolio and improving delinquency. “We saw a slightly better number in the 4th quarter, although we cannot say that this is a trend that will continue throughout the year, there are important factors that lead us to believe that the overall scenario will be a little better, but this will also depend a lot on the appetite of these companies to continue growing.”

In 2023, the credit portfolio of these companies grew by 8%, strongly influenced by the expansions of C&A (+71%), Meli (+33%), and Carrefour (+24%). Guararapes (-7.3%), Casas Bahia (-3.6%), Lojas Renner (-2.7%), and Magazine Luiza (-0.9%) took a more cautious stance and reduced originations during the year, given the adverse scenario for their retail segments and greater financial pressures on their balances, except for Renner, which has a stronger balance sheet.

Despite the decline, the credit rating agency points out that the sector will still face challenges. Donatti states that factors such as high family indebtedness, decreased credit grants, and high interest rates are determining factors.

“Combined with indebtedness, retail, especially discretionary, typically depends on credit. And when we see a scenario of deteriorating delinquency, we see companies holding back a bit on granting credit. This, to some extent, ends up being limiting. And that’s why it’s important for delinquency to start falling at a slightly faster pace, so that companies feel more comfortable returning to granting more credit, thus also helping retail performance,” Donatti points out.

For 2024, Fitch believes that retail is expected to improve. “This aligns somewhat with these more controlled inflation levels. We have a resilient employment level and a minimum wage increase of about 7%. We believe this is an important factor in restoring some of the income that has been affected by inflation over the past three years. This 7% adjustment, by itself, will not restore 100% of purchasing power, but it helps,” says Donatti.

Marco Saravelle, chief strategist at MSX Invest, states that the sector is receiving many stimuli, with debt renegotiation for the population and injection of resources by the government, which naturally tends to reduce delinquency. “At first, I agree that we have much more positive news than negatives on this point. We have to look not only at retail results, but mainly at banks. And I think it’s a certainty that there won’t be an explosion of delinquency, a significant worsening, which is the major concern. I think that’s the main point,” Saravelle points out.

“The performance of stocks has been greatly determined by the long-term interest rate curve, not because of these more specific factors, but, in a way, in terms of delinquency, we have a positive surprise for banks and for retail as a whole for the year.”

For 2024, Fitch still has a neutral outlook for the sector, on top of a weak base in 2023. “At the end of last year, we also saw several companies improving inventory levels, taking advantage of the end of the year to make some promotions, entering 2024 with more controlled levels. All of this indicates that this year has everything to be better for retailers than 2023,” comments Donatti, who mentions the Americanas event and the wave of short-term refinancings. “What we have seen now is that the market is really more liquid and this has allowed companies, not only retail ones, but especially those we mentioned here, to refinance their debts with longer terms,” says the director of Fitch.

Caroline Sanchez, a retail analyst at Levante Inside Corp, analyzes the data from retailers and believes that the first half of 2024 will still be cautious for the market. “In this first semester, I believe the market should be, in general, a little more cautious about taking a little more risk. I believe that during this period, the focus will be more on the macro, but looking at the second semester, we will be able to focus more on the micro, on the quality of companies, look at valuation, and in terms of interest rate reduction, it should favor more leveraged companies,” says Caroline. “This is an issue that contributes in two aspects, both from the point of view of stimulating population consumption, as well as being able to contribute in relation to the cost of capital of these more leveraged companies.”

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Investment funds record second highest net inflow in the last five years

Apr 8, 2024

The positive start to the year for the investment fund industry can be explained by several factors. Technically, the two marked by a massive outflow of resources partly justify the high percentage increases in the indicators. Falling benchmark interest rates and regulatory changes that limited access to tax-exempt products also played in favor of greater attractiveness of the funds. The result was a first quarter with a net inflow of R$ 105 billion (US$ 21 billlion), the second best in the historical series of the last five years. In the same period of 2023, funds lost, also in net terms, R$ 73.4 billion (US$ 14.68 billion), according to data from the Brazilian Association of Financial and Capital Markets Entities (Anbima).

“Products such as LCI (Real Estate Credit Letter), LCA (Agribusiness Credit Letter), CRI(Real Estate Receivables Certificate), and CRA (Agricultural Receivables Certificates) offered a very interesting return with low volatility and were tax-exempt. As they become more restrictive, fixed-income funds and infrastructure funds end up gaining more activity,” comments Pedro Rudge, vice president of Anbima, mentioning one of the factors that contributed to the industry’s good quarter.

By the end of March, funds had accumulated assets totaling R$ 8.7 trillion (US$ 1.74 trillion), 15.5% higher than in the same period last year. Other figures presented by Anbima this Friday (05) reinforce the sector’s recovery momentum. There was an increase of 6.9% in the number of accounts, 6.2% in the number of investment funds, and 8.3% in the number of fund managers.

The recovery of investment funds this year until March, however, is not happening linearly. Multimarket and equity funds are going against the trend and losing assets, while fixed-income funds maintain their appeal. Multimarket funds lost a net amount of R$ 28.2 billion (US$ 5.64 billion), while equities saw much smaller outflows of R$ 2.1 billion (US$ 420 million) in the quarter. Once again, fixed-income funds are driving the industry’s performance, having captured nothing less than R$ 131.7 billion (US$ 26.34 billion).

Another highlight in Anbima’s press conference was the performance of infrastructure funds, which, in Pedro Rudge’s view, benefited from regulatory changes at the beginning of February that limited access to incentivized products related to agribusiness and real estate. In the first quarter, fixed-income infrastructure funds captured R$ 22.2 billion (US$ 4.44 billion). Just in March, after the measures, R$ 9.3 billion (US$ 1,86 billion) flowed into the product. “Fixed-income and fixed-income infrastructure funds are receiving a portion of these resources that were going into tax-exempt securities. This explains part of this positive inflow,” says Rudge.

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The Central Bank of Brazil is keeping an eye on US inflation data and is not attempting to “contain the dollar” through intervention

Apr 4, 2024

In a scenario marked by expectations about the direction of US monetary policy, all eyes are on data regarding the behavior of the American economy, hoping for a signal about the start of cuts to the Fed funds rate. The president of the Brazilian Central Bank, Roberto Campos Neto, even stated on Wednesday (03) that the numbers on April 10 are important to define the next steps of the Fed. He refers to the CPI – data on American inflation. Campos Neto, speaking at an event hosted by Bradesco BBI, reiterated the challenging global scenario, mentioned the resilient service inflation, and denied that the Central Bank, with its exchange intervention, had attempted to contain the dollar.

“We embarked on a disinflation process, which stalled. Some people call it the last mile, last kilometer. And in this event we had a month and a half ago, some people said that the last mile was already done, and I said I didn’t think so. I think in the minds of central banks, especially the Fed, this is not true,” said Campos Neto. The BC president added that inflation cores have fallen, but now at a slower pace and, in some places, have stalled. “In others, it started to rise a little. We also see some emerging countries with a similar dynamic.”

“In the US, we see that headline inflation has started to stall around 3.2%. The number that will come out on April 10 is very relevant because the Fed needs to have a narrative about the disinflation process, and it has remained with a greater degree of uncertainty because some things that were identified as disinflationary factors are not proving to be so disinflated: labor, real estate, energy has started to rise a bit again, so this will also be a challenge,” he points out.

According to the Central Bank’s survey, almost all developed countries have an equal expectation of interest rate cuts, unlike the scenario in Latin America. He considered it important to emphasize that Brazil has, over the past few years, been able to work with lower real interest rates, although still high, and he affirms that the disinflation process is “more or less in line with what the authority understands.”

During his participation in the event, the BC president also commented on the intervention made in the exchange market the day before, with the sale of US$1 billion in foreign exchange swap contracts. “Our intervention had nothing to do with the exchange rate movement; we always say that the exchange rate is floating. It is important for the exchange rate to be floating because it functions as an element that absorbs shocks and then redistributes resources more efficiently.” According to Campos Neto, the reason for the intervention was the maturity of NTN-A3. “We thought it was significant, that there could be some dysfunction on the day, and that is why an intervention was made. We mentioned this in the intervention text; many people did not notice.”

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Requests for Judicial Recovery by individual farmers in Brazil increase by 535% and reinforce risks linked to rural credit

Apr 2, 2024

The “agro crisis” resulting from factors such as reduced commodity values, crop failure due to climatic issues, high interest rates, increased production costs, and farmers’ indebtedness have concerned the market and generated pressure for actions to foster the sector. Among those affected are individual rural producers, who saw a 535% increase in requests for judicial recovery (JR) in 2023, according to Serasa (the largest credit bureau in Brazil) data. The number of requests for this recourse rose from 20 in 2022 to 127 the following year. Just from the third to the last quarter, there was a 62% increase.

If previously, problems in the sector – whether in agribusinesses or their individual owners – almost exclusively affected public banks that financed the harvest, today the sector utilizes instruments from the capital market to raise funds. With investment funds from agribusiness production chains, Fiagros (an investment fund in agro-industrial chains), and Agricultural Receivables Certificates (CRAs) growing in importance, rural issues reach even Faria Lima, worrying managers and investors.

Data released on Monday (01) by CVM (Brazil’s Securities and Exchange Commission) show that the CRA market grew by 35.8% in 2023, reaching US$ 25 billion (R$ 130 billion). Fiagros, on the other hand, grew by 103% in the same period, reaching US$ 4.2 billion (R$ 21.3 billion), an evolution almost 10 times greater than fixed income, variable income, and investment funds markets, which grew by 11.2%, on average, in the period.

In a note, Serasa Experian’s agribusiness head, Marcelo Pimenta, commented that “when we consider the number of judicial recovery requests relative to the millions of people engaged in agricultural activities, the number of judicial recoveries seems small, but the speed at which these requests are growing quarter by quarter is concerning. In addition to climatic issues, which have led to crop failures in several regions and increased management challenges, the economic scenario, both nationally and internationally, has not contributed to creating financial stability in the field.”

With the use of artificial intelligence created by Serasa, the Agro Score, the entity identified that the majority of requests for judicial recovery stem from poorly evaluated credit decisions over the last 3 years.

According to Serasa’s findings, the rural producers who requested judicial recovery the most were those with larger areas planted with soybeans via remote sensing analyses, followed by pasture areas, and then coffee.

Felippe Serigati, a researcher at FGV Agro, points out that in the course of 2024, there may be a new increase in requests for judicial recovery. “I think not everyone who is on the brink has already made their request, but the scenario, perhaps, will not be as uncomfortable as it was throughout the first semester. We have better rainfall volumes at the end of February, March, and even in the first half of April. Especially for corn producers who manage to start the harvest a bit earlier, or at least not so late, I think the situation is a bit more favorable,” comments Serigati.

Challenges of agribusiness

Among the sector’s challenges, Laura Bumachar, an expert in Judicial Recovery and Bankruptcies and partner at Dias Carneiro Advogados, cites the crop failure in 2023 due to severe drought and the increase in credit costs.

“Today, the government is not the only one financing agribusiness. On the contrary. You have a soup of securities, such as CDA and WA, CPR, CRA, all financed by the private sector. And, with the rise in interest rates, this CRA also became a bit more expensive, in the end. There have been several processes of judicial recovery for farmers, which is a bit worrying, precisely because it further increases credit costs, especially if judicial recovery is not the appropriate remedy for this type of situation,” points out Laura.

The Selic rate is in a downward trend, but the cost that agribusiness is paying in the current harvest is the financing cost established last year, during the preparations for planting, making credit for the sector more expensive.

“Although the Selic rate is falling, the long-term interest rate curve is not exactly following the same dynamics; there are many uncertainties regarding the Brazilian economy, and that is the point. Credit, for the Brazilian economy as a whole, is not expected to fall to the same extent as observed in the Selic,” Serigati points out.

The specialist also mentions the importance of this year’s Harvest Plan, which will be discussed later, but emphasizes that it addresses only a limited fraction of the sector’s total financing needs. “Most of the resources that agribusiness needs to carry out its productive activities throughout a harvest come from within the chain itself, and the sector has developed several instruments to enable these operations. Behind these instruments is a calculation of who is providing this credit, this financing, which is sensitive to market conditions, notably the future interest rate curve of the Brazilian economy,” he points out.

Credit relief package

In order to curb JR in the agricultural sector, the government intends to announce a new credit package with longer terms, smaller installments, and lower interest rates. The concern is that the “unbridled granting” of JRs may harm the agribusiness financing market, making credit even more expensive.

Camila Crespi, an expert in corporate restructuring at Luchesi Advogados, states that Judicial Recovery is an effective measure for economically viable companies and is extremely useful as long as it is carried out within legal standards, aiming at maintaining jobs, preserving business activity, and recovering credit.

“What happens is that we see a movement of trivialization of the institute and unrestrained use of processes to resolve issues that could often be subject to extrajudicial renegotiation, mainly with a view to preserving credit. The misuse of the remedy, in addition to harming the rural producer, ends up harming the entire credit system, which can cause an even greater collapse, besides legal uncertainty,” points out the lawyer.

Although there are no details yet, the goal is to create additional credit lines with BNDES (Brazilian Development Bank) to refinance debts of producers, agricultural input distributors, and machine and fuel retailers.

“I think the main focus will be on debt renegotiation, payment postponement, something in that direction. I think the budget dispute will be different in the harvest plan, and it’s not for now either. We would love it to be, but it probably won’t be,” says Serigati. “It will be announced at some point in June, early July, according to the official calendar, but I would also like it to include something more associated with insurance. What I hope for from the package are measures like debt renegotiation and payment postponement, but I would like it to strengthen the rural insurance program,” he concludes.

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Foreigners are pulling out of the Brazilian stock market, but until when?

Apr 1, 2024

The dashed expectations regarding monetary policy easing in the United States are the common factor in the discourses explaining the exodus of foreigners from the Brazilian stock market. But it’s not the only one. In the risk assessment balance evaluated by foreign investors, domestic fiscal concerns, interference in Petrobras, and the high Selic interest rate, which increases the cost of the foreign exchange hedge made by foreigners, are also included.

The last year with a net outflow of foreigners from B3 was 2019, with only US$ 1.29 billion (R$ 6.5 billion) withdrawn. The last three years saw an inflow of funds, with R$ US$ 8.25 billion (41.5 billion), US$ 23.8 billion (R$ 119.9 billion), and US$ 11.1 billion (R$ 55.9 billion), respectively, in 2021, 2022, and 2023. In the accumulated total for the first quarter of this year, up to March 26th, B3 has already lost a net amount of US$ 4.47 billion (R$ 22.5 billion) in foreign resources. If the US$ 2 billion (R$ 10 billion) leaving the futures market are added, the US$ 6.46 billion (R$ 32.5 billion) represents more than half of all the inflows into the stock market last year. The good news is that, according to those interviewed by Capital Aberto, the strong outflow of foreign funds is a sign that the negative scenario has already been priced in, meaning that the capital flight from now on either stops or slows down.

“The market, anywhere in the world, will always move in an anticipatory manner; the volume leaving B3 has already factored in the expectation of no rate cuts by the US in the next meetings. From now on, if there is no new development, the outflow will be smaller,” explains Rafael Oliveira, equity manager at Kinea. “That’s why I also understand that when signs of improvement begin, when the Fed starts cutting rates, funds will start coming back.”

One of the factors contributing to the array of reasons for the exodus, adds Oliveira, is the very high domestic interest rate, which increases the cost of the currency protection strategies set up by foreigners operating in Brazil. “When doing hedge operations to protect against real depreciation, they buy currency in the futures market, and the high CDI (the Brazilian interbank deposit) impacts the cost,” he comments. “When the domestic interest rate is lower, it will not only stimulate the stock market but also make it less costly for foreigners to set up a hedge.”

The perception of Brazil’s risk is another factor cited as important for the attractiveness—or lack thereof—of foreign investors. “In addition to disappointment with the Fed, fiscal issues and interference in Petrobras dividends have amplified the outflow of funds,” comments Leonardo Otero, partner at Arbor Capital. He mentions that the 2050 NTN-B paid, in December, a yield of 5% and jumped to 6% this year, reflecting a higher risk premium demanded by investors for buying Treasury securities. “Foreigners coming to the country have a short-term view and await any signs of improvement to return.”

Data collected by Elos Ayta Consultoria in partnership with the Investing.com platform showed that B3 had the worst performance among 41 evaluated stock exchanges worldwide, with a decline of 4.53%, to 128,000 points. The second worst performance was recorded by Thailand, with a 3.21% decline, and Hong Kong, with a 2.97% decline. Countries like India (Nifty 50) and Russia (MOEX) saw their stock markets advance by 2.74% and 6.75% in the quarter, respectively. In the US market, the S&P 500 VIX advanced 4.5% and the Dow Jones 5.62%. Analysts cannot assert whether the exodus of foreigners from B3 led Brazilian dollars to other stock markets or even to local fixed income, which benefits from the Selic at 10.75% per year.

The largest bets on US rate cuts, highlights Bruno Lima, stock analyst at BTG Pactual, are concentrated in June, with something close to a 65% probability. “It’s not only the timing of the start of cuts that matters, but also the quantity. At the beginning of the year, we talked about five or six cuts; today it has dropped to two or three,” comments Lima, adding that marginal improvements in some variables such as GDP, inflation anchoring, and fiscal issues will make the stock market move.

In Lima’s view, another factor that enhances a stock market recovery is that the decline, so far, has been very concentrated in a few companies. The two companies with the greatest weight in the Ibovespa, Petrobras (PETR3) and Vale (VALE3), suffered from political noise. The oil company experienced a first quarter of volatility, despite closing the period almost unchanged, with a slight increase of 0.32%. The balance sheet data were resilient, in line with expectations, but the decision to withhold extra dividends distribution dropped the shares by 10.5% in a single day, after the announcement. Part of the foreign exodus is linked to Petrobras, analysts say. Vale, on the other hand, plummeted by 17.67% in the period.

“There is a universe of other companies, from other sectors below the surface of the Ibovespa, to advance. Again, with few improvements, we see the Ibovespa performing well this year.” One of the indicators mentioned by the BTG Pactual executive is the P/E ratio of the Ibovespa, considering Petrobras and Vale, around eight times, below the historical average of 10.8 times. “The same goes for small caps with a P/E ratio of nine times against a historical average of 15.” About foreigners, he recalls that although they are responsible for around 54% of the monthly traded volume, their weight was much higher in the past.

“Everyone is monitoring the probabilities of cuts in the fed funds in June, as well as macroeconomic data that reinforce this possibility. Even before the cut materializes, this probability improving already helps the stock market and eventually the return of the funds that left,” comments Bruno Lima. BTG Pactual does not have a call for the Ibovespa at the end of the year, but works with various scenarios. In the most conservative one, the main stock index of B3 stands at 125,000 points, in the most optimistic, it can close the year at 155,000. “The return of foreign funds is important for the most optimistic scenario, but not only that. Local mutual funds also have a low allocation in equities and need to resume investments in the market.” Today, equity and multimarket funds have about 9.6% of assets allocated in stocks.

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Minutes of the Brazilian Monetary Policy Committee reaffirms pursuit of flexibility

Mar 27, 2024

The minutes of the Brazilian Monetary Policy Committee (Copom), released this Tuesday (26), reinforced a change signaled in the statement after the last meeting when it reduced the Selic interest rate by half a percentage point to 10.75% per year, marking the sixth consecutive cut. The reading of the minutes reinforces the view that the committee seeks greater flexibility in monetary policy. In practice, a cut at the same pace is scheduled for the next meeting. Furthermore, there is no clarity.

“The tone of the Copom Minutes was neutral compared to the post-meeting statement, with the monetary authority providing details about the major uncertainties identified in the domestic and international environments and, consequently, the need for greater flexibility in conducting monetary policy,” evaluates João Savignon, Head of Macroeconomic Research at Kínitro.

Itaú’s view, brazilian financial services company, expressed in a macroeconomic analysis report signed by the bank’s chief economist, Mário Mesquita, goes in the same direction and reinforces that the Copom minutes brought a more detailed discussion about why future signaling was shortened. “The committee emphasized a cost/benefit analysis of this decision, where the advantage of lower volatility was recently outweighed by the cost of inflexibility in a more uncertain environment, both in terms of activity outlook and inflation,” the report says. “Authorities also reinforced that the change in future signaling should not be confused with an indication of a change in the dimension of the easing cycle.”

The report highlights paragraph 23, considered a “crucial excerpt” from the minutes, where the Copom emphasized that new data disclosures will be essential to define both the pace and, especially, the terminal rate. “We maintain our view of a terminal rate of 9.25% per year, although also data-dependent.”

In the analysis of domestic inflation dynamics, the minutes mention that, on the one hand, there is a benign behavior of food and industrial goods, but on the other hand, due to resilient activity and recent disclosures, doubts arise about the speed of disinflation of services. “The committee noted that a slower disinflation process, both domestically and globally, is not the baseline scenario but has been incorporated as a source of uncertainty. This increase in uncertainty prescribes caution in conducting monetary policy.”

Savignon, from Kínitro, comments that regarding domestic inflation dynamics, the minutes observed, on the one hand, a benign behavior of food and industrial goods, but on the other hand, showed doubts about the speed of disinflation of services. Regarding future signaling, he states, “the minutes took stock of the use of forward guidance, reinforcing that it fulfilled its role of coordinating expectations, increasing the potency of monetary policy, and reducing volatility. It then debated communication for a scenario that requires more degrees of freedom (or flexibility) to conduct monetary policy.” The economist maintained the projection that Copom has the conditions to continue with interest rate cuts at a pace of 50 bps in the May and June meetings, slowing down the pace in the second half of the year.

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Infrastructure debentures prioritize energy transition projects in Brazil

Mar 26, 2024

The decree regulating the issuance of “infrastructure debentures” and “incentivized debentures” will be signed today by President Luiz Inácio Lula da Silva. The document has been eagerly anticipated due to expectations that some sectors would be prohibited from issuing the new instrument, the infrastructure debenture, created by Law 14,801 of this year.

According to Brazil’s Ministry of Finance, one of the improvements established by the new decree is the streamlining of access to the financing mechanism. Additionally, projects that generate significant environmental or social benefits will be prioritized, while activities that harm the environment will be excluded. Sectors such as petroleum and non-renewable energy generation will not be prioritized.

“The idea is to boost investments committed to climate neutrality, sustainable development, and social inclusion,” says the government’s statement. Projects related to energy transition, such as low-carbon hydrogen production, synthetic fuels, carbon capture, and strategic mineral transformation projects, become a priority.

Infrastructure debentures enter the market as a complement to the well-known “incentivized debentures,” which are also regulated by the new decree. Another improvement established by the decree, as stated in the government’s statement, is the streamlining of access to the financing mechanism, “while maintaining the federal government’s management capacity over the progress of public policy.”

Another highly anticipated aspect for the market concerns the exemption of projects from prior evaluation by ministries. The prior publication of ministerial approval for projects is no longer required, “with the project owner ensuring its compliance with the requirements established by the decree.”

The law on incentivized debentures, dating back to 2011, offers reductions in Income Tax rates to individuals and legal entities investing in projects considered priorities in infrastructure areas. For legal entities, the tax rate on income from acquired debentures is reduced to 15%. For individuals, it is reduced to 0%.

During the signing ceremony, the Brazilian Chief of Staff, Rui Costa, commented on a recent trip to Saudi Arabia and their interest in investing in infrastructure. “We heard a strong willingness to invest in Brazil from them. However, their decision is to invest without necessarily being project managers. They want to have a stake, and debentures are an important stake.”

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Securitization companies say that limits on CRI and CRA have little impact on business

Mar 26, 2024

Nearly two months after the publication of Resolution 5,118 by the Brazilian National Monetary Council (CMN), which changed the rules for issuing Agricultural Receivables Certificates (CRAs) and Real Estate Receivables Certificates (CRIs), securitization companies describe a discrete effect on their businesses and see a positive scenario for the securities, even with the restrictions. One reason is that the prohibited issuances, made by publicly traded companies that were not in agriculture or real estate, as well as by financial institutions, had lower profitability. Another factor is that there are alternatives for this group of companies, also through securitization, to raise funds.

Capital Aberto spoke with three securitization companies of different sizes to understand the impact of the CMN measures. OPEA, Grupo Travessia, and Leverage Securitizadora highlight a benign scenario for activity and CRI and CRA issuances, even though specific segments have been prevented from conducting operations. “At OPEA, the companies that were prohibited from issuing the securities were not so relevant. Even in terms of remuneration for the company, these operations had a lower return. It doesn’t affect our business,” says Flavia Palacios, CEO of OPEA. “It’s not bad for the market, which ends up adapting; there are other ways to raise funds.”

The CEO adds that even for companies now prohibited by the regulator from issuing the securities, there are other options. “Those who can no longer issue CRI or CRA will, in my view, seek other securitized products, remain as clients, and may use a CR (Receivables Certificate), an FIDC (Fund of Investment in Receivables), or a securitized debenture. They will turn to, let’s say, the root products in the securitization universe,” comments Flavia.

OPEA has more than 40 securitization operations in structuring representing more than US$ 2 billion (R$ 10 billion), a number very similar to what it had a year ago. “And we have a mandatory volume 40% higher than we had last year; that is, despite the CMN rule negatively affecting the volume of market transactions, reducing the possibilities of issuing CRI and CRA, the natural market growth, and, eventually, the change in fundraising product, more than compensated.” OPEA’s numbers include, in addition to CRI and CRA, CR transactions and securitized debentures.

For Vinicius Stopa, partner at Grupo Travessia, more significant reductions in the CRI and CRA market, due to the new rules, should be felt in March and April operations, but without an impact on the securitizer. “There hasn’t been much change for us because we didn’t do the type of transaction that ended up being restricted. They were companies that accessed the market with cheaper borrowings and were not on our radar,” comments Stopa. “We focus on structured credit portfolio operations.”

Regarding the impact on the market as a whole, the partner at Travessia says there are estimates that it could be up to 30% less. “This is adding up the companies that were prohibited from issuing and those that issued for reimbursement, now prohibited,” explains Stopa. The executive refers to an item in the resolution that prohibits the use of funds for expense reimbursement, only for future investments. “Those who used it for reimbursement usually did so for two reasons, either because they did not have access to bank credit or because the CRI was more attractive. They will have to find another way out.” The securitizer has 12 transactions in structuring representing close to US$ 60.2 million (R$ 300 million).

Data consolidated by Clube FII, at the request of Capital Aberto, show that until this Monday (25), CRI and CRA issuances reached approximately US$ 460 million (R$ 2.3 billion), 30% less than in March 2023 (whole). In the year-to-date, however, US$ 1.79 billion (R$ 8.9 billion) of CRIs and CRAs were issued, an important advance over the same period last year, with US$ 1.33 billion (R$ 6.6 billion) raised. Although the Resolution came into force on February 2, many operations were already contracted.

Leandro Issaka, founder of Leverage, a securitization company focused on the middle market, recalls that the effects of changes in the rules do not affect the niche in which it operates, regarding the issuers, but rather in relation to the use of raised funds for expense reimbursement. “For smaller developers, the CRI was important for reimbursement; it was a very simple operation. Now to obtain it, we have to use a mixed asset,” comments Issaka, who has a different understanding of the Resolution and found a way to meet clients’ needs.

“Now it’s more expensive and more complex, but it’s possible. I issue a CRI with two assets, one debt security, and another from the portfolio already sold. Thus, I can use part of the funds for reimbursement,” comments Issaka. “What was prohibited is the issuance of CRI/CRA with assets resulting from ‘financial transactions whose funds are used for expense reimbursement,’ but it was not prohibited, for example, an issuance operation of the CRI with collateral in a Commercial Note that reimburses the construction costs of the developer.”

Technology facilitates risk control

The Leverage executive, a company that has been on the market for just over a year, states that even with restrictions, there is plenty of room to issue and distribute securities, citing the importance of technology; “In the middle market, it is difficult to assess the risks of the paper itself, there is little information. The solution was to seek big data, gather information from Serasa, from the IRS, everything possible to measure that risk properly. It is possible to price better, with a more adjusted cost, which encourages the entire chain.” The securitizer is preparing its first issuance with QR Tokenizadora and TG Core/Trinus of a Tokenized CRI with blockchain technology. “We will test the format, it is safer, faster, and all in a regulated environment, in the regulatory sandbox, which is important for risk management.”

OPEA and Grupo Travessia share the same view that technology will be a facilitator for structuring offerings and distribution, but only if they add real value. “Technology can be a way to reduce costs, bureaucracy, and this is very positive. It can also be a way to distribute,” comments Flavia Palacios, CEO of OPEA. “Here we are agnostic; anything that comes and really delivers value to us is good. Regarding tokenization, we are looking at its development, but I believe it is something for the medium term.”

At Opea, Flavia highlights, there are significant investments in technology, including enabling the platform to connect to various tokenizers in the market. “This connection applies when the tokenization object is a CR and also when we plug in our services as oracles in tokenization networks, for validation of calculations or receivables management, regardless of our securitizer’s participation in the transaction.”

Grupo Travessia also adopted caution and investment in a company as strategies. “We look carefully at the tokenization issue, but it’s still in its infancy. It will be important not to issue the token, but to allow everything to be controlled in a tokenized way via blockchain,” comments Stopa, adding that the securitizer, like OPEA, made an investment in a tokenizer, seed capital, to follow the development.

Overall, the securitization companies are optimistic about the future despite the regulatory changes, as they believe there are still ample opportunities in the market. They emphasize the importance of adapting to new regulations and leveraging technology to enhance their operations and risk management processes.

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Shopping centers REITs accumulate US$ 500 million in acquisitions this year

Mar 22, 2024

After a busy 2023 marked by acquisitions, 2024 promises to repeat the dose, especially in the Mall REITs segment. Between January and March this year, mall acquisitions by funds already total US$ 500 million (R$ 2.5 billion), considering the acquisition of the SYN portfolio by XP Mall, according to a survey by Genial Investimentos managers. Among the major buyers are the XPML11 fund from XP and the MALL11 fund from Genial.

The basket of shopping mall funds stood out in 2023 compared to other brick funds categories, such as corporate or logistics floors, which has generated significant results. The return to historical occupancy levels, a decrease in default rates, and the end of the discount season on rents, and consequently, a considerable increase in income, have been important factors in the recovery. All this, combined with the discount level on the stock exchange shares that the funds experienced 12 months ago. “This promoted outstanding sector performance,” says Caio Nabuco de Araújo, an analyst at Empiricus Research.

“With this, the funds were able to anticipate some raises, especially at the beginning of the domestic interest rate decline. We’ve already seen shopping centers issuing new quotas, raising funds, intensifying this scenario of mergers and acquisitions in the sector, something that we see as quite significant in recent months,” analyzes Araújo.

More cash inflow

According to Rodrigo Selles, manager of Genial Malls, the market has noticed these movements and the trend of shopping malls’ recovery, which has had a positive impact, especially on the most important funds. “The MALL11 itself made a US$ 94 million (R$ 470 million) offer at the end of last year, beginning of this year, broken into two settlement windows, but other funds also raised a lot,” comments Selles.

XP Mall conducted a public offer in February, raising US$ 200 million (R$ 1 billion). The Capitânia Shoppings fund, with just over a year of existence, raised US$ 64 million (R$ 320 million) to pay obligations of existing properties in its portfolio. Another fund that went to the market to raise funds was HSI Malls, which raised US$ 87.5 million (R$ 437.5 million) with its third issue. BTG Mall, from BTG Pactual, announced a new quota issuance plan, with the intention of raising around US$ 124.8 million (R$ 623.8 million), but did not specify which acquisitions would be made with the resources.

“What explains the sector’s movement is partly about what’s happening in the ‘micro’, with the shopping industry, with assets, and obviously the macro issue, which affects the entire industry, due to the expectation of lower interest rates in Brazil and the United States,” comments Selles. For the manager, the asset is in a good moment of growth, retail, public, consumption, etc., in addition to the expectation that, at the end of the year, interest rates in Brazil will reach 9% or 9.5%.

“And when we talk about real estate funds, there is a very strong correlation with these macro aspects. With these two combined effects, one macro and one ‘micro’, we had this very strong movement at the end of last year, and also this year. At the beginning of this year, there are already some offers being announced,” he adds.

“If we bring this number (US$ 500 million or R$ 2.5 billion in acquisitions this year) to 2023, of course, it is a considerably larger amount because the funds started making new issues since mid-2023. So, a large part of the properties has already been acquired last year itself, and it is a volume that we see continuing throughout 2024,” analyzes Araújo, from Empiricus.

According to Maria Fernanda Violatti, head of listed funds at XP, this shows that there is an expectation that the segment will be one of the largest fronts within the offers of 2024.

Among the main buyers, the first to stand out is XP MALLS, which announced less than 30 days ago the acquisition of a stake in the SYN’s portfolio of properties and shopping malls. “This brought the XP MALLS’ acquisition movement to over US$ 400 million (R$ 2 billion), let’s say, in the last 12 months,” comments Araújo, from Empiricus.

In second place, with a smaller acquisition volume of US$ 55.5 million (R$ 277.3 million), Genial Malls also stands out. Rafael Vasconcelos, manager of MALL11, comments that all the fund’s acquisitions have already been completed. Among this year’s purchases are 20% of Shopping Metropolitano, 17.5% of Caxias Shopping, and 100% of Barra Malls FII’s shares, the owner of Península Open Mall and Rio 2 Shopping.

“We had a good part of the acquisitions in Rio de Janeiro. First, it was Shopping Metropolitano, which is a shopping mall with huge growth potential today. When we look at our portfolio, I would say that this is one of the main assets with growth potential. It is located in an expanding area of the city, Barra da Tijuca, where you will have population growth, and it is still a developing region. It is currently a super interesting profitability with huge growth potential,” says Vasconcelos.

Investment trends

Drawing a profile of the regions from 2023 to the present, the ‘target regions’ of real estate funds were the South and Southeast, which represented, according to Empiricus’ survey, about 75% of shopping centers acquisitions, covering this window of 15 to 16 months. According to Araújo, São Paulo enters as a region of greater focus, with about 30% of acquisitions, considering this database.

Maria Fernanda also mentions the increased demand for the two regions. “It is an expectation that managers seek much more, at this first moment, in these more consolidated regions, São Paulo and Rio de Janeiro states. A very important point is that the movements are also associated with the recycling of listed companies. They recycle the shopping mall, and it turns out that, at the opportune moment when real estate funds have a good possibility of raising funds, they can then acquire several of them that are on the market,” comments the XP’s fund head.

For MALL11’s managers, this trend is a reflection of GDP concentration. According to them, Brazil’s consumption is somewhat concentrated in the Southeast, so there are more shopping malls in this region, and it is natural for shopping FIIs to also have a more concentrated portfolio.

“When we take HGBS, for example, it is clearly a fund focused on the state of São Paulo. Now Vinci’s Shopping REIT is a fund that does not have a clear focus on a specific state, on the contrary, it may be the one with the greatest geographical presence in Brazil,” comments Vasconcelos, MALL11’s manager. “XP’s also intends to focus more on the Southeast, from what we have seen in the portfolio. We have this proposal, a little different from HGBS and Vinci’s fund, as I see it. We are entering the South now, but we have a greater focus on the Southeast (with almost 50% concentrated in the state of Rio de Janeiro) and even a little in the Brazilian Northeast, and I think we are a little more agnostic in that sense,” he concludes.

Vasconcelos mentions that the managers study the operation and understand what makes sense, and if the asset’s characteristics fit the portfolio, they proceed with the transaction.

“For example, we are going to acquire a shopping mall in Feira de Santana, interior of Bahia. When you look at the characteristics of the city, 700 thousand inhabitants, it is the only shopping mall in the region, Feira is one of the main cities in the Northeast, has N factors, and we see that it makes complete sense to make a transaction in this place, and the shopping mall is doing very well,” he analyzes.

“What we do is fit, look at the asset, analyze, understand how it is positioned in the city today, in the market where it is inserted. We know that the real estate market is a micro thing, it’s regional, so it’s no use looking at one characteristic and not understanding the city where it is positioned.”

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Asset manager has plans to operate with managed portfolios and is looking for a partner in the market

Mar 22, 2024

As an independent manager specialized in structured funds, ID Asset Management (IDGR) looks more like a “corporate banking,” in the words of one of the partners and investment director, Gustavo Biava. And that’s exactly how it is, serving institutional clients, that ID aims to continue its growth process. Last year, with the structuring of funds – REITs, FIDCs (Fund of Investment in Receivables), and FIPs (Private Equity Funds) – and the management of products for third parties, ID doubled its assets under management to US$ 1 billion (R$ 5 billion). The company also administers an additional US$ 240 million (R$ 1.2 billion) in third-party funds. The current work aims to maintain the pace of growth, which means reaching US$ 2 billion (R$ 10 billion) by the end of the year. In an interview with Capital Aberto, Gustavo Biava shares the plans to achieve this ambitious goal.

Founded in 2019, ID focuses on so-called structured, illiquid products, offering them to institutional clients such as family offices, banks, assets, economic groups, and foreign investors. This essence, as Biava emphasizes, will continue. “We will remain in this same strategy. We have some retail clients in REITs listed on the stock exchange, but it’s not the central idea,” he explains. ID has five real estate investment trusts (REITs), three already listed on B3 and the other two in the process of listing. “We never focused on retail, and we only listed them because it was a condition of large investors seeking liquidity.”

Retail Fund of Investment in Receivables, not yet

The same goes for FIDCs, which provide direct credit to business chains, such as agribusiness or retail, with goods or crops given as collateral. The possibility of offering the product to retail investors, now possible with CVM (Exchange Commission of Brazil) 175, does not excite ID, at least not for now. “We have an FIC of FIDC, which buys quotas from other FIDCs, open. It only buys senior quotas, which have a minimum of 30% subordination. We thought about putting it on the shelf, but today, brokerages are not prepared to sell FIDC to retail investors; we’ll wait.”

Fipe with REIT DNA

ID has a portfolio of 30 investment funds in shares, half of which are internally originated, and the other half for which it provides administrative services to other managers. Many of ID’s FIPs are equity, explains Biava, meaning they are constituted by families seeking to improve asset governance with a view to a future sale, for example.

One of the novelties is an FIP set up in partnership with BR Angels, a venture capital firm, which raised US$ 3 million (R$ 15 million) from 93 investors. The product has already made its first two acquisitions. Another, in the study phase, is an Fipe to purchase a solar plant, to own the asset like an REIT. “In this case, we would rent out the facility to those participating in energy supply auctions. In the REIT, we would receive a rent that is not taxed, with a tax benefit.”

Separation of activities

Recently, ID acquired a smaller management company as part of its strategy to segregate operations. Once approved by regulators, there will be two companies – IDGR, which will focus solely on FIPs, and GRID, which will be responsible for REITs, FIDCs, and will provide services to other managers. “This preserves the company, separating activities that should indeed be segregated.”

At GRID, there will also be a new area of operation, managed portfolios. Currently, ID is looking for a partner to operate in the segment, which, in Gustavo Biava’s view, will grow significantly with the change in taxation of closed-end funds. “With the new rules, it no longer makes sense to pay the entire structure of a fund to manage smaller amounts, say US$ 1 million (R$ 5 million). There is already a flow of resources into managed portfolios,” he comments. “As we don’t have expertise in the area, we are currently looking for a partner.”

Internationalization on the horizon

ID’s project to open a unit in the United States is already underway. “In Brazil, we represent non-resident investors, authorized by the Central Bank. Within the management company, we have almost US$ 200 million (R$ 1 billion) from foreign investors. In the United States, we want to represent American investors and also present investment opportunities for Brazilians in the United States. So we will make this exchange.” In the bureaucratic arrangement phase, the office is expected to open in early 2025.

The optimism about the projected growth for the year, says the partner, comes from two sources. “We have internal operations being originated and also negotiations with funds to migrate here, which significantly accelerates growth.” And he adds, “There has been a lot of regulatory change, with many smaller managers looking for a way out. Today, we practically make very little commercial effort, but opportunities always arise.”

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Brazil remains in the uncomfortable position of having the second-highest real interest rate in the world

Mar 21, 2024

The Monetary Policy Committee (Copom) of the Brazilian Central Bank once again reduced the basic interest rate by half a percentage point, maintaining the pace of previous meetings. With the Selic at 10.75% per year, the real interest rate – nominal minus inflation – stands at 5.90% projected for the next 12 months. It is the world’s second-highest real interest rate, trailing only Mexico, with 7.46% per year, according to a survey by MoneYou.

In the statement, the committee stated that the external environment “remains volatile, marked by debates about the start of monetary policy easing in major economies and the speed at which sustained inflation declines will be observed in various countries.” Regarding the domestic scenario, Copom states that the set of economic activity indicators “remains consistent with the scenario of economic slowdown.”

According to economist and partner at Matriz Capital, Vinicius Moura, the highlight of the statement is the fact that they mention expecting another interest rate cut at the “next meeting” in the singular, not in the plural. “This leaves a climate of uncertainty about what may happen at the upcoming meetings. But I also think it could just be a way to communicate that the government maintains its fiscal goals. I do think there is room for cuts of the same magnitude.”

The statement shows that there is a process of disinflation underway, with consumer inflation on a downward trajectory and inflation expectations for 2024 and 2025 hovering around 3.8% and 3.5%, respectively. In Moura’s view, this fuels confidence that “we are on the right path to achieving a more stable and predictable economic environment.”

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Bradesco Asset outlines scenario for multi-market funds 

Mar 20, 2024

After disappointment with US monetary policy and maintaining high interest rates, Bradesco Asset sees something positive on the horizon. For the asset manager, the pessimism that weighed on asset behavior in the first two months has already been priced in. In a decisive week for global monetary policy, with meetings of the FED, Copom (Brazil’s Monetary Policy Committee), BOJ (Japan), and the Bank of England, among others, the asset has outlined a scenario with challenges for macro multi-market funds and highlighted the strategy adopted for currencies and equities.

“When we observe the market trading at rates exactly where the FED board imagines interest rates will be in 2024 and 2025, we see that much of the wave of pessimism at the beginning of the year has already been priced in,” comments Fernando Monteiro, head of the Macro Multimarket area of the asset. “Fortunately, at the end of 2023, our assessment was that the market was exaggerating in the wave of optimism, buying into the argument of five or six rate cuts this year. We started the year with slightly more conservative positions, and this was very positive for our products.”

Bradesco Asset’s chief economist, Marcelo Toledo, is optimistic about combating inflation in several economies. “At the beginning of the year, there were negative surprises with persistent inflation and resilient activity that pressured interest rate curves around the world, but we are in the home stretch, missing one last mile to bring inflation back to target,” comments Toledo.

Despite multi-market funds suffering significant redemptions last year, the asset’s Investment Director, Felipe Biocchini, highlights the importance of the product in allowing managers to navigate different regions and asset classes. “Multi-market funds are products that can express everything we have learned in terms of economic and market conditions in Brazil and abroad, important in unstable scenarios,” comments Biocchini, acknowledging the difficulty of risk assets performing in recent years.

“Only one asset class, in fact, has performed well in the last three years, private credit. Which is repeated at the beginning of 2023.” During a transmission from the asset about the outlook for multi-market funds, on Tuesday (19), the director cited comparative data on the performance of fixed-income indicators and credit. “If you take fixed-income indices like IMA-B or IMAB-5, and normalize, the securities yield CDI minus 1%. Credit indices, on the same comparison basis, yield CDI (Interest rate for Interbank Deposit) plus 1%. It is an environment that continues to challenge managers.”

Currency bets

In the manager’s view, although the dollar has been on years of consistent appreciation against developed currencies, there is still room in the short term for slight appreciation, precisely due to the divergence between monetary policies. “In multi-market funds, this is essentially our positioning. We are a little more optimistic about Asian currencies and more short (selling) in European currencies, essentially the euro and pound,” comments Fernando Monteiro. “Today what defines quotations is monetary policy. An example is the Central Bank of Chile, which had a very aggressive stance and brought down the currency, depreciating by 12% in the year.”

Equity

Regarding the stock market, the asset’s executives highlighted a detachment between different markets. The rise in US stocks, in particular, comes from the development of new technologies, with AI, helping in the appreciation of the “Magnificent Seven” – Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet, and Tesla – in a short period of time.

“We see profit growth in major markets, both in the American and Brazilian markets, and, in the end, that’s what motivates investors. If you look at the last 12 months, the performance of stock markets, overall, is quite positive,” evaluates Monteiro.

Regarding the exposure of the asset’s multi-market funds to equities, the executive states that today the decision is to “stay a little out,” referring to more structural positions. “If we have to choose an asset class, without a doubt, real interest rates close to 6%, real interest rates for 30 years in Brazil, catch our attention. When we put the relative value metric between asset classes, it’s more interesting.”

“It doesn’t mean that we don’t have a position in equities in Brazil. In fact, our greatest alpha generation came from our long-short positioning this year, with a very expressive result. It’s what we did in this first quarter and as far as our sight goes, it’s what we’re going to do, and not structural bets.”

An evaluation of the asset on what happened to the stock market in interest rate cut cycles shows that in all periods there was a significant increase in stocks. “When we look at the averages of these cycles, it gives something close to 70% in 24 months. This doesn’t mean that this is a number that we’re expecting now, but it’s a guide to what it was in the past,” explains Biocchini. “Similarly, we try to create a more sectoral assessment, we see smaller capitalization companies, from the small-cap index, in the last interest rate cutting cycles, with higher increases, on average, of 150% in the 24-month period.”

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B3 and S&P DJI bring VIX, known as the “fear index,” to Brazil

Mar 19, 2024

Assessing the expected volatility of an asset or market is an important part of the investment process. In various exchanges, a particular index fulfills this role, predictively measuring the expected volatility for the next 30 days. It’s called the VIX index, or “fear index,” which uses the methodology of the Cboe Volatility Index to predict volatility in the US stock market. The index now arrives in Brazil after a partnership between B3 (Brazil’s stock exchange) and S&P Dow Jones Indices (S&P DJI).

The VIX, which begins to be disclosed this Tuesday (19) during trading at B3, follows the same methodology used in the American market, meaning it is calculated based on the options market. “In recent years, the Ibovespa options market has experienced substantial growth and more than doubled traded volumes since 2019. Market makers played an important role in this movement,” comments Henio Scheidt, Index Manager at B3, explaining the decision to bring the VIX to the Brazilian market. “Brazil has reached a new level in terms of trading volume, which allowed the launch of this index and enabled bringing to the local market a methodology that is already established in other parts of the world.”

The VIX adds to B3’s product portfolio a volatility indicator that can be used by investors as a reference to measure risk perception. Globally, the indicator is known as the “fear index” precisely because it reflects moments of worsening investor risk perception. As the options market inherently embeds a more negative or optimistic view in the premiums paid when buying put or call options on an asset at a future date, the VIX uses this segment of the market as a basis for its calculation.

“S&P Dow Jones Indices in partnership with B3 makes this important launch in Brazil that further expands the use of volatility-based benchmarking instruments, not only in the US, but in key markets around the world,” said Tim Brennan, Director of Capital Markets at S&P Dow Jones Indices, adding that the VIX is present on various exchanges worldwide such as Canada, Australia, and Hong Kong.

Just like in the American market, on B3, the VIX index will produce a constant measure of expected volatility for 30 days, based on real-time average prices of put and call options on the Ibovespa (Brazil’s most important stock exchange index). Thus, it measures in real-time investors’ sentiment and market volatility.

B3 is considering launching products tied to the VIX in the future, but with no defined date yet. “We may have different products linked to the index, such as ETFs, structured notes, or funds, but only at a later stage. First, we want to understand how the implied volatility index will behave,” comments Scheidt.

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Infrastructure debenture faces decisive week

Mar 18, 2024

Market expectations regarding the regulation of Law 14,801, which established the infrastructure debenture on January 9, are set to culminate this week. The delay in the publication of the decree, expected within 30 days, has stalled projects awaiting crucial details of the law, whether to include the infrastructure debenture among fundraising options or not. Capital Aberto consulted experts on their expectations for the decree, which points of Law 14,801 need further clarification, and the potential issuers and investors of this new fundraising instrument.

The law creating the infrastructure debenture also introduced changes to other fundraising and investment instruments, such as the legal framework for incentivized debentures established by Law 12,431, the Infrastructure Equity Investment Fund (FIP-IE), and the Incentivized Infrastructure Investment Fund (FI-Infra).

Law targets pension funds

The main innovation in the infrastructure debenture is the incentive for its issuer, unlike incentivized debentures, which granted tax exemption to the investor. The new bond grants benefits to the issuer as long as it falls under the real profit regime. The interest paid or incurred will be deducted from the calculation bases of Income Tax and Social Contribution, with an exclusion of taxable income of 30% of the interest paid in the fiscal year.

“When the law defines this structure, it mainly targets pension funds. Incentivized debentures were only interesting for individuals or investment funds. There was no gain for pension funds,” comments Celso Contin, partner of the Banking & Financial area at Vieira Rezende Advogados.

According to Ricardo Russo, partner at Pinheiro Neto Advogados and responsible for the firm’s infrastructure area, the expectation is that by benefiting the issuer, the bond will offer more attractive rates and attract institutional investors. “For pension funds, which already have income tax exemption on the purchase of fixed-income securities, it was not worth buying incentivized debentures,” he explains. “Although the law does not oblige passing the issuer’s incentive on to the bond’s cost, the expectation leans in this direction.”

In the lawyer’s view, issuing companies now have a wider range of fundraising options, being able to choose incentivized debentures if the focus is on individuals or investment funds, or an infrastructure debenture, with a higher rate, aimed at pension funds. “It will be up to the company. Both instruments as project financiers will coexist,” adds Russo.

Doubts about criteria

The expectation for the decree also arises from certain points of the law that allow different interpretations or are questioned by the market. The law firm Machado Meyer Advogados, in partnership with the GRI Club, prepared a document, sent to the Legislative and Executive branches, with contributions to the regulation of Law 14,801.

One of the points, explains Alberto Faro, partner in the Infrastructure area at Machado Meyer, is the need for greater clarity on what the 30% mentioned in the law entails. “A highly debated point is the calculation basis for the tax incentive, or whether the 30% of the interest paid to investors is taxed on profit taxes,” explains the lawyer. “Does Law 14,801 mean 30% only on the interest or 30% on the entire remuneration criteria of the indenture, considering interest, inflation, monetary correction, exchange rate variation, among other factors. It’s not clear.”

Faro adds another point that, in Machado Meyer’s view, requires clarification. Law 12,431 was not clear about the use of funds raised by the incentivized debentures for payment of project grants, which was later clarified through an official letter. In Law 14,801, the debate is whether the grant will be included as collateral for the use of funds, which is important especially in projects modeled by BNDES. “From what we’ve seen, BNDES has explained the importance of this guarantee and it will be included in the decree. But the expectation is high.”

Less ministry, more agility

In the incentivized law, one of the points that stalled several issuances and projects was the need for ministries, through ordinances, to define which projects were prioritized and could thus use the instrument.

“This is an important difference between the two types of bonds; in infrastructure, there will no longer be dependence on ministries, that’s what we expect,” comments Renata Menescal, legal director of the Brazilian Association of Clean Energy Generation (Abragel). The energy sector is one of the main users of debentures to finance long-term investments.

A study conducted by Abragel in partnership with Souto Correa Advogados revealed that from 2012 until October last year, 656 incentivized debentures were issued with a total fundraising of US$ 46 billion (R$ 235 billion). Only the electricity sector was responsible for 354 issuances and a volume of US$ 21 billion (R$ 106 billion) raised.

Despite the fast track system for issuances already being in effect with Law 14,801, according to lawyers, regulation needs to confirm this understanding. “Some ministries have resisted accepting the fact that they no longer participate in the endorsement of priority projects. But they at least want to publish general rules by sector with guidelines,” comments Alberto Faro. “There is lobbying from ministries to participate in some way. We will monitor the final wording.”

The document prepared by Machado Meyer and sent to authorities makes this concern clear, stating that since numerous ministries still do not have technical teams allocated for issues involving priority sectors and incentivized and infrastructure debentures, there are risks of delays in issuing ordinances if the decree fails to regulate, “in a final and exhaustive manner, the requirements applicable for determining project priority.” It concludes that “if delegation becomes strictly necessary, we understand that existing ordinances should be considered valid for the purpose of defining, within each ministry, priority sectors. In this case, only ministries without regulations should issue new ordinances on the subject.”

Ricardo Russo, from Pinheiro Neto, recalls that for the issuance of incentivized bonds, there was no standard even among ministries. “The Ministries of Transportation or Regional Development simply copied the decree; requesting approval for the project was enough, while the Ministry of Mines and Energy was restrictive. The law says that the energy sector is a priority, but Distributed Generation was not considered by the Ministry. Everything was very bad.”

Access to the foreign market

The 14.801 brought something new that will facilitate the issuance of bonds for infrastructure projects abroad. The law guarantees income tax exemption in relation to interest from securities in the international market that are registered with the Brazilian Central Bank, provided that the funds raised are allocated to projects considered priorities. The norm, in the view of Alberto Faro from Machado Meyer, is sufficiently comprehensive and imposes no restrictions on the conditions of the bond. The caution, made by the lawyer, is that since the National Monetary Council may eventually regulate the issue, some care is needed to avoid, in practice, making the instrument unfeasible.

“Existing restrictions on incentivized and infrastructure debentures, such as weighted average maturity, index linkage, repurchase and resale restrictions defined in Law 12,431, could not be imposed on foreign instruments. These conditions listed, among others, would not be compatible with the nature of the numerous foreign instruments, which are extremely diverse and have their own logic according to international practices,” comments Faro.

Issuers do the math

The definition of which instrument to use to raise funds – incentivized or infrastructure – is not trivial. The Legal Director of Abragel, which represents plants with up to 50 MW, such as Small Hydroelectric Plants (SHPs) and Small Hydropower Plants (SHPs), explains: “the new debenture is valid for companies with real profits, but most of the generators we represent have another tax regime. It is necessary to calculate, case by case, whether it is worthwhile to change the regime to real profit or even to create structures that allow fundraising through 14,801,” says Renata Menescal.

“An alternative would be to adopt a holding company model, with real profit and that would issue the bond, and below SPEs. It is necessary to evaluate very carefully what is worthwhile and if it is worth it.” The final wording of the decree, which is expected to be released throughout the week, as stated by the Chief Minister of the Brazilian Civil House, Rui Costa, will also be important for this tax analysis. “We are waiting to advance in the studies. It is not something simple, that applies to all the generation companies we represent, but it will give a direction so that case by case they decide on a change in the regime, in the corporate organization or continue to issue the incentivized, by 12,431.”

FI-Infra and FIP-IE

The decree should also provide details on Infrastructure Debenture Investments by FI-Infra funds, established by article 3 of Law 12,431, which are obliged to allocate at least 85% of the benchmark value in 12,431 assets and the remaining 15% without restriction. “Despite this, 14,801 did not clarify whether FI-Infra could also invest in infrastructure debentures and account for such investment within the minimum allocation of 85%,” according to a document from Machado Meyer Advogados. “In the same way that an FIP-IE could allocate 100% of its net worth in infrastructure debentures, the same should be allowed for an FI-Infra,” questions the document.

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Law of Joint-Stock Companies vs. Law of State-Owned Enterprises: conflict between public and private goes beyond legal issues

Mar 18, 2024

Petrobras shares showed volatility in the market last week, highlighting the importance of political and governance issues that, even in private companies like Vale, can result in significant financial and management impacts.

On Thursday (7), after the release of the fourth-quarter results for 2023, the state-owned company faced a crisis involving the dividend policy, pitting the market against the federal government. The decision regarding the retention of extraordinary dividends that would be distributed by the company triggered a series of losses in the stock market.

The veto on the distribution of the extra dividends occurred through opposing votes of government appointees to the Board of Directors, who received support from the Petrobras employee representative. The market interpreted this as political interference in management, which, although denied by Jean Paul Prates, the current company president, is presumed by investors due to government statements.

“It’s very funny. Sometimes, I see the news like this: ‘Petrobras grows by 30%. Petrobras breaks the record for gasoline production. Petrobras breaks the record for oil exports. Petrobras breaks the record for revenue,’ and we don’t get anything out of it. And when someone lives on speculation in the stock market, you can grow by 30% one day, fall by 20% another day, and that’s it,” said President Luiz Inácio Lula da Silva in an interview with the SBT channel on Monday (11). He added, “So, what I think is important for Petrobras, which is a company where the government has influence over it, is to consider the following: it’s not just a company to think about the shareholders who invest in it because Petrobras has to think about investment and think about 200 million Brazilians who own or are partners in this company.”

The President also claimed that “what is not correct is that Petrobras, which was supposed to distribute US$ 9 billion (R$ 45 billion) in dividends, wanted to distribute US$ 16 billion (R$ 80 billion). And US$ 8 billion (R$ 40 billion) more that could have been allocated for investment, for more research, for more ships, for more waves, was not done.”

On Wednesday (13), Petrobras’ president used his social media to comment on the incident and stated that the guidance to retain dividends came from the government, but considered that “to speak of intervention in Petrobras is to create dissent, speculation, and misinformation”, since “Petrobras is a mixed-capital corporation controlled by the Brazilian state, and this control is legitimately exercised by the majority of its Board of Directors”.

Was there room for the distribution of extraordinary dividends?

According to Marco Saravelle, chief strategist at MSX, yes. “The company had all the conditions to make the extraordinary distribution. The capital structure today is much more comfortable. It was the great work done over these last few years to readjust, to have a company today that generates a lot of cash and that, with a very comfortable leverage level, can carry out all investment plans and distribute extraordinary dividends. So, in financial terms, it’s not because of this reason,” analyzes.

The market’s main concern is what will be done with the funds. “If there were an investment with a higher return for the shareholder, okay. I think no one is against profit retention, right?” Saravelle questions.

Petrobras informed the market that the total unpaid amount of extraordinary dividends will go into a capital remuneration reserve, but it is not known where the funds will be allocated in the future.

Stock drop and market value loss

On the day of the retention announcement, ordinary and preferred shares, PETR3 and PETR4, fell by more than 10%. It is not the first time that political noise has caused the company’s value to drop in the stock market.

Concerning past depreciation problems, Saravelle comments that one of the effects is the ability to invest and grow. “The less it grows, the less tax it collects, and with an exclusively government outlook, it loses out on several fronts. As a company increases its risk, it can impact job creation and tax collection, as it brings uncertainty to revenue and profitability, and consequently, also generates less dividend for me, for you, and for the government as a shareholder,” the chief strategist points out.

The public vs. private interest conflict

According to Alessandro Paixão, lawyer and professor at the Evangélica University of Goiás, specializing in Administrative and Constitutional Law, even though it is a mixed economy, the manager and controller of Petrobras is the State. According to him, the economic ideology of the State, from any political group, ends up interfering in this structure, both in direct public administration and in indirect public administration.

Saravelle highlights that it is necessary to understand that Petrobras “is not a [pure] state-owned company, it is not a company whose only owner is the government. Here in Brazil, and anywhere in the world, it is a mixed-capital company. All decisions, in my opinion, would be better if they were made by consensus, which seems not to have been the case on the Board regarding this specific [extraordinary dividends] issue,” affirms the MSX chief.

Gustavo Mizrahi, partner at Vieites Mizrahi Rei Advogados, comments that dividend distribution to shareholders continues to be a fundamental pillar of corporate economics, but he points out the influence of the provisions in the Law of State-Owned Enterprises.

“The distribution of dividends represents one of the main incentives for investment in the stock market. The existence of the mandatory dividend regime in the Law of Joint-Stock Companies is proof of this. After all, the attraction of buying shares of a company is directly linked to its potential financial return,” comments Mizrahi. “It is crucial to emphasize, however, that the Law of State-Owned Enterprises stipulates that the dividend policy of mixed-capital companies, such as Petrobras, must take into account the public interest that justified their creation. If the public interest that underpinned its existence is the development of the Brazilian oil market, those responsible for distributing the company’s profits cannot ignore the need to invest the company’s resources in the sector.”

Adilson Bolico, partner at Mortari Bolico Advogados, says that the debate goes beyond legal matters, due to the model chosen by Petrobras, which makes it difficult to balance interests. “Legally, this will probably be brought at some point to the judiciary, perhaps even to the Supreme Court, which ends up receiving a large part of the country’s major debates. There is no way to have a coherent balance in market matters for this situation. It is a company with political interference, and it will follow the course that the current president gives it,” comments Bolico. Regarding a possible solution to the conflict, Bolico believes that “it’s much more about working with a contingency, even invoking Saint Thomas Aquinas, the lesser evil”.

Ricardo Julio Rodil, Capital Markets leader at Crowe Macro Auditors and Consultants, points out that maintaining Petrobras as a mixed-capital company makes perfect sense since the Brazilian State needs to have control over a strategic source of energy, such as fuels.

“This control is strategic, for example, in case of international conflicts, whether involving Brazil or not. But, in normal times, Petrobras must function as a company, therefore, with profit-making purposes. A strong Petrobras operating as a profitable company is good for the company, for shareholders, not forgetting that many are foreign investors/funds, and for the Federal Government itself, which pockets substantial amounts in taxes, dividends, and royalties, the latter shared with state and municipal authorities,” comments Rodil.

Time to reconsider the position in state-owned company stocks?

“I think it’s a good time to reconsider, but it’s still not time to make the decision because the company remains healthy, with a good capital structure, a good level of indebtedness, good projects, and good cash generation,” says Saravello. “So, without any radical changes yet, which is the yellow flag, then I think it’s time, yes, to put at least part of the profit that many people have made with Petrobras over the past two months, in the pocket,” he adds.

The strategist argues that it is not the time to make radical reductions, considering the information that the market has at this moment, which is limited.

Vale also suffers from governance issues

Vale is a private company; however, the government has a stake in the company through pension funds of Previ (the pension fund of Banco do Brasil employees). News reports this week raised discussion of possible interference in the company’s governance issues.

Recently, a member of the mining company’s board of directors, José Luciano Duarte Penido, resigned from his position due to disagreement with the succession process of the current company president.

“Although respecting collegial decisions, in my opinion, the current CEO succession process at Vale has been conducted in a manipulated manner, does not meet the best interests of the company, and suffers from clear and harmful political influence,” says Penido in the resignation letter.

With this development, concerns about possible intervention came into focus, but the company, when approached by the media, did not comment.

“In the case of legal persons, the interference of the State, in theoretical terms, should not exist. But it is not the first time that there is news of this attempt by the federal government to intervene in Vale’s administrative activity,” says lawyer Adilson Paixão.

According to the chief strategist at MSX, the Previ fund can appoint, according to the number of votes it has, a specific number of directors, but it cannot, even being a relevant shareholder, exercise the power to individually choose the company’s chief executive.

“So, that’s the concern. There’s a lot of doubt regarding governance, and we also know that not only Petro, but Vale has also made wrong investments in the past, not to the same magnitude, the same intensity, but that ended up destroying the value of those investments individually,” says Saravello. “This is the concern, once again, of the investor, misusing resources, having a misallocation of capital, which I think is the big concern at this moment for Petrobras, which could, at some point as well, happen at Vale,” he adds.

In the opinion of MSX’s chief strategist, the market is not pricing in, in the short term, the increased governance risk of Vale, unlike what is happening at Petrobras. “So, it’s a subject that I think is far from the market understanding or starting to price in. And, in a way, in quotes, it was postponed to the end of the year,”  Saravello opines.

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Recovery for major Brazilian banks will come in the medium and long term, says Fitch Ratings

Mar 15, 2024

Brazilian major banks face challenges in maintaining or increasing the profitability of their operations, even with the prospect of a less intense deterioration in credit portfolios this year, following a challenging 2023. This assessment comes from Fitch Ratings, a risk rating agency that held an event on Thursday (14) focusing on the scenario for Itaú, Bradesco, Banco do Brasil, and BTG banks.

“The progress in the sector’s revenue generation is expected to continue with challenges in the short term, but we have good potential for recovery in the medium and long term,” comments Claudio Gallina, Fitch Ratings’ Senior Director of Credit Risk. “This will be a reflection of a less restrictive monetary policy, which will help in a gradual recovery in the banks’ business volume as well.”

The rating of the group of major banks analyzed varies from double B to double B+, and according to Gallina, it is largely supported by business diversification. “It is also a reflection of distinct financial performance and sufficient loss absorption cushions to absorb potential shocks in the credit portfolios of these banks.”

“For Itaú and Bradesco, the assigned ratings are one level above the country’s sovereign risk, a performance resulting from the robust credit profile of the institutions and their significant role in the national financial system. This gives the two banks a greater capacity to absorb risks in more adverse macroeconomic scenarios,” comments Claudio Gallina.

Of the four banks evaluated in this Fitch Review, all four have a double B operational environment, with a stable outlook. The operational environment allows measuring the bank’s ability to generate business in that jurisdiction and to assume acceptable levels of risk.

“One factor that could change this operational environment is international presence. We have two banks that have an important and growing presence abroad, which are Itaú and BTG, mainly in Chile. Today, this international presence is not yet sufficient to change the operational environment,” comments Jean Lopes, Director of the Latin America bank group at Fitch Ratings.

Results and asset quality

After a very challenging 2023, Fitch expects the inflow of lower-quality loans to be less strong in 2024. Last year, concessions were already more restrictive and will continue in 2024, also due to the large loss recognitions by banks so far.

“We project a stable performance indicator at 8.3% this year, slightly below the 8.4% of 2023. On the other hand, credit recoveries should be a starting point for improving asset quality,” comments Gallina, adding that this item differs from bank to bank. “The latest delinquency indicators show that small and microenterprises continue to be the most sensitive, as well as the low-income segment, although we have already seen a recent recovery.” The Fitch director points out that this scenario is one of the factors explaining, for example, the negative outlook in Bradesco’s asset quality assessment.

Fitch assesses asset quality as double B for all four banks and considers the good provisioning level for Itaú, Bradesco, and Banco do Brasil. Regarding BTG, the positive adjustment is due to the credit index, which is predominantly concentrated in the corporate segment, with naturally lower risk.

Profitability is a challenge

When it comes to profitability, Fitch sees challenges in the short term. In summary, the scenario is of lower margins and still strong competition for the four mentioned banks, for which the agency has “slightly distinct assessments,” according to Jean Lopes.

For Itaú, the assessment is double B. “Itaú has demonstrated solid cost controls, while also showing a balanced risk management, which, combined, also seeks to improve product offerings. We expect this trend to continue in the coming years,” reports Lopes.

Banco do Brasil presented a B- grade, below the other three banks. “If we look at Banco do Brasil’s trend in the last two years, mainly, it is of improvement, which explains the positive outlook for the bank’s profitability score. What positive aspects have we seen in Banco do Brasil? An improvement in its internal capital generation, also supported by a strategy to improve margins and a transformation in the bank’s cost culture,” says Lopes.

Regarding Bradesco, the director highlighted the bank’s profitability, which worsened in the last two years. The decline is explained by higher provision expenses, mainly in its retail portfolio.

“I think Bradesco has restructured its strategy and has been seeking a better mix of lower-risk portfolios. Fitch’s projection is that in 2024, it will show some improvement, but still not enough to bring it back to pre-pandemic historical levels that the bank presented, numbers that should start to improve in 2025. Today, Bradesco’s outlook is negative for profitability,” analyzes Lopes.

Banco BTG is classified as BB with a stable outlook. “BTG today has a much stronger revenue mix. We also see a more lasting improvement in some revenues that BTG presents, mainly before taxes,” analyzes Lopes.

Major banks and Agribusiness

With the number of defaults and bankruptcies in agribusiness increasing, concern arises about possible restrictions by major banks on this sector. Agribusiness has grown very strongly in recent years, and according to Jean Lopes, credit has played an important role.

“We see well-diversified positions, without much concentration in certain clients or in the largest borrowers. We follow a modernization of the agribusiness sector and the guarantees offered. Banks are very attentive to the issue of guarantees, governance breaches. The problem has been manageable, and we believe that major banks will continue to be prudent regarding agribusiness,” Lopes adds.

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Interest on Equity Capital gains space as a tool for shareholder remuneration

Mar 14, 2024

The first bimester of 2024 was marked by a significant increase in dividends distribution by publicly traded companies. Shareholders pocketed, in the form of dividends or Interest on Equity Capital (JCP), the sum of US$ 5.5 billion (R$ 27.36 billion) in dividends, surpassing the historical mark of US$ 4.4 billion (R$ 21.93 billion) in the first bimester of 2020. Data gathered by Meu Dividendo at the request of Capital Aberto reveals that the use of JCP to remunerate shareholders continues to gain traction in companies’ strategies. In January and February, 68% of the total distributed to shareholders came from JCP, a historical record in the use of this instrument.

The preference of publicly traded companies for JCP to remunerate shareholders is not coincidental. One of the reasons, explains Wendell Finotti, CEO and founder of the Meu Dividendo platform, is the decision of the National Congress in December 2023. “Companies are no longer allowed to engage in tax planning and distribute JCP related to previous fiscal years,” comments the executive. “Since the decision was approved, we have noticed an increase in dividends paid in this format, leading to the record in the first bimester.”

The tax law specialist at Freitas Ferraz Advogados, Thiago Braichi, highlights that companies rushed to take advantage of the opportunity. “They are burning through reserves from previous years, resources that may not be usable. There is a debate with the Federal Revenue Service that argues that the effect of the new law already includes previous surpluses.”

Unlike dividends, calculated as a percentage of companies’ profits, JCP was created to ensure investor remuneration corrected by the long-term interest rate (TJLP). “It is a hybrid instrument, an important advantage over dividends. It is a form of remuneration and tax planning, which reinforces the thesis that companies want to take advantage of the reserves from previous years before the window closes,” adds Braichi.

Since the JCP paid to shareholders is recorded as an expense in the balance sheet, it has the positive effect of reducing the tax that companies will have to pay on profits. “The combined use of instruments, in situations where applicable, is interesting. Part of the remuneration reaches the shareholder via dividend, tax-free, and the other part using JCP, which when considered an expense reduces the tax on profits,” evaluates the lawyer from Freitas Ferraz. Another effect, adds Finotti from Meu Dividendo, is on cash flow. “Less tax payment means more cash resources. At least over this year, I see companies prioritizing the JCP instrument as a trend.”

The survey produced by Meu Dividendo shows which companies made the largest migrations in the form of distributing dividends, from dividends to JCP, last year. Track & Field, which distributed US$ 12 million (R$ 59.8 million) in dividends in 2022, last year used only JCP, in the amount of US$ 35.75 million (R$ 178 million). Allied Tecnologia, Unifique, and Vittia also shifted resources previously distributed as dividends to JCP.

Among the companies that already used the instrument, the highest percentage increase was with Banco Mercantil, with 865% in the annual comparison, rising from US$ 121 thousand (R$ 603 thousand) in 2022 to US$ 1.16 million (R$ 5.8 million) last year. Capital Aberto sought Mercantil to understand the movement, but there was no executive available. Following is ISA CTEEP, which increased the value distributed via JCP by 511%, to US$ 140 million (R$ 700 million).

Although CTEEP’s statute defines the minimum dividend distribution as the highest value between US$ 72 million (R$ 359 million) and 25% of the net profit for the fiscal year, the company has another practice. ISA CTEEP adopts the distribution of profits of at least 75% of the regulatory net income, with the possibility of payment of interim dividends, always ensuring that the profit is equal to or greater than the mandatory minimum.

“Last year, ISA CTEEP leveraged the use of JCP due to the better result in the period, an increase in the Profit Before Income Tax and Social Contribution (LAIR). This significant growth was possible due to the result throughout the year, maximizing tax savings and generating value for the company’s shareholders,” explains Carisa Cristal, executive director of Finance and Investor Relations of the company. “Prioritizing JCP is a strategy used to optimize the tax burden and, consequently, preserve the company’s cash.”

Capital Aberto also approached SulAmérica Seguros, which only uses JCP as a form of shareholder remuneration, but the company cited executive unavailability.

Another data point raised by Meu Dividendo that reinforces the movement of companies seeking to preserve cash is the increase in the deadline for dividend payments. In 2022, the average period between the dividend announcement – from when the shareholder is entitled to it – until the actual payment was 63 days. Last year, it rose to 84 days. “Since companies do not adjust the value, with the exception of Banco do Brasil, it is a strategy to preserve cash,” comments Finotti. In the first bimester of this year, the average period was 33 days, a decrease from 2023, but in the CEO’s view, it should rise again. “Our studies indicate that a significant increase in these deadlines as early as next month is likely to occur.”

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Brazilian Federal Revenue Office regulates taxation of offshore investments

Mar 14, 2024

The Brazilian Federal Revenue Service published on Wednesday (13) the new rules for taxing investments abroad (offshore) through Normative Instruction (IN) 2180. The deadline for regularization of assets abroad was defined between March 15 and May 31. During this period, Income Tax will be collected at a rate of 8%, compared to the standard rate of 15%. Repatriation of funds for the purpose of paying the 8% IR is already authorized.

The Office announced that there will be a program for investors to regularize their resources, the ABEX (Update of Assets and Rights Abroad). The rules published by the Revenue also establish that virtual assets will only be taxed when they refer to financial assets. A novelty in the Revenue’s rules, highlighted by Ricardo Santos, partner of Asset Reorganization and Succession at Lefosse, refers to the taxation of controlled companies.

“The Normative Instruction clarifies that the equivalence provided in Law 14.754 for indirectly controlled entities to direct controlled entities as sister entities for tax purposes applies only to the periodic taxation of profits, and not to capital reductions,” explains Santos. “In the case of capital reductions by an indirectly controlled entity to a directly controlled entity abroad, the individual partner must reallocate the portion of the acquisition cost of one controlled entity to another in the annual adjustment declaration, and the gain from currency exchange variation will only be taxed by Income Tax when resources are made available to the individual partner.”

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More banked Brazilians lead to record 1.2 billion active accounts

Mar 13, 2024

Brazilian access to banking services now reaches 89.8% of the population, reveals the idwall Digital Experience Ranking, conducted in conjunction with Brazil’s Central Bank. This scenario is responsible for the historical record of active accounts in the country reached in 2023: more than 1.2 billion, an increase of 14.2% over 2022.

Released during the 6th edition of idsummit, this Tuesday (12), the study shows that the average number of bank accounts per person has been increasing in recent years, from 3.5 in 2020 to 6 in 2023, but at a slower pace than in previous editions of the survey. Age is also a decisive factor in banking relationships. People aged 25 to 34 have 14.3% more accounts. The preference for digital banks for account opening is another important data point, responsible for 62% of new registrations.

Although the number of bank accounts is increasing every year, the pace of this increase is beginning to show signs of slowing down, which, in the view of Bank of America (BofA), may signify market saturation. In practice, a reduction in the number of existing accounts may be looming on the horizon, reinforcing the need for banks to focus on offering a good experience to retain customers.

The use of chatbots, although a trend, is not something desired by customers, reveals the research. 68.7% prefer to speak with another human being when solving their problems. Automated support in the form of chatbots was the response of 26.9% of respondents, and another 4.4% mentioned FAQs, tutorials, and independent searches.

Another important data point revealed by idwall’s research, a technology company that provides identity verification, risk management, and digital onboarding platform, is about a shift in the distribution of accounts, with digital banks doubling their representation. Digital banks represented 62% of account openings by respondents. Nubank, PicPay, and Mercado Pago led in the number of accounts opened, in that order. Although there is a greater presence of institutions classified as digital compared to traditional ones, the study highlights that “it is notable that the average number of accounts opened by digital institutions is significantly higher, totaling 223 accounts, while traditional institutions, represented by Bradesco, Banco do Brasil, and Itaú, ranked 4th, 5th, and 6th, respectively, registering an average of 128 accounts opened per institution.”

Security in Focus

Last year, Brazil recorded 1.5 billion leaked data. The forecast for costs associated with identity fraud until 2025, according to research data, may reach US$ 1 billion (R$ 5 billion). 64% of Brazilian companies are targets of fraud and digital attacks. In Brazil, 9% of Brazilians have already fallen victim to a Pix scam, with underclasses being the most affected.

Despite security data showing an increase in attacks, 91% of users consider that their banks have an adequate level of security. Onboarding was the 2nd process in which more people felt insecure or very insecure. Loan, on the other hand, was the process in which fewer people reported feeling secure, followed by investment.

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Funds granted extension for adaptation to new rule 

Mar 13, 2024

The investment fund industry has been given more time to adapt to Resolution CVM (Securities and Exchange Commission of Brazil) 175, the new regulatory framework for the sector. The implementation of the next phase of the rule has been divided into three stages with the approval of CVM 200. In a statement, CVM informs that the decision meets requests made by associations representing agents in the investment fund industry. Among the associations that requested more time are Anbima (Brazilian Association of Financial and Capital Markets Entities) and Anfidc (National Association of Participants in Investment Funds in Credit Rights).

Among the reasons presented by CVM are operational challenges related to the Brazilian tax reform that affected investment funds, combined with the complexity and depth of the new fund regulation. “CVM remains open to frank and direct dialogue with participants in the Brazilian capital market. Active listening has been a characteristic of our management at the agency, including in order to promote the smooth functioning of our segment,” comments João Pedro Nascimento, CVM’s president, through a statement. “Thus, at this moment, in evaluating received requests, CVM understood it was convenient and timely to grant additional time for the industry to properly adapt to the new regulatory framework of investment funds, Resolution CVM 175.”

Stock Adaptation

The deadline for adapting the stock of Financial Investment Funds (FIFs) jumps from December 31, 2024, to June 30, 2025. The adaptation of the stock of Investment Funds in Credit Rights (FIDCs) changed from April 1, 2024, to November 29, 2024.

Anfidc’s president, Klever Lairana Muller, justified the request for postponement. “The time ended up being too short for a series of reasons, including the change in the taxation of funds, which occurred throughout the second half of last year and required a significant amount of adjustment for several administrators and managers. This extra time is important for the market to better adapt.” Muller added as a challenge the fact that there are 2,300 FIDCs with diverse structures in the market. “The change requires individualized interaction between administrators, managers, and credit consultants. That’s why the need for more time. We understand that this deadline meets the market’s demands.”

Other changes occurred in the deadlines for the entry into force of paragraph 1 of article 140, on the segregation of fees among service providers, which changed from April 1 to November 1 of this year, and paragraphs 2 and 4 of the same article, on the implementation of the structure of classes and subclasses, which moved from April 1 to October 1, 2024.

CVM also made specific changes to Annex III of Resolution CVM 175 to incorporate into the regulation the changes in the legislation of real estate investment funds made in Law 8,668, which now allows Real Estate Investment Fund (REIT) and Agricultural Chains Investment Fund (Fiagro) to use assets as collateral for operations of their portfolios, as well as to constitute real burdens on real estate in the portfolio.

In a statement, Anbima expressed its reasons for requesting an extension of deadlines. “We made this request because we had major changes that affected the daily work of the teams at the same time: 175 and the new tax rule regarding closed-end funds, both quite complex,” explains Pedro Rudge, vice president of Anbima. “The extra time offered by the regulator will give fund service providers more peace of mind to make the necessary changes securely,” he emphasizes.

CVM also took the opportunity to make other adjustments to the rule, making specific changes to Annex III of 175, which now allows the creation of real burdens on real estate in the portfolio.

New Deadlines “Are Final”

CVM informed that the new dates were “established definitively and will not be subject to further extension.” And added that the superintendences must monitor adaptation to the rule. “In addition to granting additional time to market agents, CVM’s collegiate body instructed the superintendences dealing with the supervision of investment funds to actively monitor the efforts of agents to adapt to the rule, with the aim of reinforcing compliance with the new fixed deadlines, which were established definitively and will not be subject to further extension.”

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More restricted access to tax-exempt securities and falling interest rate redirect investments in Brazil

Mar 12, 2024

The downward movement of the Selic rate (Brazil’s interest rate), forecasted to end the year close to 9%, at the same time as markets postpone the prediction of a cut in the US interest rate, has had two effects on the Brazilian market. In the stock market, with the outflow of foreign funds, securities are performing below the initial expectation for the stock market. In the fund industry, which has lost assets in recent years, the beginning of 2024 suggests a recovery, driven by fixed income funds.

“The Selic rate is falling, but it’s still high. In addition, there are private credit funds with good securities and other actively managed funds that seek to increase shareholder returns. This is what is driving the fund industry so far,” comments Marilia Morais, Head of Products at SulAmérica Investimentos. Another important point in the movement of resources towards funds, Marilia points out, is the tightening of rules for the issuance of incentivized securities, such as LCI (Real Estate Credit Letter), LCA (Agribusiness Credit Letter), CRI (Real Estate Receivables Certificate) and CRA (Agribusiness Receivables Certificate). “With fewer tax-free securities available, investors seek alternatives, and the fund industry is an option.”

After a 2023 of asset loss, mainly by multimarket funds, investment funds recorded a positive net inflow of US$ 6.85 billion (R$ 34.2 billion) in February, compared to a loss of US$ 3.21 billion (R$ 16 billion) in the same period last year, according to Anbima data. In January and February combined, the net inflow of resources into funds reached US$ 17 billion (R$ 85 billion), compared to a negative performance of US$ 7.69 billion (R$ 38.4 billion) in the same period last year.

In Anbima’s bulletin, Pedro Rudge, vice president of the entity, associates falling interest rates, still high, and the new rules for incentivized securities with the beginning of the funds’ recovery. “The February results show that, despite the downward trajectory of the interest rate, the current level of the Selic makes fixed income funds attractive to investors,” comments Rudge. “Recent regulatory changes that increased tax symmetry between investment products also tend to benefit these funds. With a smaller supply of tax-exempt bonds, it is natural for investors to consider other resource allocation options, and fixed income funds can be an interesting alternative that provides liquidity.”

The fixed income category was the one that drove the industry’s performance in February, with a positive net inflow of US$ 8.56 billion (R$ 42.7 billion). The negative highlight remains with multimarket funds, which had net withdrawals of US$ 1.89 billion (R$ 5.9 billion) in February, after much larger net outflows in January, totaling US$ 3.31 billion (R$ 16.5 billion).

Fund managers hit the brakes

One of the negative effects of recent years, according to the Fund Map in Brazil, elaborated by the financial information platform Nelogica/Comdinheiro, is the decrease in the creation of investment funds. Two years of negative net inflows contributed to fund managers hitting the brakes. With the less favorable scenario, 3,244 new funds were created in 2023, a decrease of 9.26% compared to the previous year.

“Coming from difficult years and high interest rates, investors end up being more inclined towards traditional products such as CDs and direct treasury, for example, and stop looking for more sophisticated alternatives such as multimarket funds,” explains Filipe Ferreira, Director of Nelogica, a provider of technology for investments in Latin America, which in 2022 acquired Comdinheiro.

“Higher interest rates discourage managers from creating funds. We saw a significant decrease in the creation of multimarket funds, from 2,314 in 2022 to 1,963 in 2023. On the other hand, fixed income funds increased from 577 new products in 2022 to 721 last year.”

Outflow of funds from savings accounts

Data released by the Brazilian Central Bank (BCB) confirm the continuation of net withdrawals from savings accounts. In February 2024, the net loss was R$ 3.8 billion, after a January in the red, with outflows of US$ 4 billion (R$ 20.1 billion). According to Marília Morais of SulAmérica, the numbers are not only related to the need for funds to pay off debts but also to a structural change. “This year’s numbers show a slowdown in withdrawals, but they are likely to continue. Brazilians are learning about investment alternatives, gaining access to cheaper products and platform facilities. Withdrawals are not isolated, they show a trend.”

In 2023, withdrawals from savings accounts had already exceeded deposits by US$ 17.63 billion (R$ 87.8 billion). In the last twelve months, up to February, in only two months did savings accounts receive more deposits than withdrawals – June and December. “We consider that the trend of withdrawals from savings accounts continues, with their lower profitability compared to other types of investments as well as to meet the financial needs of Brazilians, who still have debt in the current scenario,” according to a report from XP Investimentos.

As a result, the balance of savings deposits ended February at US$ 194.66 billion (R$ 969.6 billion), which includes US$ 1 billion (R$ 5.3 billion) in earnings. The stock has already exceeded R$ 1 trillion in 2020 and 2021 when it began to be reduced by withdrawals from investors surpassing deposits. According to XP, considering the Selic rate at 11.25%, investing in a savings account is less attractive compared to other investments.

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From startup to unicorn: Brazilian managers share the treasure map of venture capital

Mar 11, 2024

Every year, around a thousand startups seek funding from Astella in order to turn an idea into reality or to kick-start their business journey. However, the venture capital funnel is narrow. Out of the thousand candidates, only about ten receive the investment. Of those, even with the cash injection, half close their doors. Another 30% see modest results, just enough to keep investors from being in the red. “In 20% of cases, we succeed, but only one will become an extreme success case, like unicorns,” reveals Edson Rigonatti, co-founder of the management company. In his assessment, these statistics are not unique. “This is just a sample of the early stages of venture capital.”

“We often say that, in our market, creating a unicorn is like climbing Mount Everest,” Rigonatti says. “For every thousand people who arrive in Kathmandu, which corresponds to the pre-seed stage, only 100 reach Base Camp, equivalent to initial capital, with monthly revenues between US$ 20,000 (R$ 100,000) and US$ 60,000 (R$ 300,000).” And the journey continues to be challenging. “Only about 20 reach Camp One, corresponding to Series A venture capital, with revenues between US$ 100,000 (R$ 500,000) and US$ 300,000 (R$ 1.5 million) per month.” With an increasingly restricted market, only one of these ventures reaches the top, reserved for businesses with market values in the billion-dollar range.

To understand how managers identify the few companies capable of reaching the top, Capital Aberto interviewed two responsible for funds that invested in startups listed as possible next Brazilian unicorns, as elaborated by Distrito. One of them is Omie, which, with the development of its cloud-based management system (ERP), helped obtain an average return of 52% for Astella’s 2014 crop fund — the same fund that sold Resultados Digitais to software giant Totvs, in a US$ 370 million (R$ 1.86 billion) deal. With a revenue of around US$ 70 million (R$ 350 million) last year, the company did not have revenue when it received, ten years ago, the first check of US$ 40,000 (R$ 300,000) from the management company — the second was for US$ 400,000 (R$ 2 million).

Another unicorn aspirant, according to Distrito, is Blip, an artificial intelligence platform for messaging between companies and customers through apps like WhatsApp and Messenger. In two rounds since 2020, the company has already received a total of US$ 34 million (R$ 170 million) from Warburg Pincus. The management company operates with a focus on more advanced businesses — the so-called growth capital — and also has startups such as legal tech Jusbrasil in its portfolio. According to Bruno Maimone, director of Warburg Pincus, since the first fund injection, Blip’s annual revenue has multiplied by five and currently “exceeds US$ 20 million (or R$ 100 million).”

Both companies, according to managers, are candidates to go public in the coming years. Moreover, they are two cases that follow what Rigonatti calls the four Ps. “When looking for companies aiming for the top, we look at people, product, processes, and price,” he says. However, he emphasizes: “We don’t always get it right, and often we fail to choose companies that later prove to be very successful or, conversely, we select businesses that don’t do as well.” But in Omie and Blip, managers hit the mark. See how:

People

In selecting entrepreneurs, experience is fundamental. “Blip’s partners were not first-time founders. They were experienced, having already sold a company and founded another that is still operating today,” says Bruno Maimone of Warburg Pincus. “They have a lot of operational experience and the ability to do a lot with a little, which we admire,” he adds. “So much so that, up to our first US$ 14 million (R$ 70 million) check, they had grown with their own capital, with an impressive technology team.”

“In searching for companies aiming for the top, we look for entrepreneurs who have already climbed mountains — that is, who have had previous businesses,” says Rigonatti. “We also seek teams with the skills needed for the climb.” In his view, Omie’s founders combined both qualities. “They had already created and sold another ERP company and were on their second business, this time focusing on small business management,” he says.

Products

According to Maimone and Rigonatti, both Blip and Omie already had products that were tested and approved by customers. In Blip’s case, the portfolio with heavyweight clients like Claro, Localiza, and Itaú caught Warburg Pincus’s attention. “They had already demonstrated the ability to serve large and medium-sized customers, with a unique product and the potential to become a market leader,” he says. “At the time, very few companies were using artificial intelligence in messaging for customers, and none had the traction they had.”

Although Omie was not yet selling its ERP when it approached Astella, the product had already been tested in various companies. “In the assessment of non-paying customers, they received an average satisfaction score of 96%, while the market average was around 35%,” Rigonatti reports.

Processes

Regarding the third P, of process, Rigonatti says that, for Astella, differentiation in sales and marketing is essential in choosing startups. “In the fight between David against Goliath, David has to fight differently,” he says.

“To be successful, it’s not enough to have an incredible team and an incredible product,” he says. “It’s also necessary to sell in a different, scalable, and inexpensive way.” In Omie’s case, what caught the managers’ attention was the sales proposal with the boost of partnerships with accounting firms and the creation of a franchise network.

Currently, the company has 120 franchised units — a model that allows for expansion without a major injection of resources. “Venture capital funds generally seek scalable models that enable growth without the need for a significant increase in the team,” says Distrito analyst Leonardo de Bona.

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With good returns and less volatility, Brazilian quantitative funds still struggle for space

Mar 08, 2024

Quantitative funds represent almost a third of the fund industry as a whole in the American market. In terms of returns, they perform equal to or better than traditional funds, but with much less volatility. While the product has already proven its worth abroad, it remains a discrete segment in Brazil, although the first quantitative manager, Kadima, emerged in 2007. To understand the barriers that are hindering the advancement of quantitative funds in Brazil, Capital Aberto heard from managers and collected performance data from different sources. Currently, as there is no specific classification for quantitative funds, the product remains in a kind of limbo and lacks consolidated data.

Regardless of the metric, quantitative funds in Brazil show good performance and resemble the behavior of products in more mature markets. In the United States, according to a survey by Eureka Hedge over the past 13 years until September 2023, the return on quantitative funds was 1.75 times better than traditional ones, with a profitability of 261% compared to 112%. The lower volatility of the products is a highlight – the largest drawdown of quantitative funds was 9.49%, while in traditional funds, it reached 12.71%.

In Brazil, at Capital Aberto’s request, Quantum Finance gathered the number of funds in recent years. In 2023, there were 210 quantitative funds as a whole – including the master fund and its mirrors. The number is slightly lower than in 2022 (220 funds). Just for comparison with the main benchmark of the Brazilian market, the CDI rate (the Brazilian interbank deposit), last year 190 quantitative funds outperformed the CDI rate (90% of the total). This year, until February 28th, there are 204 quantitative funds, with 201 of them surpassing the indicator’s variation.

The number of quantitative funds in Brazil, which use mathematical models and algorithms for decision-making, is very small compared to the fund industry as a whole. At the end of 2023, according to Anbima, there were 25,931 funds in the market – fixed income, multimarket, equities, currency, and ETFs. Of this total, only 38.5% outperformed the CDI, much lower than the performance of quantitative funds.

Other data that reinforce the benefits of using technology for analyzing historical data and market behavior and algorithms for trading were collected by the Equus Quantitative Funds Brazil index, developed by Equus Asset. “The methodology for creating the index follows the standards of American fund sector indices. We evaluate 10 constituent funds and weigh them equally,” explains Felipe Uchida, partner and director of Quantitative Analysis at Equus Capital. The index reflects the performance of managers who implement artificial intelligence and machine learning models in their trading processes since 2018.

The IEFQB was compared to the Anbima Hedge Fund Index (IHFA). So far, the index has accumulated a return of 58%, similar to the IHFA, which recorded a return of 58.1%. However, the volatility of the IEFQB is lower compared to the IHFA, at 3.4% against 4.9%, respectively. “This represents less than 70% of the volatility of the indicator. These are products with good returns and much less volatile,” adds Rubens Terra, partner and director of Investments at Equus Capital.

According to the executives of Equus, a manager founded in 2022 and which has two funds, one quantitative and the other venture capital, technological and knowledge barriers of those who sell the product have impacted the conquest of a larger share of the market. “It used to be more expensive to set up an asset of quantitative funds, due to the need for servers, equipment capable of analyzing a lot of data, but it has been improving,” comments Terra.

Another factor that prevents quantitative funds from accelerating is the lack of knowledge, not only by the investor but also by those who sell the product. “Many distributors don’t understand it well, they sell a quantitative multimarket fund, just as a multimarket, and it’s not the same thing,” explains Terra, adding that Equus has been talking to brokerage firms that distribute funds to improve how they are presented to clients.

The technological barrier is, in Pedro Simonetti’s view, a partner at Giant Steps Capital, still the main obstacle for new asset managers focused on quantitative products. “If you set up a traditional manager, you can start with 4, 5 people and a room. Quant funds require cutting-edge technology, servers, programmers, as well as trend analysis teams and market experts,” comments Simonetti. Giant is the largest quantitative fund manager in Latin America, with US$ 1 billion (R$ 5 billion) under management. “Not only in Brazil has this industry hardly developed, with very few players, but also in the region as a whole. The initial investment is high. We spent years just reinvesting the profit.” Giant’s main fund is the Zarathustra FIC FIM, which has several mirror funds, depending on the distributor’s strategy.

Another reason highlighted by the executive is that quantitative funds benefit from scale and speed in operation. Giant, for example, has a server at B3, the Brazilian stock exchange, to reduce order execution latency. “The models are designed, but it needs to be fast in reading what happens and in executing orders,” he explains. “We use data analysis and the analysts’ experience for what matters. When it’s time to press the button, to run the strategy, it’s not necessary.”

In the partner’s view, as Brazil is a relatively young industry and Brazilians are only now diversifying their investments, it will naturally take time for them to turn to products they don’t yet understand. “Whether you like it or not, you have a higher level of complexity to understand abstraction.”

Rodrigo Pereira Maranhão, partner and manager at Kadima, is more optimistic and sees the industry moving positively, although he emphasizes that it will take time for consolidation because it is “another way of dealing with the narrative and using technology for efficiency gains.” “I think it’s just a matter of time. Abroad, there are funds that have been doing this since the 1970s,” comments Maranhão.

For the Kadima partner, there are many advantages involving the quantitative management model that the investor does not know. “You systematize decision-making, that is, you have rules that will indicate when to buy or sell, algorithms programmed for this,” explains Maranhão. “It is important to mention that these are not rules created based on feeling or interpretations, but on tested theses or theories, contemplating various scenarios.” The idea is to reduce unconscious biases. Kadima currently manages around US$ 480 million (R$ 2.4 billion) in quantitative funds of different strategies.

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Why the Brazilian ROE is going against other countries

Mar 08, 2024

Brazilian publicly traded companies are falling short of their investors compared to many foreign markets. The ROE (Return on Equity) has been decreasing here, unlike the upward trajectory of countries like the United States or Japan. This information comes from Andrew Reider and Fernando Fenolio, respectively CIO and chief economist of WHG (Wealth High Governance) independent asset. In an online event promoted by the company this Thursday, the duo argued that, with the lower weight of the new economy, the country stands out from the trend of developed countries, where areas such as artificial intelligence, software, and Cloud drive profits and growth.

In Reider’s assessment, Brazil still focuses on the old economy. “In the composition of the stock market, state-owned commodity companies or banks dominate,” he says. And he points out the result: “Brazilian ROE is falling. Only in the commodities segment has it improved. In the opposite direction, the return to US investors has been growing, largely thanks to companies betting on innovation, especially technology giants. According to the executive, among the innovative companies of the S&P 500, ROE jumped from 24% to 51% from 2015 to 2024, driven by the performance of the Magnificent Seven, especially those focused on artificial intelligence, and others.

“Artificial intelligence could add up to $13 trillion to the global GDP, which means an additional 1.2% annual growth,” says Fernando Fenolio, mentioning data from McKinsey consultancy.

“I think that’s why the Brazilian stock market is slipping a lot because there’s not even flow for buying,” adds the CIO. The solution to this, according to what was presented in the lecture, is to wait for an international disinflation process and Fed rate cuts. Brazil should, above all, “hope for lower inflation worldwide,” in the expectation of becoming even more attractive to foreign investors.

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Brazil has room for a new stock exchange? Experts respond

Mar 07, 2024

The news is circulating in the market: Americas Trading Group (ATG), a platform for trading financial assets, has revived its plan to open a stock exchange in Rio de Janeiro. According to the newspaper O Globo, the idea is to debut in the second half of 2025 and operate stocks, derivatives, currency, and commodities. This isn’t the first time ATG has attempted this venture. In 2012, the company submitted the necessary documents to the CVM (Brazilian Securities and Exchange Commission), and in 2019, after a lengthy arbitration process, reached an agreement to use B3’s depository service in the business. Still, the plan didn’t materialize, much like other attempts by American stock index companies interested in establishing a presence here.

However, this time, ATG comes with the backing of its new controller, Mubadala Capital, owned by the sovereign wealth fund of the United Arab Emirates. With that in mind, the question arises: will the plan finally come to fruition? Seeking answers, Capital Aberto consulted four experts: Carlos Reissmann, CEO of Criteria; Pedro Gonzaga, partner and analyst at Mantaro Capital, a manager focused on stocks; Gustavo Harada, head of the equity desk at the Blackbird Investimentos autonomous agent office, and Ricardo Rocha, leader of the finance track of Insper’s postgraduate program. In common, they all said that competing with B3 will not be an easy—or cheap—task.

“I find it very challenging, especially in terms of demand and cost,” says Reissmann. “The business requires competitiveness in terms of price and product depth,” he argues. Rocha thinks similarly. “After the merger that created B3, the capital structure became very robust, so to compete, you need to invest a lot of money,” he says. He is also skeptical about the size of the Brazilian market. In his view, to accommodate a new exchange, Brazil would need 400 listed companies and twice as many investors, which, in his calculations, would require the country’s income to double as well. “For that, GDP would have to grow by 7% per year for 10 years,” he calculates. “So, the conditions are not the most favorable for the new business.”

Although he disagrees that the Brazilian market is large enough for a new exchange, Gonzaga, from Mantaro Capital, shares with Rocha the view that one of the major obstacles to the new business lies in the creation of a central counterparty system, which provides investors with the guarantee that transactions will be honored. “Regulators prefer the exchange to take on the role of the central counterparty, especially in equity and derivatives transactions,” he says. “It doesn’t seem credible that the CVM and the Central Bank would accept a relaxation in this other forum that would offer less security than what already exists,” he states. Rocha agrees: “People from all over the world come to know B3’s central counterparty, and the CVM wouldn’t see the sense in regressing.”

However, the system is costly. “It will be necessary to allocate a lot of capital to demonstrate a strong signal to all market participants: you can trust me as the central counterparty. When I take on the risk of any counterparty of yours, I can be sure that I will honor the obligations,” says Gonzaga. Asked by Capital Aberto, CVM confirmed in a statement that it is analyzing the request for the creation of the new exchange but said it does not comment on specific cases.

According to the analyst, the migration of brokerage firms to the new exchange would also be expensive. “There is a significant operational cost to prepare systems for integration with B3’s platform,” he says. In his view, overcoming this barrier is crucial to the success of the new exchange venture. “One way to get around the problem would be for the new competitor to assume part of this cost.”

Where to operate?

For him, the new exchange’s focus on specific niches would also help make the new business competitive, as is the case in the United States, for example, with Nasdaq focusing on technology companies, and in Canada, which has an exchange specializing in mining. “It would be necessary to think about an underserved niche,” says Gonzaga. “Perhaps some technology, now that there is a more vibrant venture capital environment in Brazil, could be a possibility,” he continues. “One potential angle is access to listing smaller companies.” But he cautions: “the difficulty is that the smaller the company, the harder it is to have a liquid free float to be traded.”

For him, the less complex option would be to compete with B3 in the original Cetip market. “Several small competitors have already emerged there, especially in fixed income and fund share registration.”

For Reismann, fixed income operations would be another possible focus. “The Brazilian fixed income market is huge, and since the ones absorbing this are the brokerage firms, a stock exchange for these types of instruments would make sense,” he says. Still, he points out obstacles: “for B3, which is practically a market monopoly, increasing these new revenue lines is a marginal cost, while potential new players would have to develop all the technology that B3 has.”

For issuers and investors, the new exchange could bring the advantages of a more competitive market. “I think the arrival of a competitor could reduce costs a bit for companies looking to go public,” says Harada, from Blackbird. “Lower fees could also benefit investors,” he concludes.

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Report from PwC points to an uptrend in Mergers and Acquisitions in Brazil for 2024

Mar 07, 2024

The year 2024 began with 85 mergers and acquisitions operations recorded in Brazil, the same number as in January of last year, but with market characteristics that already reveal a growth trend in the coming months. This conclusion comes from the monthly mergers and acquisitions report produced by PwC Brazil.

However, compared to the end of 2023, the report indicates a slight decrease in the volume of mergers and acquisitions, which, in the view of PwC Brazil’s partner, Leonardo Dell’Oso, will be offset over the year. “The year 2024 begins with greater investor interest in acquiring majority control rather than minority stakes, with 54% of the operations during the period, compared to 47% in the same period last year. This behavior may demonstrate a longer-term view by investors,” said Dell’Oso.

Another data point indicating a shift in the trend for M&A, according to the PwC executive, is the number of operations by type of buyer (strategic or financial). When evaluating the average of operations from 2023 in relation to January 2024, the report points to a resurgence in investments by private equity funds and investment banks, with transaction volume increasing by 19%. This same trend can be confirmed when analyzing the last 12 months ending in January 2024 compared to the same period in 2023, showing a growth of 10%.

“Private equity funds and investment banks have maintained high liquidity in recent years and reduced acquisitions since the Covid-19 pandemic. They spent the last two years focused on making the companies in their portfolios profitable, acquired between 2020 and 2021,” commented the PwC Brazil partner. “Additionally, due to the local and global political-economic scenario, company valuations in Brazil, which soared during the years 2020 to 2022, have been declining since 2023. The combination of these key factors increased financial investors’ interest in companies, resulting in this increase in M&A transactions for this type of investor.”

The consultancy’s report highlights that, in sector comparisons, the technology sector continues to stand out. When comparing the last 12 months up to January 2024, the sector experienced a significant decrease in the number of operations. However, in the comparison between January 2023 and January 2024, there was a recovery, representing 50% of the transactions in the period. The consumer sector, which performed well in 2023, also experienced an 8% decrease in transaction volume over the last 12 months up to January 2024, but a slight increase in the proportion of total transactions in the comparison between the periods.

The negative highlight goes to the services sector, which, despite the low volume of transactions compared to the whole, showed a sharp 71% decrease compared to January 2024 and the same period last year, and a 16% decrease considering the 12-month period.

Regarding the outlook for 2024, Leonardo Dell’Oso is optimistic. “Considering the history of transactions analyzed in PwC’s M&A transaction information database and, especially, the demand for transaction support services from the consultancy’s clients, we believe that, if macroeconomic conditions are maintained and there is stability in the international scenario of 2023, the M&A market in 2024 should experience growth between 5% and 10% in transaction volume,” commented Dell’Oso, adding that there would be 1,450 transactions in the year. “The main sectors expected to drive this growth are technology, energy (especially renewables), professional services, industrial products (heavy machinery), mining (special metals), among others”.

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Mercado Bitcoin launches Digital Variable Income

Mar 05, 2024

Mercado Bitcoin (or MB), the largest digital asset platform in Latin America, is expanding its range of investment products. The new addition is the launch of Digital Variable Income (DVI), which will allow access to assets from startups and sports, focusing on companies at various stages of maturity, including some restricted to funds and exclusive investors. The public assets of DVI, as informed by Mercado Bitcoin, follow CVM (Brazil’s Securities and Exchange Commission) 88 regulations.

The platform had already been a pioneer in launching Digital Fixed Income (DFI) in 2019. So far, over 160 assets have been launched, totaling over R$ 500 million, bought by more than 50,000 clients. Of the fixed income assets launched last year, the average annualized return was 17.44%, according to MB. Now, the platform is advancing into the variable income category.

“DVI not only diversifies the portfolio of investors but also contributes to economic development by supporting the growth of startups in various sectors and even more exclusive markets, such as sports. With a significant transaction volume already at launch, MB aims to reach the mark of US$ 20 million (R$ 100 million) in origination in 2024,” says Reinaldo Rabelo, CEO of MB.

The platform’s plans are to bring Digital Variable Income to other countries, such as MB Portugal, and to expand the range of assets offered, including sectors such as entertainment, as well as expanding sports offerings.

Customers who opt for an annual liquidity forecast can access MB Revenue Share, one of MB Startups’ fundraising modalities, which establishes the opportunity to invest in companies with stable businesses that generate recurring revenue, so that investors can participate in their results with protection of the invested value. In this model, with investments starting at US$ 20,00 (R$ 100,00), customers will be remunerated with part of the startup’s annual net revenue. MB Startups, an integral part of MB’s ecosystem, uses blockchain technology to tokenize these real assets. At launch, over US$ 3.43 million R$ 17 million has already been transacted in the variable income category.

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Campos Neto wants to ensure “immediate comparability and portability” of funds in banks

Mar 05, 2024

The president of the Brazilian Central Bank, Roberto Campos Neto, refuted the view held by much of the market that the real interest rate – adjusted for inflation – has not kept pace with the cuts made to the Selic rate, Brazil’s main interest rate, currently at 11.25% per year. “It’s not true; when the nominal rate began to fall, the projected real rate also started to decline,” said the executive in a lecture on Monday (04) at the São Paulo Commercial Association (ACSP). “Real interest rates in Brazil have fallen more than in other emerging countries.”

Regarding the pace of monetary policy easing, Campos Neto acknowledged that prices continue to show a benign behavior, but that the service sector requires attention, with price behavior still far from expected.

During the lecture, Campos Neto highlighted the “recurring surprises in GDP performance”, mentioning the recent years when the economy grew above forecasts. “Economists have consistently missed, including myself, growth projections. And when we look at 2024, the movement to revise growth upwards has already begun.”

Last week, IBGE (The Brazilian Institute of Geography and Statistics) reported that GDP grew by 2.9% in 2023, well above the market’s estimate. For this year, the Ministry of Finance predicts a growth of 2.2%. Meanwhile, the financial market raised its estimate of GDP expansion from 1.68% to 1.75% last week.

Technological agenda in focus

During the event promoted by ACSP, the president of the Central Bank highlighted some achievements of the monetary authority and the next planned steps to improve access to the financial market. “When we talk about technological advancements at the Central Bank, we are thinking about what financial intermediation will look like in the future. PIX was the first step, and we will advance,” commented Campos Neto, adding that the digital representation of assets “is here to stay,” citing crypto assets, NFTs, and stablecoins.

“Now, we need to make sure that this actually helps people. The second part is to ensure immediate comparability and portability, which is open finance. Moving from one bank to another automatically in search of better products.”

The idea is that in the future Brazil will have a kind of “finance marketplace,” like a Google where “you go to one environment, view all the banks where you have an account and the products you consume, compare, and migrate to wherever you want,” explained the executive, stating that this will greatly increase the efficiency of banks.

In his lecture, the president of the Brazilian Central Bank also argued that citizens should own their data and be able to sell them or even accept tokens as payment. This will also have an effect on how companies are evaluated. “It’s data monetization. Today, we evaluate companies not only by market cap but by what we call data cap, that is, the amount of data companies have”.

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Tokenization opens up the capital market for medium-sized companies

Mar 04, 2024

Last year, Lucas Carvalho, an executive at Redepetro, a fuel distributor based in Ribeirão Preto, began considering options to raise funds to reduce the cost of an existing debt. Initially, the capital market was out of the question. “In a traditional issuance, via a letter of credit, receivables certificate, or debenture, the structuring cost wouldn’t justify a small operation like ours, of US$ 1.21 million (R$ 6 million), as we would pay between US$ 400,000 (R$ 2 million) and US$ 600,000 (R$ 3 million) just in fees,” he says. Until a new option emerged: the issuance of digital fixed income tokens.

Last October, the company raised the desired amount in an operation conducted by MB Corporate, a unit of Mercado Bitcoin (MB) focusing on the capital market. “The transaction reflects the growing confidence in the tokenization of real assets, also known as Real World Assets (RWA),” says Vitor Delduque, director of MB Corporate.

He details the transaction: “The commercial note was first purchased by our fund, an FDIC managed by Iggy, and then tokenized and offered to the public.” The tokens, all already sold, were traded on the secondary market by the MB platform, which can be accessed by both individual investors and brokerage firms interested in offering them to clients. With maturity in 2029, the assets, post-fixed, yield 3% per year, plus the variation of the Selic rate (Brazil’s basic interest rate).

According to Delduque, similar operations at MB typically range from US$ 1 to US$ 10 million (R$ 5 million to R$ 50 million). “These are volumes that do not interest large banks, which, in conventional operations, seek deals worth hundreds of millions,” he says.

Last year, according to the executive, MB Corporate launched 256 million tokens, in fundraisings carried out by companies with annual revenues between US$ 50 million (R$ 250 million) and US$ 600 million (R$ 3 billion). “After the issue with Americanas, it became very difficult to raise credit in the market, and as a result, larger companies also started looking for us,” he says.

For 2024, the goal, according to him, is to quadruple the amount, to around US$ 200 million (R$ 1 billion). “We are very optimistic for this year,” he says. According to him, most issuances are backed by receivables, such as energy contracts, rent, credit card, and service invoices. “With receivables as collateral, the debt does not enter the balance sheet liability, which helps the company if it later wants to take out bank credit or seek new fundraisings,” he says.

Promising Future

Fernando Carvalho, CEO of Vórtx QR Tokenizadora, mentions another advantage of tokenization. “With blockchain, it is possible to track the entire history of an asset, from its issuance to each wallet it has been distributed to,” he says. “This allows for perfect bookkeeping.”

The executive also bets on the growth of the segment. “It is a market that is just emerging now and has great potential, with the tokenization of different financial and even non-financial assets,” he says. In his opinion, the modality should gain strength in the coming years with the emergence of platforms for trading different tokenized assets in the secondary market. “I believe that alternative trading environments to B3 will emerge, which will use blockchain and will be integrated with Drex, the digital real, for settlement processes,” he predicts.

For him, this expected expansion of the secondary market should encourage demand for new tokenized assets. “When there is a healthy secondary market, there is also a healthy primary market because, with increased liquidity, the initial investor knows that they can exit the asset more easily.”

Currently operating under the CVM’s (Brazil Securities and Exchange Commission) regulatory sandbox (an experimental environment to test innovative financial products and services), Vórtx QR has already tokenized three debentures, totaling US$ 36 million (R$ 182 million). The assets were purchased by the treasuries of Itaú and Santander.

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CMN relaxes rules for issuance of CRI and CRA

Mar 04, 2024

The Brazilian National Monetary Council (CMN), in an extraordinary meeting this Friday (01), decided to make specific adjustments to its Resolution No. 5,118, which restricted the eligible collateral for the issuance of CRIs and CRAs (Real Estate Receivables Certificate and Agricultural Receivables Certificate, respectively). In a statement, the CMN stated that the decisions aim to “harmonize the understanding of market agents regarding aspects related to eligible collateral for issuances.” The measure comes in the wake of the resolution that, at the end of January, limited the collaterals that can be used in operations. The objective was to prevent companies outside the agricultural and real estate sectors from issuing CRIs and CRAs in search of better rates, resulting from the income tax exemption of these securities for individuals.

The first change made explicitly states that contracts or obligations of a commercial nature, such as promissory notes, lease agreements, purchase and sale contracts, and usufruct contracts related to real estate, can be used as collateral for CRA and CRI operations. “They made it clear that they are excluded from the restrictions defined in January,” says Felipe Ribeiro, managing partner of the FII club. The measure opens up an important door again: “With this, for example, it is once again possible to use a real estate credit portfolio as collateral within an FIDC (Investment Fund in Receivables Rights),” he says.

The CMN also informs that it “sought to restrict, within the financial system, the application of the new prohibitions to financial institutions or entities authorized to operate by the Central Bank of Brazil, entities that are part of a prudential conglomerate, or their respective subsidiaries.” Ribeiro explains the main change brought about by the measure: “Controlling entities of financial institutions will be able to issue the securities,” he says. “With the advancement of technology within financial institutions, several construction companies and developers have started to have some type of financial institution to finance their buyers. Now, they will also be able to issue CRIs.”

Another change made by the CMN allows debt securities whose issuers are not characterized as debtors, co-debtors, or guarantors to also constitute collateral for CRA and CRI, such as the Real Estate Credit Certificate (CCI).

The capital market represents 28% of the total outstanding debt of companies in Brazil

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Mar 01, 2024

In the last decade, the composition of financing sources for Brazilian companies has undergone significant changes, characterized by the reduced participation of banks and BNDES (the Brazilian development bank) as financiers. The most recent study by the Capital Market Studies Center (CEMEC-FIPE), previewed for Capital Aberto, brings numbers on the advancement of different fundraising instruments, such as debentures, stocks, and bonds.

In December 2023, the share of the capital market’s debt securities balance stood at 28.4%, nearly double the level recorded ten years ago, at 16.7%. Over the same period, the share of bank loan balances for free resources decreased from 33.3% to 25.6%, while the share of BNDES decreased from 21.2% to 7.1%.

“Worldwide, in more developed financial systems, the capital market is essential for financing companies. The numbers show significant progress, but the potential is even greater, very significant,” comments Carlos Antonio Rocca, CEMEC coordinator, citing as an example listed companies on the stock exchange. “The number of companies with shares listed on the Brazilian stock exchange is very small, incomparable to other markets like the American or Asian ones.”

The faster growth of the capital market occurred from 2017 onwards, with the sharp reduction in subsidized financing and the decline in interest rates. In the years 2021 and 2022, the capital market accounted for 66% of the net fundraising of all Brazilian companies. Last year, it stood at 55%.

In Rocca’s view, accelerating even more depends not only on companies’ interest but also on the cost of the operation for small and medium-sized enterprises to also use debt instruments. “Not all companies can access the capital market; there are costs involved that depending on the size of the issue do not compensate. In addition, very small issuances end up having little liquidity, which is important for the secondary market for the securities,” he explains.

A more recent movement that should unlock smaller value operations is that of “duplicatas” (trade bills), which need to be registered to avoid fraud or even being used duplicatively. “The regulation of registering companies solves two problems, fake duplicatas and those used in duplicate. These are instruments that help in raising smaller value funds,” evaluates Rocca.

Less BNDES, more market

Excluding resources from the Housing Finance System, directed at real estate financing, those from real estate purchases with savings and FGTS (Brazil’s Severance Indemnity Fund) resources, and those from rural credit financing, the capital market and BNDES are the main domestic sources of medium and long-term resources for companies, highlights the study.

Last year, the sum of BNDES and capital market resources – corporate debt, IPOs, and follow-ons – represented 3.28% of GDP. The largest share, as a percentage of GDP, came from corporate debt issuances, at 2.47%. “In 2010, BNDES accounted for 4.33% of GDP, equivalent to 65% of the total, while last year it stood at 0.69%. One hypothesis is that the capital market advanced as BNDES reduced the supply of subsidized credit, whose rates were much lower than those of the market.”

The study points out that between 2013 and mid-2017, BNDES interest rates were much lower than market rates (CDI). “There are several factors that explain the evolution in the composition of financing sources for Brazilian companies, but several data show that the capital market has long had the conditions to advance as a financier of companies, but competition with subsidized credit delayed the movement.”

Foreign market

The CEMEC study also provides data on the increase in the share of resources raised in the international market from 22.3% in 2012 to 32.3% in November 2023. The CEMEC coordinator explains that the increase in foreign currency balance and the exchange rate explain the leap. Between 2012 and 2021, foreign currency debt jumped from US$ 229.9 billion to US$ 335 billion, reflecting the exchange rate increase from US$ 0.54 (R$ 2.66) to around US$ 1.11 (R$ 5.5). The decrease in the average exchange rate to US$ 0.99 (R$ 4.94) last year moderates debt growth to US$ 371.5 billion, as of November 2023.

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Brazil’s Finance Minister advocates for G20 unity in combating tax loopholes benefiting the super-rich

Feb 29, 2024

On the second day of the G20 meeting, Brazil’s Finance Minister Fernando Haddad once again targeted tax loopholes benefiting the super-rich. The minister announced during the meeting in São Paulo that Brazil “will seek to build a G20 statement on international taxation” by July.

“We will consult all members and work together to have a balanced, yet ambitious document that reflects our legitimate aspirations,” he told finance ministers and central bank governors from the world’s twenty largest economies.

The joint action, he said, aims to reduce “opportunities for a small number of billionaires to continue taking advantage of gaps in our tax system to avoid paying their fair share.”

“It is an unquestionable fact that the world’s billionaires continue to evade our tax systems through a series of strategies. The latest report from the EU Tax Observatory on tax evasion showed that billionaires pay an effective tax rate equivalent to between 0% and 0.5% of their wealth,” said Haddad, citing a study from the European Union. One of the authors of the research, French economist Gabriel Zucman, was invited to the event in São Paulo.

The speech aligns with the federal government’s measures, starting from the end of last year, to combat tax advantages and close loopholes in the taxation of the super-rich. This includes the application of “come-cotas” (an specific taxation for funds in Brazil) for exclusive funds, changes in the taxation of offshore funds, and the limit of US$ 1 million (or R$ 5 million) per person on the assets of exclusive family pension funds.

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The scenario of judicial recovery in Brazil has seen a slow response to the decrease in interest rates

Feb 28, 2024

The business environment at the beginning of this year in Brazil remains delicate, even with a more benign macroeconomic outlook. This is suggested by recent data released by Serasa Experian, indicating a 62% increase in Judicial Recovery requests in January compared to the same period last year. The variation aligns with the accumulated performance of 2023 when Judicial Recovery requests jumped by 68.7%, reaching 1.4 thousand companies, the fourth-worst number since 2005, when Serasa Experian began the historical series.

In January, 149 Judicial Recovery requests were filed, with micro and small businesses standing out with 99 protocols. Medium and large companies filed 32 and 18 requests, respectively. Bankruptcy requests in January, on the other hand, decreased by 4.2%. Since the beginning of last year, when the Americanas (one of Brazil’s biggest retail companies, which almost went bankrupt in 2022) case caught everyone by surprise and affected private credit funds holding the company’s securities in their portfolios, managers have been closely monitoring the debt and judicial recovery scenario. Other large companies such as Light (Rio de Janeiro main energy company), Tok&Stok (a furniture retail business), and Oi (a telephone provider company) have also had to seek solutions for their debt through Judicial Recovery requests. The financial relief for companies expected with the beginning of the Brazilian Central Bank’s monetary easing policy, according to Serasa Experian data, is still distant.

“It’s a concerning number linked to a macro factor, which is high interest rates. The rate cuts already made take time to materialize and have not been sufficient to stop the continued increase in Judicial Recovery requests,” comments Antonio Nachif, an expert in Judicial Recovery and Bankruptcy and a partner at Dias Carneiro Law Firm. “Many companies had been negotiating agreements with creditors, but without success. This is especially the case for retail and service companies, which are the first to be affected when delinquency worsens.”

The assessment by Serasa Experian’s senior economist, Luiz Rabi, aligns with this view. “The increase in Judicial Recovery requests reflects the growth of companies facing the imminent risk of insolvency, which last year recorded a record level of default, with 6.6 million CNPJs [National Registry of Legal Entities] negative,” comments Rabi. “Despite signs of improvement emerging, such as the decrease in inflation and interest rates, in the context of Judicial Recovery, the response is slower.”

At the Dias Carneiro firm, which acts in defense of creditors of troubled companies in renegotiation and Judicial Recovery processes, clients have been paying closer attention to the persistently negative scenario. Nachif comments that although the speed of the processes has improved in recent years with advances in case law and changes in the Bankruptcy and Judicial Recovery Law in 2020, the process significantly impacts the companies’ image. “Today, there are better-established deadlines for appeals, but throughout the entire process, from the outset through the subsequent phases, companies face difficulties in the market, especially if they are publicly traded companies with shares in the stock market,” comments the lawyer.

The deadlines for completing Judicial Recovery processes vary greatly, which is also a point of concern for the market, ranging from 1.5 to 2 years, in successful cases, up to 10 years. “And a deadline that depends a lot on how the process unfolds and is always more complex when dealing with publicly traded companies with different decision-making bodies,” comments Nachif, adding that the scenario of Selic [Basic Interest Rate] below double digits projected for the end of the year will help, but not immediately. “It’s still a high interest rate and takes time to materialize in the companies’ financial situation. It’s not immediate”.

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ESG bond issuances are expected to reach $1 trillion in 2024

Feb 27, 2024

Global issuances of green, social, and sustainable bonds are expected to reach around $1 trillion in 2024, compared to $980 billion in 2023, according to a recently released report by S&P Global Ratings. Despite the modest growth, the study predicts greater geographical diversification in the origin of these bonds. “2024 may be a year of regional expansion and a variety of instruments, rather than strong global growth,” the study states.

In this scenario, Latin America is expected to stand out after ranking second in emissions in 2023, with a 56% increase, trailing only the Middle East, with 149% growth. Among the factors contributing to the increase in Latin American emissions are global and regional efforts to accelerate the energy transition and achieve the UN’s Sustainable Development Goals (SDGs), according to the report.

The situation is quite different in Europe, with emissions growing by only 7% in the past year (in dollar terms). The European Union has been reducing its participation in ESG bond issuances since 2020 due to decreased funding for emergency projects related to the Covid pandemic. As a result, in 2023, Europe and North America together accounted for 57% of global emissions—the lowest share in five years.

Historically, notes S&P, ESG bond issuance has been dominated by high-income countries. However, other markets may begin to increase their presence in 2024, primarily due to “significant unmet financing needs,” according to the report.

ESG Bonds in Brazil

In Brazil, the year began with two major green bond issuances from Ambipar, specialized in waste management, and FS, a corn ethanol producer. The companies issued $750 million and $500 million, respectively, in green bonds overseas on January 30th. The yield stood at 9.875% for Ambipar’s bonds and 9.125% for FS’s, both with a seven-year maturity.

In both cases, demand was high. Ambipar initially aimed to raise $500 million. However, as the demand exceeded three times that amount, surpassing $1.5 billion, the company increased the issuance by 50% to $750 million, as Luiza de Vasconcellos, head of sustainable finance fixed income at Itaú BBA, the company’s lead coordinator, along with BTG Pactual and Bank of America, explained. The proceeds will be used to pay off other debts, but the company has committed to investing an equal amount in projects that may involve renewable energy, non-polluting transportation, or water management.

In the opinion of the Itaú BBA executive, operations like Ambipar’s can help broaden the range of foreign investors interested. “In addition to accessing those who typically buy emerging markets, you also access pockets with an ESG focus, which do not necessarily have a limitation by geographic region,” she says. “It can even be two funds from the same investors,” she adds.

The reasoning is shared by Gabriela Bertol, head of sustainability at Santander Brasil, one of the coordinators of FS’s issuance. “In addition to bringing reputational gain to companies, ESG issuances allow for diversification of pockets and greater demand in volume, which sometimes also brings cost benefits, with lower rates for the issuing company,” she says.

According to information published by Invest Talk, from Banco do Brasil, the high demand, totaling $1.3 billion, enabled a reduction in the rate paid to investors, initially signaled at 9.5%, to the 9.125% effectively negotiated by FS. The resources were used for investments and debt extension.

New Projects

Currently, globally raised funds in green issuances typically go to renewable energy projects, energy efficiency, clean transportation, or construction, in the case of green bonds—such as Ambipar’s. Social bonds, on the other hand, usually finance affordable housing, basic accessible infrastructure, and other projects with a socioeconomic focus. These data come from another study, this time by Fitch Ratings.

In the coming years, however, new projects are expected to be added to the list, such as initiatives focusing on agriculture decarbonization, food security, biodiversity, and healthcare, predicts Fitch.

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EQI Investimentos opens its first office abroad

Feb 27, 2024

The Brazilian brokerage firm EQI Investimentos is initiating its internationalization process with the opening of its first office abroad, in Miami, United States. With currently US$ 5,44 billion (R$ 27 billion) under custody and over 67,000 active clients, EQI has an average monthly capital raised of US$ 200 million (R$ 1 billion) and over two thousand new accounts. With its first foothold in the American market, EQI, currently linked to BTG Pactual, aims to accelerate the pace in acquiring new clients, expand its product offering, and diversify its sources of revenue.

The company’s international division will be led by Caio Tuca, EQI’s international head, who will operate from Brazil, along with Guilherme Zanella, who will lead the office located in Miami. “We expect to serve Brazilians who have left Brazil and become U.S. residents and, in the future, clients from the United States as well. With this expansion, we will be able to diversify our revenue sources through the offering of financial services in an international market, while strengthening EQI’s reputation as a reliable and competent investment company, both in Brazil and abroad,” says Juliano Custódio, EQI’s CEO, adding that the company is attentive to opportunities in the world’s largest capital market, enhancing allocation options for clients.

EQI already plans to replicate the model implemented in the Miami operation to other locations. “Through the U.S. territory, we will have access to the whole world. We have already looked at Europe, but our greatest demand is still concentrated in the U.S. We will start there, but without ruling out other possibilities,” comments Custódio. “Our intention is to become a hub of international solutions for our clients, including real estate financing, insurance, and real estate.”

Founded in 2008 in Santa Catarina, EQI was the first investment platform to obtain a license to operate as a brokerage firm in Brazil. Currently, it has 12 offices in seven Brazilian states. The expectation, according to the company, is that the platform will reach US$ 30 billion (R$ 150 billion) under custody in five years.

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The Brazilian Government launches foreign exchange hedge program for sustainable investments

Feb 26, 2024

The government announced on Monday (26) that it will offer foreign exchange protection for foreign investments in sustainable projects in the country. According to a statement from the Ministry of Finance, the Inter-American Development Bank (IDB) will act as an intermediary in contracting an international bank that will offer foreign exchange insurance in Brazil, in a program called Eco Invest Brazil. It will be up to the Central Bank to bridge the gap with investors in ecological projects in the country benefiting from the foreign exchange hedge. The government will also offer a special liquidity line for financing large sustainable projects.

The IDB (Inter-American Development Bank) will support the program on two fronts, totaling R$ 27 billion (US$ 5.42 billion). According to the entity’s president, Brazilian Ilan Goldfajn, there will be US$ 3.4 billion in derivatives and US$ 2 billion through a credit line. “We will acquire derivatives in the foreign market and pass them on to local companies,” he said.

The program involves the participation of the Ministry of Finance, Ministry of the Environment, and the Central Bank. “The IDB has been involved since the beginning, and we hope that many more partners will participate, including the British government and the World Bank. We will have the contribution of Banco do Brasil and BNDES,” clarified Goldfajn.

In a statement, the Ministry of Finance stated that, given the volatility of the real, the cost of foreign exchange protection for longer periods ends up making investments in foreign currency for ecological purposes in the country unfeasible, hence the importance of the new instrument. “The insurance promises to cover the exchange difference, ensuring that the investor can buy dollars at a previously defined rate, thus minimizing their losses,” the statement said.

The new program will be implemented with the issuance of a provisional measure and subsequent regulation by the National Monetary Council (CMN), which will detail, among other things, the mechanism of foreign exchange derivatives.

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Brazil’s market awaits the first Insurance Risk Note (IRN) of this semester

Feb 23, 2024

Created by the legal framework of securitization (Law 14,430/22), the Insurance Risk Note (IRN) is closer to reaching investors in Brazil. Recently, the Brazilian National Monetary Council (CMN) published a resolution addressing the role of fiduciary agents in issuing the security, which serves as a financial instrument for transferring insurance and reinsurance risk. With this, expectations are rising that the Superintendence of Private Insurance (Susep) will approve the two requests for the creation of Specific Purpose Insurance Companies (SSPE), units that will receive portfolios from insurers and issue the security (IRN) for sale to investors. It is expected that, already in the first half of this year, the first IRN issuance will occur, equivalent to the insurance-linked securities (ILS) common in other Brazilian markets.

According to the National Confederation of Insurance (CNseg), at the end of last year, there were approximately US$42 billion (R$200 billion) in ILSs worldwide. “If you do a simple calculation just as an example, taking into account that the sector in Brazil represents between 1.5% and 2% of insurance worldwide, you can estimate a potential market of US$800 million (R$4 billion),” comments Alexandre Leal, Technical Director of Studies and Regulatory Relations at CNseg, considering it positive that Susep is already evaluating two SSPE requests. “It’s a new instrument, there will be a learning period. The company that receives the portfolio will have a lot of work to find investors willing to accept the risks and buy the security.”

Contacted by the report, Susep informed that the licensing requests consist of three distinct stages: technical presentation, prior authorization, and approval. Without mentioning names, it added that “there are two licensing requests so far, which have surpassed the technical presentation phase and are in the prior authorization phase.”

The issuance of IRNs will follow the same model as securitized operations. Insurers or other interested companies need to create an SSPE, with its own capital, that will issue the security backed by the risk portfolio transferred from the insurer. Thus, there is no communication between the assets of the insurer and the SSPE that will issue the securities for sale to the investor.

“The company will effectively be separated from the insurer’s capital, which protects everyone. If the investor incurs any losses, they cannot hold the insurer liable. And on the other hand, if the insurer goes bankrupt, the investor in that portfolio will also not suffer the consequences,” explains Alexandre Chang, Director of Fitch Ratings and head of insurance at the credit rating agency, which oversees the ratings of ILSs offered to investors.

For the CNseg director, the instrument should be particularly useful in covering events with low probability of occurrence but high risk, such as natural disasters. “Often these are risks that are difficult to share with reinsurers. With the possibility of transferring the portfolio to the SSPE that will issue the financial asset, insurers gain an important tool,” explains Leal. “I don’t see the IRN replacing the role of reinsurers, but it will be complementary.”

Chang, from Fitch, adds that, in theory, the cost of selling the financial asset to investors should be lower than the amount paid to reinsurers. This type of security will only be offered to professional investors, with over US$2 million (R$10 million), or institutional investors. Although the law does not limit insurance or reinsurance companies to the possibility of creating an SSPE to transfer the portfolio and issue the security, the Fitch director considers it unlikely that companies from other sectors will be interested. “It is a specific purpose company, but it needs to understand the insurance sector, be authorized by Susep, and also comply with some insurer requirements. It is unlikely to attract companies from outside the sector.”

The issuance of securities by insurers will also require the involvement of other players in the capital markets, such as fiduciary agents. “Practically every economic niche has a vehicle to access investors. Something was missing for insurers, which is now solved with the IRN,” comments Eugênia Souza, partner and head of Corporate Trust at Vórtx, a company that provides infrastructure for the capital markets.

Even before the CVM (Brazil’s Securities and Exchange Commission) regulation focused on fiduciary agents was issued, Vórtx was already preparing to serve the insurance market. “The insurance risk note is a security that will need to be recorded, guaranteeing the investor’s ownership,” explains the Vórtx executive, which already operates monitoring the collateral of securities that go to market and the governance obligations of the issuers.

“The creation of the IRN is very important for the insurance market and requires a series of players for the entire operation to be safe and fulfill its role,” explains Eugênia, emphasizing that adaptations were necessary at Vórtx to serve the sector. “It is very different to monitor and track this type of security, linked to an insurance policy, which has loss experience, than other assets, such as real estate funds, for example. We made the necessary adjustments.”

The report contacted several insurers, but they preferred not to comment. Only Tokio Marine informed that the issue is being discussed between the CFO (financial management) areas and the Statutory Directorate.

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Brazil’s SEC prohibits leverage for REITs until regulation

Feb 23, 2024

On Thursday (22), the Brazilian Securities and Exchange Commission (CVM) prohibited leverage for REITs, which had been authorized by Law 14,754, last December, until the regulation of the new rule. The possibility of leverage, which had gone unnoticed by most of the market, was the subject of an article published in Capital Aberto in January, written by Felipe Ribeiro, managing partner of Clube FII. In practice, as revealed, leverage received the green light after modifications made by the new Law 8,668, which changes two points of the previous legislation: the burden on REIT properties and the possibility of taking on debt in the fund (articles 7 and 12, respectively).

As the specialist explains, the new law now allows the use of REIT properties as collateral for debts assumed by the funds or their unitholders. With this, a REIT can, for example, issue a CRI  (Real Estate Receivables Certificate) using an existing property in its portfolio as collateral, provided that the funds are destined for the acquisition of new properties, development, renovations, or retrofits, in compliance with CVM regulations. “Until then, leverage was mainly carried out through the purchase of properties, given as collateral for CRIs, which, in turn, had the REITs themselves as debtors,” says Ribeiro.

The new law also allows the use of guarantees, appraisals, acceptance, or co-obligation, provided that they are intended to guarantee obligations assumed by the fund or its unitholders.

Public hearing

In its justification, the CVM says that the change “could be preceded by a public hearing and could, among other things, establish the eligible target audience, a differentiated informational regime, the form of prior approval for REITs to provide guarantees, appraisals, acceptance, or co-obligate themselves in any form, as well as whether REITs may use these faculties to guarantee operations assumed by specific unitholders of the fund.”

According to Ribeiro, the CVM is right to provide more transparency to leverage operations. “It’s great for the market,” he says. “Regulation provides security for administrators, investors, and managers, so that no one does anything outrageous. You have to show how you’re doing it.”

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Ten non-financial institutions already act as issuance coordinators in Brazil

Feb 22, 2024

One year after the publication of CVM (Brazil’s Securities and Exchange Commission) Instruction 161, which introduced a new regime for the registration of public offering coordinators and authorized non-financial institutions to operate in the market, there are already 10 accredited companies, as reported by Anbima. The list includes securitizers, consultancies, fiduciary agents, and asset managers qualified to coordinate issuances. However, two of them are non-financial companies affiliated with two major players that already act as coordinators – BTG Pactual and Itaú.

One of the regulator’s objectives in issuing CVM Instructions 161 and 160 was to expand access to a wider range of new types of coordinators, issuers, and investors, as well as to simplify processes and reduce the CVM’s prior intervention in less complex offerings, which now have an automatic procedure. The queue of non-financial institutions accredited as issuance coordinators was led by Oriz Partners, four months after the norm’s issuance. The results so far have been very positive.

“It was a very wise decision by CVM to democratize the market and take this activity solely out of the monopoly of financial institutions. There were several adjustments so that we could set up the operation, discussions with B3, and system parameterization, but it worked,” comments Rafael Prudente, responsible for Structured Operations at Oriz. Since obtaining authorization, Oriz has coordinated US$ 200 million (R$ 1 billion) in public securities offerings. “It was much more than we imagined. We coordinated nine offerings in this first year for companies like Cashme, from the Cirella Group, or MRV. Also, part of the operations in which Oriz was involved was the IPO of a Fiagro credit.”

As a strategy, Rafael Prudente says that Oriz is agnostic regarding the type of operation and volume. “We have carried out large operations, but also smaller ones, which is somewhat the goal of CVM in stimulating this market. We coordinated the issuance of a commercial note for a company in the Brazilian Northeast worth US$ 3 million (R$ 15 million).” As differentials compared to banks, Prudente comments, there is a lower price and greater agility, and, in the case of Oriz, a seniority of the team that also contributes to the speed at which the area has progressed in this first year.

At Bamboo Securitizadora, the decision to accredit as a coordinator after the publication of CVM 161 was a natural path. The company, using the securitizer registration, could already coordinate issuances, but only for clients of the company, whose operations had been structured by it. “The debt market never served smaller companies very well. The big banks pay attention to operations above US$ 40 million (R$ 200 million). With the license of 161, we can attack any niche, but it is not the intention to enter direct competition,” comments Arthur O’Keefe, co-founder of Bamboo.

The company’s strategy is to operate in the range between US$ 4 million (R$ 20 million) and US$ 40 million (R$ 200 million), mainly coordinating the issuance of CRI  (Real Estate Receivables Certificate) and debentures. “We are 100% aligned with the regulator in allowing more companies to use the capital market.” The co-founder and CFO of Bamboo, Igor Donni, recalls that expertise with operations under the securitizer license has been important. “We had already worked on the first CR in Brazil, a securitization deal for solar panels for a company called Sunny Hub worth US$ 1 million (R$ 5 million). The operation proved that with technology, micro-issuances are viable,” comments Donni. Bamboo, already under the rules of 161, coordinated issuances of US$ 20 million (R$ 100 million). “We have been in the market for a short time, but we aim high. In Anbima’s ranking, there are at least five levels of coordinators, and we are gradually advancing,” says Arthur O’Keefe, adding that the plans for 2024 include 20 operations.

Another accredited as an offering coordinator is One Investimentos, a company that was born as an investor advisory and advanced in supporting corporate clients, as an office linked to BTG. “Coordinating an issuance of US$ 10 million (R$ 50 million) or US$ 100 million (R$ 500 million) almost requires the same amount of work, so banks always sought larger operations. We had already observed this, but we couldn’t act. With CVM 161 and 160, which facilitated the process, it was a natural path,” explains Francisco Gonçalves, partner at One Investimentos. “At One, we developed an important segment of companies, we have an origination end of legal entity clients very good.” At One, the capital markets area is independent of the rest of the operation.

Accredited since June last year, One coordinated the first issuance in December, a CRI from BR Partners, worth US$ 14.72 million (R$ 72.6 million). “Today, I won’t decline larger operations, but my way of provoking is different. In the capital market, one of the ways of origination is when large companies invite banks to participate, almost a bidding process, a model that doesn’t make sense for us,” explains Gonçalves.

The other origination channel, comments the executive, is provoked operations, where the client often didn’t even consider it, but there are issuance opportunities that can improve the balance sheet. “It is in this format that we will act, bringing solutions to clients.” The space that One will prioritize are operations between US$ 6 million (R$ 30 million) and US$ 20 million (R$ 100 million), with a longer term. “For this year, we believe that it is possible to coordinate a total volume close to US$ 100 million (R$ 500 million) in debt, in seven or eight operations.”

On the list with the 10 non-financial companies accredited by CVM 161, there are two linked to large banks that already coordinated issuances and would not need to act under the new CVM 161. Contacted by the report, Itaú explained that the accreditation of the non-financial company of the group is part of the intragroup corporate reorganization, disclosed at the end of last year. At the time, Itaú informed that the total spin-off of Banco Itaú BBA S.A. was approved, and all activities of financial advisory, structuring, and coordination of operations with securities or securities will be transferred from the bank to Itaú BBA Assessoria. BTG Pactual, on the other hand, preferred not to comment.

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New energy exchange arrives in the Brazilian market next quarter, with derivatives on the radar

Feb 21, 2024

In the wake of the opening of the free energy market, with the potential to bring over a hundred thousand new high and medium voltage consumers into the segment, N5X will be launched in the second quarter of the year an energy exchange formed by L4 Venture Builder, a fund supported by B3 (the Brazilian stock exchange), and Nodal Brasil, a subsidiary of the EEX Group. In the future, the goal is the creation of a clearing house, linked to the business, to offer guarantees in derivative operations and possibly also in transactions in the physical market.

“Our long-term goal is to bring the financial market into the sector, following the evolution that has occurred in countries that have undergone a liberalization process, such as in Europe,” says N5X CEO Dri Barbosa. “Overseas, the physical market is for the short term.” According to her, medium and long-term contracts in mature markets are operated in the futures market, with derivatives, in some cases with the possibility of converting futures contracts with a financial settlement, without physical delivery of the energy, into contracts with physical delivery.

If all goes as planned, the new system will provide more security to consumers and sellers. EEX intends to act as a clearing house to guarantee, as a central counterparty, the fulfillment of agreed terms—a mechanism nonexistent in Brazil in bilateral transactions carried out by the Brazilian Energy Commercialization Chamber (BBCE) platform or other means. Currently, if the agreed price for energy purchase rises by the delivery date, there is a greater risk of the contract being undone by the supplier than there would be if there were a clearing house with its guarantee fund.

“Today, every 6th business day, the seller prays to receive payment and the customer prays to receive energy,” says Cláudio Ribeiro, CEO of the energy trader 2W Ecobank, holding approximately 10% of the market. According to him, unfulfilled contracts can affect a chain of transactions. “Many times the purchased energy has already been resold to another before delivery, who resold it to another. So, if one does not fulfill what was agreed, there is a cascade effect,” he says.

“If an exchange brings more security to transactions, we could have more investors, more money, and more liquidity, and then energy becomes a financial product, for hedging and investment,” he says. As an example of the potential of energy derivatives, Ribeiro cites the case of soybeans. According to him, on the Chicago exchange, where producers lock in the price per bushel, the financial volume is equivalent to 14 times the physical volume, measured by the quantity of grains actually produced.

“The Brazilian market currently moves three times the physical volume,” he compares. “With an exchange that brings more liquidity, this amount can rise to 10, 12, 14, or 15 times due to the creation of new investment products,” he says.

Stages

But before reaching the commercialization of derivatives and acting as a central counterparty—a long-term goal, which depends on CVM (Brazil’s Securities and Exchange Commission) and the Brazilian Central Bank approval—the exchange will operate in the physical market, with a schedule that establishes two major stages. At the inauguration, but scheduled for the second quarter, with a date still undefined, the exchange will operate with the electronic registration of bilateral transactions conducted outside the platform.

In the second stage, expected for this year or 2025, the goal is to bring energy buying and selling negotiations onto the platform, which will match buying and selling offers. Currently, according to N5X, only 1.45% of transactions in the free market are made through electronic platforms, directly on the computer.

In the third stage, with no defined date, the exchange will act as a central counterparty to ensure that the energy contract asset will actually be delivered. “With the central counterparty, in practice, instead of company A selling to company B, company A sells to N5X, which sells to another party,” says Barbosa.

At the EEX Group, one of the owners of the new exchange, the clearing structure exists for both the physical and financial markets. “Here in Brazil, we are discussing with market participants, along with regulators, whether it makes sense to clear for the physical market as well,” says Barbosa. “But, whatever the case, before that, we have a regulatory journey to go through.”

Free Market

Since January 1st, companies connected to high and medium voltage can also negotiate directly with suppliers in the free market. Until then, the operation was restricted to large consumers, with demand above 500 kilowatts (kW).

According to the Brazilian Association of Energy Consumers (Abraceel), 202 thousand consumer units, mainly companies, are supplied with medium and high voltage energy. Of these, more than 37 thousand are already in the market, so that, according to the entity’s estimates, the migration potential from this year is approximately 165 thousand consumer units—mostly made up of small and medium-sized businesses.

Currently, the free market accounts for 35% of Brazilian electricity— a share that, according to Abraceel, has the potential to rise to 48% with the inclusion of new high and medium voltage consumers in the coming years.

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Discover the secrets of the multimarket champions

Feb 20, 2024

If every rule has its exception, it wouldn’t be different in the story of resource loss and modest performance recorded by multimarket funds in 2023. In the storm that engulfed the category, a few saw the sun shine. It was a year when all subclasses of multimarket funds, on average, lost to the CDI (the Brazilian interbank deposit). Capital Aberto’s report tells the story of some managers who outperformed the category by far.

For comparison purposes, two surveys were conducted, by Quantum Finance and Economatica, on the performance of the products. In both cases, the average return of the category was close to 11%. In the study conducted by Quantum, with 881 multimarket funds with at least 300 investors, all the top profitability champions had portfolios concentrated in crypto-assets, such as Hashdex Bitcoin and CE Bitcoin 100, with gains of 131% and 122%, respectively. It was a year when Bitcoin rose by 130%, which explains the performance of funds with digital assets in their portfolios.

In the survey conducted by TC Economatica, with funds with more than 100 investors and assets over US$ 2 million (R$ 10 million), funds with digital assets were excluded. The exclusion of crypto funds, commented Paulo Boghosian, CEO of TC Pandhora Investimentos and curator of TC Economatica’s data, takes into account the distinct volatility of the products. “I understand that they are not comparable in terms of absolute return. It was a year of very strong Bitcoin growth, but it is common in other periods for crypto to fall sharply. The volatility of cryptos is between 40 and 50. Stocks are around 20, while multimarket is much lower, around 15,” explains the executive. “By excluding multimarket with digital assets, we are left with funds where the manager’s skill made a difference in macro analysis and asset selection.”

The difficulty in achieving better performance last year, comments Boghosian, is explained by the rapid changes in the dynamics between different assets. On average, the return of the funds analyzed by Economatica was 11.40%. “Funds, especially macro multimarket ones, time monetary policy very well, the interest rate cycle, but last year was complex, with a change from contractionary to expansionary regimes in several markets,” comments the executive of TC Pandhora. “That’s why there are more equity funds and more active management in the top positions.”

The manager has a multimarket fund, TC Cosmos, which had a return of 26.26% last year. “It is a product in which we managed to make money in all asset classes.” The fund managed to extract gains from the closing of the interest rate curve in Brazil throughout the year and abroad, at the end of 2023. “Interest rate positions are relevant but tactical. At this moment, we’ve zeroed them out because we don’t see a premium in the curve,” explains the manager, who is now also more cautious with the stock market. “We have 30% of the PL in stocks; the stock market has lost foreign funds, and at this moment, we want to have more cash to take advantage of opportunities.”

The story of other managers who stood out includes a good reading of the macroeconomic scenario and tactical moves to take advantage of market asymmetries, whether in the interest rate curve or the stock market.

Volatility and return

One of the best-performing multimarket funds last year was BDR Avarga, from the BDR Asset management, led by its partners Daniel Cunha and Luiz Rizo. It is a D6 fund, with much higher liquidity than the average of similar products (D30). “It’s a cheap product, highly liquid, and volatile, ten times more than the category index (IHFA),” explains Rizo, adding that when “they hit the nail on the head,” they tend to outperform their peers by far.

Last year, the return reached 82%, after advancing 136% in 2022, recovering more than enough from the 60% decline in 2021. Avarga’s main bets were on local interest rates and currencies, as well as currency coupons. “In the first half, we basically managed to capture gains from inflation positions, in IPCA (the Brazilian inflation-targeting index). We also had gains from directional positions in the interest rate curve,” explains the manager. In the second half, with a good reading of monetary policy, the manager unwound positions in US interest rates and focused on papers that reflected the thesis of interest rate cuts by the domestic central bank. Using derivative contracts, the manager quickly changed positions to capture gains. “Today, we have positions that benefit from an acceleration of interest rate cuts in Brazil and an eventual early start to an interest rate cutting cycle in the United States, but with very low risk positions and lower volatility.”

Leverage and high gains

The higher-than-average risk level was also the hallmark of the Versa Tracker, another multimarket fund with excellent performance and an annual return of 69%. “What differentiates the fund and explains part of the performance is the level of risk. It is a product that uses a lot of leverage, through derivatives,” explains Luiz Alves, manager of the Versa Tracker Fund. The product came from two difficult years and recovered in 2023. “Our main bet for the product, which went wrong in the past, is the same one we focus on, which is the convergence of Brazilian interest rates, the real Brazilian interest rate, at the level of international peers.” This is the largest position in the fund and where, in 2023, the gain came from. The second-largest contribution to the result was from a portfolio of high-dividend-paying stocks. “It has a fixed income characteristic. Interest rates fell, and the portfolio did well.”

From the performance attribution, two-thirds were interest rates and one-third was the stock portfolio. They are more static, strategic positions. “My risk and the average duration of the position in interest rates last year was 12. Each 1% drop in the interest rate gave a 12% gain in the share,” he explains. Today, the multimarket Versa Tracker begins to push the duration of the portfolio a little more because the curve no longer has as much premium, and the terminal Selic (Brazil’s main interest rate) will still be very high, in the manager’s view.

A classic hedge fund

The list of top-performing funds includes only one macro multimarket fund, the Chess Alpha. “It’s a hedge fund in the classic American sense; we operate in interest rates, stocks, and currencies, in Brazil and abroad,” explains Vicente Matheus Zuffo, founder, and CIO of Chess Capital. “We use leverage well, and that’s why the product’s volatility is higher.”

In the Chess Alpha’s portfolio, whose return last year was close to 52%, currency and stock positions are equivalent throughout the year, but fluctuate depending on market conditions. “We don’t work with a reference allocation.”

Last year, the greatest contribution to the return came from stock positions, even with the fluctuation, which, in the case of Chess Alpha, was not a problem. “The stock market had bad moments in the first quarter, but managed to recover. The leverage factor allowed us to recover well, especially in the fourth quarter,” comments the manager, adding that there are structural and tactical positions in the search for return.

In the stock portfolio, there are between 10 and 20 stocks, in addition to the Ibovespa index, where leverage occurs in the fund, via derivatives of the B3’s future index. “At the moment, we are more conservative. We are concerned about the US interest rate, the risk of it being kept high for longer, and the US stock market, which was a small part of the fund’s performance last year,” comments Zuffo. “I think we can repeat last year’s performance. We have a very positive view for Brazilian assets, especially stocks, although we think this early year will be turbulent.”

Focus on value stocks

In managing the Guepardo Long Bias, a multimarket fund with a return of 42% last year, the focus is on value companies, and it can be up to 100% invested in stocks, depending on how discounted they are. “It’s a value fund with more agility; we’re not static; we can go from 0% to 100% allocation quickly,” explains Roberto Esteves, Guepardo’s IR director. “We only operate in the local market, and the focus is on agility to change position. We also do specific operations, such as the Safra OPA. Today we have about 13 investments.” Risk management involves choosing assets from different thesis and sectors.

“We take advantage of opportunities when prices fall to buy; it was like this at the worst moment of the pandemic and with good returns to investors. Everyone was desperate, and we were 100% allocated,” recalls Esteves. “This year we are optimistic, but repeating the 40% from 2023 may be too much. Over 20 years, we have an average annual return of 23%. This can be maintained.”

Micro focus to compose stocks

Another Long Bias multimarket fund with a return well above the category average is Polo Norte, from Polo Capital, which delivered 34% to investors in 2023. It is a fund with 19 years of experience. “The fund’s strategy is very micro in the choice of stocks to buy or sell, always in pairs,” explains Conrado Rocha, a partner at Polo Capital and manager of the company’s equity funds in explaining the product’s long-short strategy.

One characteristic of the fund’s management, Rocha explains, is that the pairs are formed by stocks from the same sector, unlike most long-short funds that combine assets from different segments. “We do it within the same sector to only run the sector’s micro risk. If I’m short in banks and long in consumption, and tomorrow the Central Bank doesn’t cut interest rates as I imagine, I can lose on both sides.”

The fund has around 80 stocks, between bought and sold positions. About 80% of the risk is Brazil, and the rest is outside, in countries like Mexico, Argentina, Peru. “Basically, I changed the language because credit penetration, informality, corruption, are all similar,” comments the executive, adding that the biggest performance contribution in the past was from Tenda, in which Polo is the largest individual shareholder and distributes the shares among all the funds it manages. “Always bought in Tenda, what changes is the short selling.”

Another position that worked out well was bought in Inter and sold in Nubank. “This was a position we carried almost all year, but we’ve already changed it. Now we’ve closed it out.” Another was in Argentina, with a basket of stocks whose drive was Javier Milei’s victory. “Historically, it’s a fund that delivers 170% of the CDI, but with moments when it ended up in the negative. It’s a shareholder adapted to this.”

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Real Estate Investment Funds part two: what to expect after Brazil’s Carnival

Feb 19, 2024

In Brazil, it is commonly said that the year truly begins only after the Carnival festivities end. For real estate investment funds (REIFs), after a shining start to 2024, the question remains whether this “new year” will maintain its strong performance. Before Carnival, the sector’s benchmark index (IFIX) had already reached its highest level since its inception in December 2010, hitting 3,340.69 points on February 7th. Since then, amid ups and downs, it has continued to set new records. Capital Aberto consulted experts and analyzed data that supported the product’s excellent performance thus far, seeking clues for the remainder of the season.

While past performance does not guarantee future returns, a look back at January 2023 showcases the strength of the product amid a period of interest rate cuts, which encourages investors to take risks and stimulates the real economy. According to B3’s report, in January, real estate funds gained 81 thousand investors, reaching a total of 2.584 million stakeholders, the vast majority being individuals. By month’s end, there were 923 REIFs with shares on the stock exchange. On the first Friday (16) after Carnival, IFIX closed with a slight increase of 0.03%, at 3,350.1 points.

Declining Interest Rates

According to experts, all current conditions favor real estate investment funds. “In my view, there is momentum to continue the upward trend. Real estate assets benefit the most when we experience interest rate cuts in a stable economic environment. It’s a matter of fundamentals: controlled inflation and a reduction in interest rates improve the profitability of real estate funds, especially brick-and-mortar ones,” analyzes Alexandre Dalpiero de Freitas, CFO of Gazit. The Israeli multinational, one of the largest shopping mall operators worldwide, sold a 20% stake in its Gazit Malls fund on B3 on January 7th, raising US$ 60,71 million (R$ 301 million). “It was the fund’s first successful public offering, amidst a scenario with the Selic (Brazil’s main interest rate) still in double digits and due to the quality of assets in the portfolio.”

Alejandro Padilha, a real estate fund manager at Kinea Investimentos, shares a similar view. “Most likely, IFIX will continue its trajectory this year. Although with a lesser contribution from paper funds, it is still important, since 40% of the index comprises CRI (Real Estate Receivables Certificate) funds,” comments Padilha. “These are less volatile assets, real estate-backed debt, almost like fixed income, with real estate debt linked to the CDI (Brazilian Interbank Deposit) or IPCA + (Brazil’s main inflation index). As the average duration of the bonds is three to five years, the manager gradually adjusts the portfolio, contracting at the new rate. It is not immediately affected by changes in the Selic.”

Brick-and-Mortar Funds

The Kinea executive also commented on the impact of interest rate trends on products with real properties in their portfolios, such as corporate office, shopping center, or logistics warehouse funds. “If you buy a shopping mall at an 8% cap rate when the Selic is at 6%, and then the interest rate rises to 13%, since the 8% essentially remains unchanged, you immediately start losing,” explains Padilha. “Now, with falling Selic rates, the effect is very positive for brick-and-mortar REIFs, which will perform better throughout 2024.”

Among the different assets comprising the portfolios of brick-and-mortar REIFs, according to experts, the moment is very favorable for shopping center portfolios. “Since 2019, we have had significant positions in shopping malls. The pandemic, of course, greatly affected them, but today, shopping consumption is even better than consumption outside these shopping centers. Since 2022, mall sales have increased not only due to inflation but have also seen real revenue growth,” comments Alejandro Padilha. “It is a segment that responds quickly to interest rate cuts and increased consumption.” Another important factor is the decrease in mall vacancies, reaching approximately 5%, which is a low rate.

Dalpiero de Freitas, CFO of Gazit, reminds us that even in turbulent times, shopping malls, by nature, are quite resilient. “They generate a lot of cash with good profit margins. They tend to weather periods of economic adversity more smoothly, and when you have a better economic scenario, they benefit greatly.” The executive adds that with significantly reduced tenant default rates due to lower interest rates, shopping mall REIFs will continue to perform well.

Corporate Offices

Corporate office REIFs, which suffered greatly during the social distancing phase to combat the COVID pandemic, have regained momentum but unevenly, according to experts. REIFs with high-quality assets in prime locations of major cities are driving segment performance. “In regions like Faria Lima in São Paulo, office occupancy rates are practically full, with less than 7% vacancy in these areas. Rental prices are rising,” explains Padilha of Kinea.

One consequence of the appreciation of prime areas is that many companies are being forced to seek leases in other regions, which will also appreciate. The executive cites areas like Berrini and Chucri Zaidan as examples. “These are regions with many new building deliveries, but due to remote work, they lost tenants.

These regions have higher vacancy rates and will absorb tenants looking to avoid high-cost areas.” In the view of the Kinea executive, over the next two to three years, office vacancies in different regions should balance out, which is positive for REIFs.

Logistics Warehouses

Logistics REIFs, which performed well during the worst phase of the pandemic, with the growth of e-commerce and the need for rapid deliveries, have controlled vacancies. According to experts, this segment is more balanced. Dividends are more stable, but on the other hand, there isn’t much gain from rent increases.

What could go wrong

What currently fuels predictions of a promising year for real estate investment funds is also the point of attention highlighted by REIF managers: monetary policy. “If interest rates remain high abroad for a longer period, it may interrupt the interest rate cut cycle in Brazil sooner. This ends up limiting potential gains,” explains Padilha of Kinea. If interest rates do not fall below 10%, he adds, the potential gain of IFIX could be lower. “Speaking of shopping malls, if the economic growth projected for the year is not as good, sales may be affected. In logistics, I don’t see much that can go wrong, except if the new asset deliveries are not absorbed much, but then I think it’s a scenario similar to Brazil’s GDP, meaning if GDP performs poorly, companies stop allocating more logistics warehouses.”

According to Dalpiero de Freitas, CFO of Gazit, among the potential issues that could affect the currently benign scenario for REIFs is the situation of the American economy, which is undergoing interest rate adjustments and presidential elections. “In an election year, here as well as there, political pressures on the Fed arise. Another point is Brazil’s fiscal policy, which can affect the economic and interest rate outlook,” he adds.

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China and interest rate reduction should favor investments in Brazil

Feb 19, 2024

“The retraction of foreign capital flows into China, coupled with the global trend of interest rate cuts, may benefit Brazil in the competition for resources. This assessment was made on Friday (16) by the Director of Monetary Policy of the Brazilian Central Bank, Gabriel Galípolo, during an event hosted by Bradesco Asset Management, moderated by the house’s chief economist, Marcelo Toledo.

“It seems that there is a withdrawal and a reduction in capital flows to China. India and Mexico have also benefited greatly during this period of investment inflows. If we are lucky and demonstrate good economic policy behavior, Brazil may emerge as a prime choice for attracting investments,” he continued.

He also stated that, although the Fed is the “lighthouse of the world” in pricing global financial assets, the Brazilian Central Bank observes the direction of interest rates in countries competing with Brazil for investments. In his view, the potential reduction in interest rates in other Latin American economies, particularly Mexico, will “relatively make Brazil a more attractive point, in a more attractive logic of profitability.”

Interest rates in Brazil

Regarding the impact of reduced expectations related to the start of interest rate cuts in the United States following the release of above-expected inflation (CPI) this week, Galípolo said, “We see this signal, but still without major impacts from the perspective of revising expectations, at least concerning Brazil.” He reiterated the Central Bank’s caution in reducing the Selic rate, the main interest rate of the country. “This emphasizes the recommendation to continue on our path in the trajectory we have drawn with due caution.”

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Learn more about the new companies being considered for the MSCI Brazil index

Feb 16, 2024

At least four companies received good news this Carnival. With the new MSCI Brazil index rule allowing the inclusion of Brazilian companies listed abroad, Morgan Stanley identified four names with significant chances of debuting on the index: Nu – the holding company of Nubank and one of Brazil’s biggest Fintechs – XP, PagSeguro, and its competitor StoneCO, all three also Fintechs. According to analysts at Morgan Stanley, the change could attract $4.7 billion in new resources to the companies, such as money from ETFs. “Naturally, there will be a greater influx into these stocks since many passive funds track the index,” says Rafael Schmidt, a partner at One Investimentos.

Pedro Gonzaga, a partner and analyst at Mantaro Capital, adds: “With investors abroad seeking to exclude China from their portfolios, any company here that enters the index should receive a very relevant flow of investors looking for other options.”

He is also optimistic about the future of the companies pointed out by Morgan Stanley. “They are four promising companies,” he says. Below, he details his expectations for each of them.

Nubank

For Gonzaga, Nubank is the most “emblematic” case among the four candidates to enter the index. He highlights the increase in shares since the announcement of the changes in the rules for joining the MSCI Brazil. This Thursday (15), the bank’s shares closed 6.41% higher than the pre-Carnival Friday (9).

“Nubank positions itself very well as the big striker among the major retail banks,” he says. In his assessment, the institution’s major differential is its successful credit risk modeling for the middle-income and lower-income population. “Nubank manages to have a high return on equity, in line with the major retail banks – something that no retail bank is achieving in these segments,” he states.

In his perspective, the bank is expected to continue advancing with new products for its customer base, both in credit lines and different types of guarantees, as well as in the launch of more insurance options. “The bank can monetize its customers even more powerfully and increase its profitability even further – something that other banks still cannot do properly.”

New – and wealthier – clients are also on their radar. So much so that the bank acquired the brokerage Easyinvest, now NuInvest, last September. “This allows Nubank to start climbing the pyramid to access higher-income clients, with new investment options,” the analyst evaluates.

Nubank’s international market performance also pleases Gonzaga. “Nubank is trying to grow in Mexico and Colombia. It can be very successful there if it can replicate what it does here.”

XP

In Gonzaga’s assessment, XP will benefit from the trajectory of falling Selic rates. “The downward movement in interest rates, with stabilization at a lower level, especially in the single digits, could reignite discussions for investors to take a little more risk in their portfolios, and XP has a very clear identification with this type of environment,” he argues.

In his view, the company also stands to gain from the resolution of the CMN (National Monetary Council) that limits the issuance of incentivized bonds (LCIs, LCAs, CRIs, and CRAs). “The new rules have two effects, one negative and one positive. I think the positive one is dominant,” he says. As a benefit, he mentions the scarcity of products, which increases the price of the papers in the secondary market. “The bonds have increased significantly in price, and it is part of XP’s business to resell the papers it holds in its portfolio to provide liquidity and offer opportunities to investors.”

On the negative side, he mentions the “derangement” of public offerings of these bonds. “But companies will have to finance somehow, so this will settle down,” he ponders.

PagSeguro and StoneCO

The analyst sees good prospects for the shares of both companies. “The payments sector in Brazil trades at much lower multiples than abroad. Obviously, there are reasons for the difference, but it may correct itself at some point,” he says.

“It is a market that grows at least as much as GDP because it follows household consumption,” he adds. According to him, the increased use of payment methods such as cards and QR code PIX (a Brazilian transaction method) also helps.

He also points out that companies in the sector have not been aggressive in pricing in the search for a larger market share. “So it’s an environment where they should be able to achieve, with the recovery of volumes, also good profitability,” he concludes.

The drop in interest rates should also contribute to the profitability of businesses, which have an important pillar in the anticipation of receivables. “These are companies that, for now, have not passed on to customers the reduction in interest rates for operations carried out in the market to advance the money that merchants anticipate,” he says. According to him, this contributes to the results in 2024. “Further ahead, it’s hard to foresee because there may be competition in the market.”

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Banco do Brasil and Itaú are tied in the profitability ranking

Feb 15, 2024

The balance sheet released by Banco do Brasil this Thursday (09) placed the institution in second place in the profitability ranking of Brazilian banks listed on the stock market for 2023. With a net profit of US$ 6.68 billion (R$ 33.16 billion) last year – an 11% increase compared to 2022 – it is only behind Itaú, with US$ 6.81 billion (R$ 33.8 billion) and a 10.2% increase. In third place, Bradesco recorded a profit of US$ 2.92 billion (R$ 14.5 billion), with a sharp decline of 31.6% compared to 2022. Meanwhile, BTG surpassed Santander for the first time in the fourth position, with a profit of US$ 2 billion (R$ 9.9 billion) and the highest growth among the five banks, 26.6% in 2023. In total, these institutions accumulated a net profit of US$ 20 billion (R$ 100 billion) last year, a 3.5% decrease compared to 2022 when they reached US$ 20.94 billion (R$ 103.9 billion). The data is from Elos Ayta Consultoria.

Against the tide, Banco do Brasil (or BB) reported a record adjusted net profit of US$ 7.17 billion (R$ 35.6 billion) in 2023, with ROE (return on equity) of 21.6% and a growth of 11.4% compared to 2022. Value added to society reached US$ 17.35 billion (R$ 86.1 billion) in 2023. In the third quarter of last year, adjusted net profit was US$ 1.77 billion (R$ 8.79 billion) – a 4.5% increase compared to the same period of the previous year. The result exceeded market expectations. Forecasts compiled by LSEG Data & Analytics pointed to a net profit of US$ 1.84 billion (R$ 9.12 billion).

Analysts diverge on the impact of the results on the banks’ stocks in the market. “Their stocks have been on a very positive spiral, with two years of growth,” says Rafael Antunes, partner at Inove Investimentos. “The year 2023 came with a strong rise (80.60%), and 2024 starts with a positive performance.”

Until the balance sheet was released on Thursday (08) after the market closed, the year-to-date increase was 6.90%. On Friday, BB’s shares were down 1.01% at US$ 11.68 (R$ 57.95) at 2:20 PM. Antunes does not rule out fluctuations: “Given such an expressive short-term increase, any little piece of news can lead to a sell-off in the company’s shares, but that does not mean a change in trend.”

“The results were encouraging, especially when looking at the increase in the bank’s loan portfolio, by 10%,” he says. “The portfolio’s profitability also increased and came in strong,” he adds, highlighting the 20% increase in interest revenues over the year. He also points out that BB presented the highest return among incumbent banks, with an ROI of 22%.

“The 4% growth in the quarterly loan portfolio, driven by agribusiness, which grew by 4.5%, was a positive highlight. I didn’t expect such a strong growth in the agribusiness portfolio,” adds Empiricus analyst Larissa Qauresma. However, she is not so optimistic about the direction of the shares on B3 (the Brazilian stock exchange). “The very cheap valuation does not allow us to recommend a sale, but we also do not have a positive outlook,” she says. “We do not recommend a purchase because there may be a certain gradual deterioration, not radical, not sudden, of the results throughout 2024 and the following years as well, due to the risk of political interference.”

The balance sheet also benefited from the result of Banco Patagonia, controlled by BB in Argentina, which profited from the exchange rate variation on dollar-denominated bonds, in a period of maximum peso devaluation. According to Quaresma, the numbers, although positive, do not deserve celebration. “The result had a very bad composition because this type of exchange profit is not very reliable, as it is extremely volatile. In one quarter, it can produce a very good result, as was the case in this fourth quarter, and in another, it can be very bad,” she says.

“Another negative point was the increase in delinquency not only in the agribusiness portfolio, as I expected, but also in the wholesale portfolio of large companies. The rate of loans overdue by more than 90 days increased by 11 basis points,” she says.

Regarding delinquency, Antunes mentions some corporate defaults, such as the case of Light and Americanas. “It weighed a little on the bank’s voluntary dismissal program earlier in the year, but apart from that, there was nothing extraordinary,” he says. “The bank presented a delinquency rate in line with the sector.”

What are the risks?

Regarding risks, the analyst agrees with Quaresma regarding the possibility of government interventions affecting profits. “The market is concerned about possible government pressures to increase financing for lines with higher credit risk, which could deteriorate the bank’s data.”

He also warns about the potential impact of possible reductions in agricultural commodity prices, since about 40% of the bank’s portfolio comes from agribusiness. “As 14% of the growth in the loan portfolio and profitability came from the rural sector, any data showing less momentum in this line may lead analysts to specify either lower growth ahead or even a reduction in revenue from such an important line.”

Disappointment at Bradesco

Contrary to BB’s balance sheet, Bradesco’s latest results disappointed the market and dragged the bank’s shares on the stock exchange. On the day of the release, Wednesday (07), shares fell 15.90% to US$ 2.81 (R$ 13.96). Today (09), they were trading at US$ 2.69 (R$ 13.33) – a 15.87% decrease compared to the day before the results were announced.

The bank reported a net profit of US$ 580 million (R$ 2.88 billion) in the fourth quarter of 2023. This is a 37.7% decrease compared to the third quarter. Despite the 80.4% increase in the quarter compared to the same period in 2022, last year’s revenue of US$ 3.28 billion (R$ 16.3 billion) was 21.3% below the 2022 figure.

According to a Citi report, profit was between 38% and 41% below estimates. The result “was impacted by higher provisions and operating expenses, while NII (Net Investment Income) continues to decline,” emphasizes the bank.

For Banco do Brasil (BB), Bradesco’s fourth quarter was an “extension of many negative trends.” BB highlights that delinquency fell, but the reduction was overshadowed by poor results in the bank’s “gears.” Among the negative highlights, the bank’s report highlights the 2.6% decline compared to the previous quarter and the 11% decline in 2023 compared to 2022. BB also points out the reduction in the loan portfolio, by 0.1% in the quarter and by 4.4% in the year, in “divergence from the industry.”

BBA also assessed Bradesco’s balance sheet and highlighted “extraordinary factors” that harmed the result. Regarding credit, BBA cites the recognition of US$ 280 million (R$ 1.4 billion) in Provision for Doubtful Debtors (PPP) due to two specific cases in the wholesale segment. It also highlights that US$ 100 million (R$ 500 million) were allocated as provisions for restructuring – an amount considered “a bitter pill” in the report after BBA “accounted for all the items that have been harming the result sequentially.”

Along the same lines, Citi said that Bradesco’s profitability improvement has a long way to go. “We believe that all attention will be on the new strategic plan and indications of levers for future ROE improvement. However, we believe that the lack of short-term improvements will prevent any better performance of the shares.”

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The big test for mergers and acquisitions

Feb 8, 2024

Ensuring that a merger and acquisition (M&A) process is concluded satisfactorily for all involved parties and that the new association succeeds in the long term is no simple task. Similar to a relationship, both the buyer and the seller must approach, cautiously, progress past the seduction phase where qualities are apparent, and confront each other’s inevitable flaws. If this process is well-executed, the corporate marriage can be healthy and enduring. Crucial in this journey to the altar is due diligence, a thorough investigation of the companies involved in the deal that can prevent potential issues.

The expectation for a more robust M&A season in Brazil is high, following a 27% decline to US$ 43 billion (R$ 215 billion) in 2023 from 2022, according to data from the Aon report, a British risk management and insurance brokerage company. This figure represents completed mergers and acquisitions. However, many fell by the wayside.

Experts in the field warn that companies should prepare for the due diligence phase before going to the market. Far from being merely a formality, this process is a vital component for understanding risks, opportunities, and the compatibility between the companies involved in the negotiation. “In recent years, we have seen greater attention from sellers in preparing themselves before entering into negotiations with investors or buyers. Simulated audits help companies get their house in order, understand their strengths and weaknesses before offering themselves to a competitor,” comments Rafael Teixeira, a partner at BVA – Barreto Veiga Law. “It’s a significant simulation that identifies and corrects what is not positive, organizes data, papers, and leaves the company ready for the actual due diligence, which will eventually occur in M&A cases.”

Those who also advocate for a pre-diligence process to discover the vulnerabilities of the company and correct them are André Camargo, a professor at IBMEC, and counsel of the Corporate Relations & Governance Practice at Tauil & Chequer Law. “This preparatory phase is fundamental, especially for companies that have never been through an M&A process.”

In Camargo’s view, the first effect of this process is to reduce information asymmetry. “The process helps in analyzing the risks of the operation and identifying opportunities. In the end, the process helps to establish a fairer price for the parties, who typically have an idea of how much the business is worth. Only through due diligence can they get close to the real price.”

Paulo Guilherme Coimbra, partner of the Mergers and Acquisitions area at KPMG Brazil, highlights some essential elements identified in due diligence that can halt a negotiation, leading the parties to reconsider the conditions. “The fiscal part, examined during the process, is very important, as well as the labor part. And it’s not just about seeing the numbers presented by the selling party but checking the accuracy of the numbers. It’s a complex task,” comments Coimbra. “It needs to be done carefully, without haste to close the deal to avoid future problems.”

Regarding due diligence models, the KPMG partner emphasizes that the process has become increasingly complex. Topics such as ESG best practices – environmental, social, and governance – are also evaluated. “You need to see if there are any labor issues, suspicion of slave labor, if it respects the environment, and if it complies with the General Data Protection Law (LGPD), for example, issues that didn’t exist ten years ago,” explains Coimbra. “Ultimately, everything aims to prevent skeletons from emerging in the future, surprises that could harm the agreement and could even lead to legal disputes.”

Alexandre Borborema, M&A director at Apex Partners, makes a consideration about the level of knowledge that many companies have about their own reality. “Due diligence is a moment in the process where many negotiations end due to a lack of self-awareness of the seller about their own company. This is more common in medium and small companies. In large companies, you have a higher level of governance, but it can still happen.” According to Borborema, the identification of contingencies, or risks that could turn into liabilities in the future, is one of the most delicate moments in the relationship between buyer and seller during the approach. “It’s also a delicate moment of negotiation and can, depending on the materiality and size of the contingencies, make the transaction unviable.”

Despite the risks of M&A processes initiated without companies having prepared for the due diligence phase, experts unanimously affirm that the market has matured. “Our experience here shows that the market is indeed maturing. Brazil is becoming increasingly proficient in corporate finance. Companies recognize that, to access capital markets, to access capital in general, they need to do their homework,” comments Borborema, from Apex Partners.

“Companies have already understood that they cannot avoid a well-done due diligence, necessary to avoid future problems and to build contractual protections if something arises in the future,” comments Camargo, from IBMEC. Rafael Teixeira, from BVA, adds: “No one wants an operation to be halted due to lack of documents or accounting errors; preparing for due diligence is important and avoids a lot of trouble for both parties.”

Market specialists outline the scenario for Brazil’s stock exchange in 2024

Feb 8, 2024

What are the prospects for the Brazilian stock market this year? What are the main risks? How is artificial intelligence expected to affect companies’ performance? These questions were answered this Wednesday (7) at an event hosted by BTG Pactual, by four experts of the segment: André Caldas, founding partner of Clave Capital; Bruno Garcia, founding partner of Truxt Investimentos; Carlos Eduardo Rocha, CEO of Occam; and Laércio Henrique, partner at BTG Pactual Asset Management. Below, you’ll find the managers’ insights. But first, a spoiler: the Brazilian stock market is undervalued and is expected to benefit from the global decline in interest rates and inflation, but there are also threats on the horizon, both domestically and potentially from a major crisis in China.

What are the prospects for the stock market? 

Laércio Henrique, partner at BTG Pactual Asset Management

“If you look at the last three years post-Covid, what happened in the Brazilian stock industry was truly a disaster. We experienced a trend of redemptions in the equity fund industry in 2022 of around US$ 12-13 billion (R$ 60-65 billion). In 2023, this trend continued, with redemptions around US$ 8 billion (R$ 40 billion). It’s nearly a 20% reduction in resources over the period. And the interest rate vacuum was on. We went from interest rates of 2% in 2021 to 13.75%, which really sucked liquidity out of the system. This explains part of the portfolio allocation shift towards fixed income.”

“But here in Brazil, we also had an exacerbating effect of this migration, which were the incentivized funds, causing a perverse dynamic in our industry.”

“For you to have an idea, the stock of LCI (Real Estate Credit Letter), LCA (Agribusiness Credit Letter), CRI (Real Estate Receivables Certificate), CRA (Agribusiness Receivables Certificate) and LIG (Guaranteed Real Estate Letter) was around US$ 60 billion (R$ 300 billion) for five years, until 2021. And this business more than tripled in two and a half years, with the stock now around US$ 200 billion (R$ 1 trillion). There’s no way to compete. This made our lives very difficult. There are good firms that managed to weather this huge industry tsunami, but other assets fell by the wayside.”

“But the positive side is that interest rates are starting to fall. Not only in Brazil, it’s a global phenomenon. The external scenario is benign. We have decelerating inflation. The American core CPI is already running at 2%. The Fed is deciding when to cut, not whether it will cut.”

“This brings a very favorable risk environment. The normalization of these incentivized credit arbitrages, which was very well addressed by the Central Bank, brings a very positive window of opportunity, looking one, two, three years ahead for our industry.”

“So, I think we’re at the beginning of a great cycle of investment in risk assets. The Stock Exchange is indeed very cheap. I think those who stay out will regret it. You see, last year was a great example. The Stock Exchange remained practically sideways from January to October. In two months, it practically made the entire rally. And only those who were investing, only those who were in pain, caught it.”

Is the stock market undervalued? 

Bruno Garcia, Truxt Investimentos

“Is the stock market undervalued? That’s a long discussion with several aspects. If you try to enter through the P/E ratio, we’re about one standard deviation below the historical average. Okay, that’s a cheap number. If we look at Brazil’s relationship with the markets, we’re about one standard deviation below the historical average, and so are the developed markets. So, it’s as if the stock market were one standard deviation below the historical average. But that says little. When you look at the past, the stock market has been below the historical average for a long time.”

“And it’s been an old trap. It’s the cheap that becomes expensive. This is basically because we’ve gone through significant downward earnings revisions over the past few years. And I think this is the main fact that is changing now. Starting from the second quarter of the year, third quarter, we began to see a turning point in the market.”

“Earnings have started to improve. Companies have gone through the worst, made adjustments, and adapted to a slightly more difficult scenario. And we have a better GDP in Brazil, a better international environment, a deflationary process happening significantly, and people’s income growing. This makes the market, when looking forward to 2024, start projecting increasing profits.”

“So, the first point is that Brazil is cheap, provided that this scenario is true and that we have gone through an earnings inflection point.”

“Another important point is that Brazil represents about 0.4% of global stocks. So, if there’s a very large external crisis, whether because the United States accelerated or because there was a very serious crisis in China – and I’m a little concerned about China –, I think we’ll end up being dragged down, even though we’re cheap.”

“And, finally, the technical position, qualitative and quantitative analysis of the positioning of investors long and short in a given asset. When there’s good technical position, a better external scenario, cheap multiples, earnings going through a turning point, and interest rates falling, it gives comfort that 2024 should be a better year for the Stock Exchange.”

What are the risks for this year? 

Carlos Eduardo Rocha, Occam

“The first important consideration when talking about risk is that what you elect as the greatest risk normally will not present itself as the greatest risk. The biggest problems are the unknown ones, affecting management. So, everyone might draw attention to China, this is a known risk. This does not prevent, even though [in many cases] it may be a bad idea to bet against China, that I’m underrated as I am in the mining and steel sector, because I think there’s likely to be a bit of a drop and cooling off in the market [due to potential reduction in Chinese consumption]”.

“There’s also the fiscal risk not only due to the expansion of the federal government itself, but also, the Legislative and the Judiciary are in a worrying expansion process. I think the inflation target will be changed by Minister Fernando Haddad, who is doing a great job, as late as possible.”

“Regarding the succession of the Central Bank, we’ve already had good news in that regard with the indication of technical people for the Brazilian Central Bank (BCB), so I think that’s going to be smoother than imagined.”

“But unfortunately, when we discuss interest rate cuts, we’re talking here about interest rates going to 8%, 9% at the end of this cycle. And with a declining inflation also here in Brazil, we’re also lowering projections, below 4%.”

“In other words, we’re talking about real interest rates of 4%, 5%. I still find that frustrating. We should be discussing here that 8%, 9% would be the ceiling for interest rates, not the peak.”

“The interest rate is brutal because, if the interest rate is lower, I think we, good managers, and Brazilian history confirms this, can surpass even the additional you gain from the incentivized.”

“Anyway, the Brazilian stock market is cheap. That’s a necessary condition, but sometimes not sufficient, because Brazil’s risks are always above average.”

Who can win and lose with artificial intelligence? 

André Caldas, Clave Capital

“This is a trillion-dollar question. But I think overseas, the big technology companies are good places to bet on, including cloud and infrastructure. Today, if I look at Microsoft, I don’t want to guess. In 2000, nobody wanted to talk about Microsoft. It was all about Google. Twenty-four years have passed, and its numbers are fantastic. And even with computer sales declining, Microsoft’s profit keeps growing.”

“What we observe, and this is the interesting part, is that technology or AI are leveling the playing field. With this, sometimes, for the company that was very good in its sector, it will bring a smaller competitive advantage.”

“I’ll give an example. With technology, we saw Renner (one of the largest Brazilian fashion retail companies), after many years, lose market share. With technology, someone buys a business, an AI, and manages to do better logistics. So, there’s a positive aspect, gain in productivity and efficiency. Who will capture this in the chain, is not so clear yet.”

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Bonds exempt from income tax harm competition, says manager

Feb 7, 2024

After last week’s changes defined by the Brazilian National Monetary Council (CMN), which reduced the scope of operations that can be used as collateral for tax-exempt products such as CRI (Real Estate Receivables Certificate), CRA (Agribusiness Receivables Certificate), LCI (Real Estate Credit Letter), LCA (Agribusiness Credit Letter), and LIG (Guaranteed Real Estate Letter), the competitiveness of other assets in the capital market is expected to improve. The significance of the new criteria, which will decrease the issuance and supply of these assets in the market, was mentioned during the CEO Conference event promoted by the bank BTG Pactual. According to André Jakurski, the founding partner of the JGP asset manager, the loss of funds invested in equity and multimarket funds is linked, at least in part, to competition with tax-exempt bonds.

‘You have equity funds and multimarket funds bleeding. This was motivated, in part, by the tax-exempt bonds factor,’ commented Jakurski, adding that now the trend is for an improvement in the environment. ‘Competition will decrease for these securities, which dramatically harm the capital market in Brazil.’

Speaking about the stock market, Jakurski pointed out that the biggest difficulty for the Brazilian stock exchange is the flow of funds, but expressed optimism about the overall scenario. ‘The problem with the Brazilian stock exchange has always been flow, and we are in an unprecedented moment where, in January, when there is normally an inflow of funds into the stock market, the stock exchange recorded an outflow of foreigners,’ said the manager. In Jakurski’s view, when interest rates fall more intensely, assets should perform. ‘You have to look at competitive sectors. Good situation in agriculture, increasing oil production. The country is doing very well.’

The founding partners of Verde Asset, Luís Stuhlberger, and SPX Capital, Rogério Xavier, are also optimistic about the potential for assets traded on the stock exchange. According to Stuhlberger, stocks ‘are cheap.’ ‘Where there is a big premium and that affects the performance of the Brazilian stock exchange is in the long-term interest rate due to fiscal risk. The long-term real interest rate, 10 years, at 5.60%, is very high,’ commented the executive. ‘It should be 3% above an American rate that is currently close to 1.60%. Fiscal fear hinders a stronger rise in the stock exchange.’ Looking three years ahead, Stuhlberger pointed out the political risk at the end of the current government. ‘We don’t know what price the PT (Brazil’s Workers’ Party) will charge for re-election, we don’t know. Having Haddad there is security for us. We are optimistic, but being an emerging country, we are always victims of electoral discontinuity and types of government.’

Rogério Xavier of SPX is a bit more cautious and mentions that high interest rates are still very attractive. ‘If there is no accident in China, and I could ask God for a perfect scenario, it would be this, with the U.S. in a soft landing, the world cutting interest rates, China sustaining growth, and exporting deflation’, summarizes the manager. ‘Expectations are not so good for Brazil, which will be a sardine, moving along with the rest of the world. The interest rate here is very high, it doesn’t make sense,’ criticizes Xavier, adding that when interest rates fall here and in the United States, markets will move.

In the view of André Esteves, chairman and senior partner of BTG Pactual, what most influences the market and investment environment today is the international scenario. ’12, 18 months ago, the debate was about what level of monetary policy would be necessary to combat inflation. The question today is different; inflation has already returned to acceptable levels, but we have a strong labor market,’ comments Esteves.

China without consensus

All managers present at the event highlighted the important role of China in controlling global prices. The country faces internal deflation and high production capacity, which stimulates the export of products at lower prices. However, they differ on the future of the economy.

Luís Stuhlberger of Verde pointed out that China has an old but functioning real estate market. ‘I don’t see risks like Lehman Brothers at the moment. The Chinese continue to pay for their real estate. China has good numbers. I am neither optimistic nor pessimistic, but China will continue to help the world.’

In Xavier’s view of SPX, China does not fight two battles at the same time, referring to a risk of a possible dispute with the United States. ‘Today it fights the economic battle, not the geopolitical one. As I see it, it will fail to resolve the economic one, and the consequence may fall on the geopolitical side. When a dictator sees himself weakened, he tends to choose external enemies to unite the nation,’ he analyzes. The founding partner of the asset manager mentions the problems that are already emerging in the Chinese credit market. He commented that in the regulated market, where public banks lend to public companies, it continues normally, but in the unregulated market, there is a marked-to-market effect, when there are withdrawals and the manager needs to sell assets to pay clients. ‘Problems in China are deep; there is a model exhaustion. I see the risk of a deep banking crisis collapse, and the country regressing, not progressing.

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After Getninjas and Cielo, a wave of Public Tender Offers (OPAs) is expected to continue

Feb 7, 2024

In January, it was Getninjas’ (one of Brazil’s largest freelance platforms) Public Tender Offer (OPA). Now it’s Cielo’s (an important Brazilian financial services company) turn. And in times of cheap stocks, everything indicates that the wave of going private is likely to continue. This assessment is shared by Maiara Madureira, a partner at Demarest Advogados (or law firm), and Thiago Lourenço, a variable income operator at Manchester Investimentos. ‘We have noticed a movement of share buybacks or, in some cases, like Cielo’s, making offers in the market to go private,’ says Lourenço.

‘Repurchasing part of the business can end up being the best investment the company can make,’ he says. With the repurchase price often below the IPO price, it is not difficult to understand the math behind the transaction. Lourenço exemplifies the advantage with the hypothetical case of a company that goes public with shares at ten reais and repurchases them for five. ‘If the company believes it is worth much more than five reais, it’s a good deal because it capitalized for ten, repurchased for five, and still had five left,’ he says. According to him, the strategy is more common among smaller companies, often controlled by founders.

The costs and obligations related to public companies also affect decisions. ‘Maintaining a public or listed company is expensive, with various obligations, especially regarding transparency, which requires internal monitoring and control structures,’ says Maiara Madureira. With this in mind, in her assessment, the cost-benefit calculation of maintaining public capital often dictates the decision for a Public Tender Offer (OPA) – an account that may not be worth it for companies without the need to raise capital on the stock exchange in the long or medium term.

Despite the advantages for companies, going private is not always welcome. ‘Looking at it objectively, it’s not a very healthy practice when we think about wanting to have a more mature market,’ says Lourenço. The move, according to him, reduces transparency and the level of governance of companies.

Shareholders, especially minority ones, can also be harmed. ‘The company goes public, they invest in it, prices fall, and the company goes private in a Public Tender Offer (OPA) at a lower price than originally paid, even though they shared the controllers’ view that the price would recover in the future.’

Cielo

In the case of Cielo, the offered price is US$ 1,08 (R$ 5.35) per share, which will be adjusted for profits, including US$ 82 million (R$ 410 million) in Interest on Equity (JCP), with payment in April.

The value may create dissatisfaction. ‘The low potential in relation to the offer price should create discussions about the going-private valuation, just as it did when Itaú (one of Brazil’s biggest banks) went private with Redecard (Rede) in 2012,’ says Genial’s (another Brazilian bank) report.

‘Considering yesterday’s (5) closing price of US$ 1,01 (R$ 5.03) per share, the offer price of US$ 1,08 (R$ 5.35) would give an upside of only 6.36%. If we discount the JCP to be received, the upside would drop to a mere 3.4%,’ the document continues. But Lourenço ponders: ‘They are paying a little above the market value, but the market is cheap. The share is available, and no one pays more.’

If the Public Tender Offer (OPA) is completed, Banco do Brasil (BB) would hold 49.99% of Cielo’s capital, and Bradesco would hold the remainder (50.01%), according to the report. Currently, BB has a 28.65% stake in Cielo, and Bradesco has 30.06%. Cielo’s free float (circulating shares) is 40.57%.

The Genial report also says that the company’s latest results were in line with market expectations. The profit of US$ 96 million (R$ 481 million) in the third quarter of 2023, ‘without great highlights,’ grew 5.3% compared to the previous quarter but fell 1.9% compared to the same period last year, according to the asset manager.

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Copom minutes raise doubts about the pace of Selic rate cuts

Feb 7, 2024

The minutes of the Copom (Brazilian Committee for Monetary Policy) meeting released today (6) by the Brazil Central Bank (BC), related to last week’s meeting, maintained the indication that the Selic rate (the Brazilian basic interest rate) will decrease by half a percentage point, at least in the next two meetings in March and April. “The Committee members unanimously agreed with the expectation of a 0.50 percentage point cut in the next meetings and assessed that this is the appropriate pace to maintain the necessary contractionary monetary policy for the disinflationary process,” the document states. As a result, interest rates, which had dropped from 11.75% to 11.25% on the 31st, will fall to 10.25% in May. But now, the question remains: what will be the next steps?

“Our interpretation is that the BC is probably looking to start discussing when to remove this 0.50 percentage point cut guidance,” says Novus Capital’s Chief Economist, Tomás Goulart. “So there may be uncertainty about whether the cut in June will be 0.50 or 0.25 percentage points because the Copom no longer wants to commit so far in advance to two half-percentage point movements.”

“The Committee emphasizes that it is important to continue monitoring the different variables in the labor market very carefully, particularly with close monitoring of the dynamics of real incomes, which have shown greater growth in recent months,” the minutes state.

In another section, the document states that “the Committee also discussed, in greater depth, the relationship between the labor market and prices in the economy.” Goulart analyzes the reason for caution: “There is concern about domestic labor market data, with the pressure on real wages that occurred at the end of 2023 and culminated in the turn of the year with some pressure on underlying service inflation.”

Economist André Perfeito adds: “The Committee’s concerns about the dynamics of the labor market and how the Copom will follow its developments in service inflation caught attention.” For him, the move may become a concern. “This is an important point, as a worsening in the dynamics of service inflation can trigger a yellow flag on Faria Lima’s desks.”

Global scenario

Regarding the global scenario, the minutes point out both factors that can slow down and those that can push prices higher (and consequently interfere with the direction of interest rates). Among the upside risks, it highlights the “greater resilience in service inflation than projected.” Among possible brakes, it enumerates two factors: the “slowdown in global economic activity” and the “impacts of synchronized monetary tightening on global disinflation,” both stronger than expected.

Taking everything into account, the committee assesses that the situation, particularly in the international scenario, remains uncertain and requires caution in conducting monetary policy in Brazil.

In detailing the arguments, the minutes state that “reversal of supply shocks, well-behaved producer inflation in China and the United States, and the recent dynamics of commodity prices allow for extrapolating a benign scenario for goods inflation.”

But it cautions: “However, there remains great uncertainty about future global demand and the extent of the residual movement of relative prices between goods and services that could still occur.” As potential sources of volatility and uncertainty, the Copom also mentions geopolitical tensions and an increase in freight costs.

In Goulart’s opinion, from Novus Capital, the positive aspects should outweigh. “The global scenario is more favorable, with the beginning of interest rate cuts abroad and generally more positive inflation numbers,” he says. As a result, he predicts the appreciation of the Brazilian real. After all, the decline in interest rates abroad attracts investors and dollars to Brazil. “A more appreciated exchange rate is how foreign monetary policy impacts domestic monetary policy.”

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Managers, analysts, and securitization companies assess the impact of changes in Real Estate Receivables Certificates (CRIs)

Feb 6, 2024

A resolution from CMN (Brazil’s National Monetary Council) last week took the market by surprise with changes such as the prohibition of issuances of Real Estate Receivables Certificates (CRIs) and Agribusiness Receivables Certificates (CRAs) backed by companies unrelated to the agribusiness or real estate sectors. It also included an extension of investment deadlines for Agribusiness Letters of Credit (LCA) and Real Estate Letters of Credit (LCI), and other restrictions on the issuance of these instruments with income tax exemption for individuals. After the initial shock, it’s time to assess the impact of the new rules on fund management. To discuss changes in Real Estate Investment Funds (FIIs) regarding fundraising, the offering of securities available for FIIs, profitability, and fund migration, among other topics, Capital Aberto spoke with a team of experts: Ivan Fernandes, Head of Credit at Kinea; Sara Balastero, Director of Securitization at Fator Bank; Felipe Ribeiro, founder of CR Data and managing partner of Clube FII; Guilherme Sharovsky, an investment banker responsible for real estate operations at Bloxs Capital Partners; Jaime Weinberg, partner and product director at Empírica Investimentos.

Here’s what they have to say:

Felipe Ribeiro, CR Data:

“A study by CR Data shows that if the new CMN resolution were already in force, 34% of CRIs would not have been issued. In terms of value, the reduction would have been even greater: 50.59%. Of this total that would not have been issued, 42.48% are in FIIs, equivalent to US$ 2 billion (R$ 10 billion). When analyzed from the perspective of the restrictions proposed by CMN, we identified that about 58% of the non-compliant volume would be related to reimbursement, equivalent to US$ 2.79 billion (R$ 13.85 billion). So, at first glance, it may seem that these US$ 2.79 billion could not have been issued under the new regulation. But there’s a catch. In the case of the reimbursement portion of CRIs that would not comply with the new resolution, 20.34% comes from the real estate sector, equivalent to US$ 1.01 billion (R$ 5.01 billion). However, securitization companies could probably find another way to issue these CRIs, based on future destinations. Of these US$ 1.01 billion in CRIs, about US$ 310 million (R$ 1.6 billion) are in FIIs and could still be issued, albeit differently, reducing the impact from US$ 2 billion (R$ 10.0 billion) to US$ 1.69 billion (R$ 8.4 billion).”

“In my view, there will only be a shortage of CRIs for funds for a period. What will happen is that managers will have to spend more time looking for new operations. Instead of waiting for operations on Faria Lima Avenue, they will have to send someone to look for an operation in Campinas, for example. I imagine this will take up to about six months [to consolidate]. But we have to remember that CRI operations are typically long-term in most cases. So what is six months in a period of ten years?”

“What will probably happen is pressure on the secondary market with a reduction in spreads in the secondary market as well. With more demand and the same quantity, a reduction in rates is expected.”

Guilherme Sharovsky, Bloxs Capital Partners:

“The estimate is that the CMN measures will affect 10% to 40% of the Net Asset Value (NAV) of each of the ten largest FIIs on our platform, varying case by case. Since this participation, above 10%, is relevant, funds will logically be obliged to invest in pure real estate sector operations, such as completion of works, land development, logistics, and hotels.”

“In the short term, the trend is for the average fund return rate to rise. Operations that are blocked are those that have a lower return than the average because they are very safe operations. They will inevitably have to be replaced by operations that present higher risk but also higher returns. On the buying side, individual investors will demand a better return to compensate for the risk. But it’s also important to note that risk management exists, mainly through the diversification of operations.”

“The fact that fund managers now have to put new companies on their radar is good news for our clients because we are an originator focused on entrepreneurs who are not yet on the verge of listing on the stock exchange. That developer who is in their fifth project, their tenth project, who earns their US$ 10 million, US$ 20 million annually and who previously had a little more difficulty accessing the capital market, will no longer have to compete with Dasa.”

Ivan Fernandes, Kinea:

“CRIs and CRAs have been an important alternative for companies to raise funds at lower rates. There will be some limitations on what these companies can do in this market, and consequently, a portion of this issuance is expected to migrate back to the institutional market, which we call the CDI+ market and also the non-incentivized market. There will then be more papers available.”

“In addition, with the limitation on the type of collateral for LCA, LCI, and LIG issuances by banks, where there is US$ 200 billion (R$ 1 trillion) in stock of these papers, we believe that more than half of this stock will not be able to be renewed according to the new rules. This means that people who were investing in LCAs, LCIs, and LIGs will have to find another destination for these funds. And some of these funds are likely to go to the private credit market, multimarket funds, bank CDs, etc.”

“But we are still digesting this change. We had a call with lawyers to understand the effect on various operations that we conduct at Kinea.”

Sara Balastero, Fator Bank:

“Here at Fator, in general, our operations are always for the real estate and agribusiness markets. Therefore, our pipeline will not be affected [by issuer restrictions]. But, looking at the market, obviously, the number of companies that can be invested in will decrease because major names that are not actually in the real estate sector will no longer issue.”

“The change makes the market more aligned with the goal of income tax exemption, which is the development of real estate or agribusiness. The company that rents an office to accommodate employees [issuing CRIs for this purpose] is not bringing the ultimate benefit of income generation through construction and development.”

Jaime Weinberg, Empírica:

“Regarding the impact of the changes, in a survey by Empírica, we estimate that about 80% of circulating CRIs are purely corporate risks packaged differently, benefiting from tax incentives to facilitate their distribution across various channels and to different audiences, many of which will be affected by this CMN decision.”

“In this sense, issuers that are related parties to agribusiness and construction chains and do not operate directly in them, such as suppliers of raw materials, implements, and machinery, for example, will have to redirect their attention to other issuances more compatible with this purpose, such as various debenture assets and [aimed at] funds like FIDCs.”

“With regard to deadlines, issuers will have to establish longer maturities for these issuances, in line with the regulator’s understanding of the purpose of these papers, which is to support the financing of projects related to their respective segments, and not just packaging collateral for a quick injection of cash into their issuers.”

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Cielo is bidding farewell to the stock market

Feb 6, 2024

On Monday (05/02), Banco do Brasil (BBAS3) announced that its Board of Directors has authorized the acquisition of up to the total outstanding shares of Cielo (CIEL3). A Public Tender Offer (PTO) will be conducted to acquire the shares, leading to a consequent increase in BB’s indirect shareholding through BB Elo Cartões Participações and Elo Participações in Cielo, up to 49.99%.

BB also stated that after the market closed, BB Elo and Quixaba, controlled by Bradesco (BBDC4), sent a communication to Cielo, informing them of the decision to jointly, along with the Elopar Group, launch a unified public offer to acquire ordinary shares of the company.

As a result of this move, there will be a conversion of Cielo’s registration from category “A” to “B” at the Brazilian Securities and Exchange Commission (CVM), and it will exit the Novo Mercado of B3 (Brazil’s stock market). The PTO registration with CVM will be made within the timeframe stipulated by current regulations, as mentioned in BB’s statement.

The PTO will be launched by the controlling shareholders Elo Participações, Alelo, and Livelo, to acquire up to all ordinary shares issued by Cielo, except those held by the offerors themselves, individuals linked to them, and those held in treasury. The offered price for each share subject to the PTO will be US$ 1,08 (or R$ 5,35).

Elo Participações has engaged Bank of America Merrill Lynch as an independent appraiser to prepare the company’s valuation report.

Latest financial report

On Monday (05), Cielo reported a recurring net profit of US$ 96.74 million (R$ 480.8 million) in the fourth quarter of 2023, a 1.9% decrease compared to the same period in 2022. The figures exceeded projections. According to data gathered by Bloomberg, consensus estimates were expecting gains of around US$ 65.39 million (R$ 325 million).

According to company information, there was an impact from lower volumes in the Cielo Brasil division and increased investments in the commercial area and operational transformation process. For the full year, the company recorded a recurring profit of US$ 370 million (R$ 1.86 billion), representing a 26% annual growth.

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Anbima recommends Fiagros with carbon credits to be submitted

Feb 6, 2024

Anbima (the Brazilian Association of Financial and Capital Market Entities) has suggested that Fiagros (Agribusiness Investment Funds) may include carbon credits, traded in both voluntary and mandatory markets, whether regulated or not. The proposal was presented through suggestions for the public hearing of the Brazilian Securities and Exchange Commission (CVM) regarding the new specific rules that will be part of Annex Normative VI of Resolution 175.

According to Anbima’s Vice President, Sergio Cutolo, carbon credits were one of the main topics discussed by the association. “The market is interested in promoting this type of investment, but the regulator’s initial proposal limits the purchase of credits to regulated voluntary and mandatory markets.” He emphasized that Brazil does not have approved regulations for the carbon market. “To provide more alternatives to the funds, it is important that the CVM allows the acquisition of these credits also in unregulated markets,” Cutolo emphasizes.

The entity also aims to eliminate cross-references. As a suggestion, Anbima wants CVM to include the most important elements of other annexes of Resolution 175 in the specific Fiagro annex. This would remove the need for the market to follow another annex in cases where Fiagro invests more than one-third of its net worth in assets covered in other annexes.

With CVM’s suggestion, if Fiagro invested more than one-third in agribusiness receivables, it would have to follow the entire annex of FIDC (Credit Receivables Investment Funds). “The measure is positive, as it simplifies the understanding of the rules that must be followed, bringing autonomy to the product and its service providers,” concludes Anbima’s Vice President.

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Changes in Real Estate and Agribusiness Receivable Certificates raise concerns in the real estate sector

Feb 5, 2024

Market analysts and fund managers are still digesting the changes defined on February 2nd by the Brazilian National Monetary Council (CMN), which restrict the collateral that can be used for issuances of Real Estate Receivables Certificates (CRIs), Agribusiness Receivables Certificates (CRAs), Agribusiness Letters of Credit (LCAs), and Real Estate Letters of Credit (LIGs) – instruments exempt from income tax for individual investors. However, one thing already seems certain: the changes are expected not only to reduce issuances by companies unrelated to the agricultural and real estate sectors, prohibited from raising funds with these instruments, but also to impact real estate developers’ issuances.

Currently, the stock of CRIs, CRAs, LCIs, and LCAs totals around US$ 200 billion (R$ 1 trillion). “When these instruments mature, the renewal will decrease significantly,” says Vitor Duarte, CIO of Suno Asset. “Many companies were already planning to issue with CRI or CRA collateral, and these issuances will no longer be possible.”

According to a survey conducted by CR Data, from Clube FII (Real Estate Investment Funds Club), if the new rules had been in effect last year, 34% of CRIs and 26.5% of CRAs would not have been issued. In terms of value, the reduction would have been even greater: 50.59% of the volume of CRIs and 60.24% in the case of CRAs, which together amounted to US$ 16.83 billion (R$ 84.15 billion) last year. The majority of the discrepancies would have occurred due to the prohibition of reimbursements – the case in 58.6% of operations last year.

Affected issuers include some in the real estate sector itself. “Until this CMN resolution was created, there was the possibility for developers and builders to issue debt securities to raise funds for the reimbursement of real estate expenses from other previous projects,” says Eugênia Souza, partner and head of corporate trust at Vórtx.

She explains that the mechanism was used to finance new projects since, with the slowdown in the real estate market, sales are not always sufficient to make future launches viable. “Companies capitalized themselves with the reimbursement of previous expenses and, with that, could start new projects to attract buyers interested in purchasing units,” she says. With the change, issuing CRIs for this purpose is not possible. “Developers, through securitization companies, can still access the capital market, but they need to have collateral by origin – in other words, they will need to have a pure real estate credit at the origin of the property tied to the land,” she continues. “In other words, for the issuance, they will have to have already sold. But how to sell if there is no construction underway due to lack of funds?”

The measures also put an end to the Rent-Backed CRIs. With this modality, companies such as supermarkets, retail stores, banks, hospitals, pharmacies, educational establishments, and industries began to raise cheaper funds with the justification of paying rents for properties where they operate, thereby improving their cost structure.

Other operations were also prohibited. “In this sense, to refine the financing structure, the use of advances on foreign exchange operations, export credits, receivables certificates, and debentures as collateral for this financial instrument was prohibited,” says a CMN statement.

For funds, the restrictions will result in a smaller supply of instruments for portfolios, reducing the available range for selecting securities – a change that may affect their profitability and volatility. “CRIs may also appreciate in the secondary market,” says Duarte, from Suno Asset.

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How would the market be affected by AES Corporation’s possible exit from Brazil? Analysts respond

Feb 2, 2024

Since Sunday, the news, previously rumored in the industry, has been circulating in the energy market: AES Brazil might be leaving the country. The unconfirmed (and not refuted) information comes from Lauro Jardim, a journalist at O Globo. According to his column, the company has already enlisted Itaú and Goldman Sachs to sell its assets in electricity generation, including hydroelectric and solar plants in São Paulo, as well as wind complexes in the Brazilian Northeast and Rio Grande do Sul. The company has been in the country since 1997, attracted by the wave of privatization in the FHC government. However, lately, it has been delivering poor results to shareholders, with its B3 shares plummeting by 30% in the last three years.

“We faced some setbacks in the sector, such as the water crisis and low prices, but even in comparison with other companies in the segment, AES fell short,” says Ruy Hungria, an analyst at Empiricus Research. “Perhaps the American controller prefers to use resources from the assets sold in Brazil to reduce its debt abroad or invest in a region where it can generate more value,” he adds. Last year, the long-term debt of AES Corp, which holds 47% of AES Brazil, was $23.6 billion – a 17% increase compared to 2022.

In a press release, the company admits seeking ways to boost its cash. “AES Brazil clarifies that, as previously communicated, it has been informed by its controller, AES Corp, that it is evaluating alternatives to finance the Company’s growth and improve its capital structure.”

Asset sales to reduce debt are not new in the market. “Disinvestment to reduce leverage is a recurring strategy in the market,” says Anderson Dutra, a partner-leader in ENR and Oil & Gas at KPMG Brazil. “This is what Petrobras, (the major oil company in the country) did, for example, with the sale of gas pipeline assets and a series of offshore fields,” he states.

If the company does leave the country, there are many possible outcomes. “It is possible, for example, to sell different assets to different buyers or sell everything to one company, and all these scenarios can lead to different fates for the company,” says Hungria. “AES could go private or be bought and become another company.” There are also cases of companies that remain listed with new owners. “When Petrobras bought Perez Companc’s assets in Argentina, the company [Perez Companc] remained listed for a long time.

According to Dutra, if the news is confirmed, the most likely candidates for purchase are companies already operating in the generation or infrastructure segment in Brazil. “But we can have surprises,” he cautions. In the opinion of André Fonseca, director of the energy market consultancy Thymos Capital, if AES does leave Brazil, European and Chinese companies may show interest in the business. “Often, to enter the country, it’s better to buy something ready,” he says. “Then the company comes already structured, and the buyer uses that platform to grow.”

Opportunities and challenges

But potential buyers will face challenges. “At this moment, the big problem in the renewable segment is the oversupply of energy, which has pressured prices and returns,” says Hungria. Fonseca thinks similarly: “These are projects with not very high returns, and with lower energy prices, this return decreases a bit.”

He also points out that companies in the sector have long-term contracts, ten or twenty years, indexed to IPCA (the main Brazilian inflation index), which makes it difficult to renegotiate agreed prices during high moments in the energy market. “It’s a competitive environment, with companies at the minimum return limit,” he assesses.

For Dutra, uncertainties in public policies for the renewable energy sector also weigh. “A whole business model can be made considering a series of [government] incentives that can suddenly change and force the company to reformulate everything,” he says.

Nevertheless, he evaluates that the country is attractive to foreign investors. “When we compare renewable assets in Brazil with the rest of the world, we have a huge competitive advantage,” he says. “The incidence of sunlight in much of Brazilian territories, compared to other places in the world, is much higher. And the winds in certain regions of the Northeast are excellent, above 9 knots permanently.”

Among the advantages, he also mentions the existence of mineral reservoirs with raw materials for battery production, essential for the development of renewable sources. Fonseca adds other attractions: “As we have a very large scale, we can do very large projects here. This, combined with the regulatory security of the sector, is well-regarded by foreign investors.

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Brazilian M&As drop by 27%, but still lead the Latin American rankings

Feb 2, 2024

In the past year, mergers and acquisitions (M&As) in Brazil amounted to US$ 43 billion (R$ 215 billion), marking a 27% decrease compared to 2022. Nevertheless, Brazil retained its top position in M&A transactions in Latin America, with 2,008 completed deals, constituting 62% of the total in the region. These insights come from a report by Aon, a British risk management and insurance brokerage company, in collaboration with TTR Data.

The study indicates that Chile secured the second spot in the operations ranking with 384 mergers and/or acquisitions, reflecting a 15% increase from 2022. Following closely is Mexico with 366 done deals, trailed by Colombia (264), Argentina (214), and Peru (40). Collectively, Latin American countries recorded 3,235 transactions last year, amounting to US$ 74 billion (R$ 368 billion).

Thiago Lang, Director of Industries, M&A & ESG at Aon, highlights that Brazil’s leadership in the number of transactions, even during a challenging period, underscores the country’s ongoing importance in the M&A landscape. Despite a 22% drop in annual operations, Brazil mobilized a capital of US$43.4 billion, showcasing the maturity and resilience of the Brazilian market.

The report singles out Natura&Co, the largest cosmetic holding in Brazil, as a prominent player in the Latin American M&A market for 2023. The company’s sale of the Australian luxury brand Aesop to the French cosmetics giant L’Oreal, valued at around US$ 2.4 billion (R$ 12 billion) at the time of the deal, contributed to this recognition.

In anticipation of the coming year, a Deloitte survey reveals the motivations behind new acquisitions. For 66% of acquiring companies, the transaction will be driven by an interest in purchasing a complementary business. Additionally, 62% point to expanding into new markets, and 58% cite the incorporation of new technologies. Furthermore, 38% will use the operation to adjust the portfolio of products and services, and 25% view the M&A process as an opportunity to change business strategy.

Leading the Way: Fintechs

Among startups in Brazil, Fintechs led the number of operations in the market, representing 23 out of the 146 deals closed last year. Following in the ranking are MarTechs (22) and HRTechs (12). These findings, from Distrito, are part of the M&A Deals Report 2023 by Questum, a company specializing in mergers and acquisitions and investments.

According to the study, the majority of transactions involved values ranging from US$ 4 million (R$20 million) to US$ 40 million (R$200 million).

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Analysts differ on Brazilian Venture Capital outlook

Feb 1, 2024

Scenario 1: There are no signs that the lean times will end anytime soon for the venture capital market. The funds committed globally by segment managers totaled $111 billion last September – less than half of the $339 billion in 2021. With limited capital available for investment, US interest rates reluctant to decrease, and a reduced appetite for risk, managers are becoming increasingly selective in scouting for companies. Faced with such a stringent funnel, only a few start-ups will manage to secure investments.

Scenario 2: Although investments have decreased considerably in 2023 in Latin America, with a 50% drop in the volume of funds raised and a 21% decrease in the number of rounds compared to 2022, Brazil was the main destination for resources in 2023, with 58% of investments in start-ups, attracted mainly by the technological innovation potential of the country’s companies. From now on, the Brazilian venture capital market is expected to gain more strength, thanks to the stabilization of the economy and the anticipated increase in available resources in the market due to fund disinvestment.

These contrasting views come from two analysts interviewed by Capital Aberto. The more discouraging first scenario is outlined by Daniel Malandrin, the leader partner of Venture Capital & Innovation at KPMG Brazil. The optimistic perspective is from Leopoldo de Lima, a partner at Questum, a consultancy specialized in M&As and investments in start-ups.

In Malandrin’s assessment, the Federal Reserve’s announcement yesterday (31) made it clear that US interest rates will not drop anytime soon. “A large portion of the funds allocated to Brazilian venture capital funds comes from the United States, where annual interest rates, before reaching 0.5%, are in the range of 5%,” he says. “This leads families and other investors, considering risk and return, to allocate resources to ten-year US Treasury bonds.”

Given the situation, shaken by the reduced appetite for risk, venture capital funds “have less money.” And, according to Malandrin, there is no indication that a turnaround will come anytime soon: “There are no signs that, in a short period, we will return to having that widely available capital.”

To complete the picture, Malandrin argues, high-interest rates also help to lower the valuation of already invested companies, compromising the funds’ performance. By devaluing publicly traded companies, high-interest rates also end up affecting, in a cascading effect, the private equity and venture capital market. “This creates a perception of prices for different private investments,” says the KPMG expert.

Lima, on the other hand, believes that the resumption of IPOs in Brazil, predicted by many analysts, should encourage fund investments in companies in the country. “There are two main exit windows for private equity: IPO or acquisitions by other companies,” he says. “After two years without an IPO, we go back to having this alternative exit.” And he adds: “It’s more capital in the market, with capitalized companies that will, at some point, also make their consolidation and acquisitions moves.”

Even with divergent opinions, at least one thing both analysts agree on: fintechs are likely to remain among investors’ favorites. According to a Questum report, from 2019 to 2013, the segment led venture capital fund investments in Latin American startups, with $13 billion in investments and 1156 operations. “The entire banking spread charged created a great opportunity for entrepreneurs that, with technology, developed new solutions as alternatives to major banks,” says Malandrin.

In the duo’s opinion, retailtechs will also continue to stand out. Currently, the segment ranks second in Latin America, with $5.8 billion in investments and 465 operations.

Lima’s list from Questum also includes healthtechs and agtechs, due to the significant participation of the healthcare and agribusiness sectors in the Brazilian GDP. According to him, new sectors are also starting to attract investor attention, such as traveltechs (due to the strength of tourism), energytechs (due to the search for sustainable energy), and start-ups focusing on artificial intelligence or biotechnology.

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Investor Relations (IR) professionals work hard to fill out the Reference Form of the Brazilian Securities and Exchange Commission (CVM)

Jan 31, 2024

The following months will be a busy time for Carolina Melo, an analyst in the Investor Relations (IR) department at Cemig, and hundreds of her colleagues. The filling season for the CVM (the Brazilian Securities and Exchange Commission) Reference Form has already started, with a mandatory submission deadline of May 31. “Our work has been crazy, involving over a hundred professionals depending on the company’s size,” she says. The statistics support her statement. According to a survey conducted among Ten’s clients, a company focusing on technological solutions for the capital market, 85% of the 48 interviewed clients named filling out the form as the main headache in the IR department, far ahead of other complaints related to IR websites, conducting assemblies, among others.

“It is a very time-consuming document, very complex to fill out, with exchange relationships with various areas of the company and tight deadlines,” says Rafael Wajnsztok, partner at Ten. According to him, the most complex version of the CVM Form, required for companies with shares on the stock exchange, requires the completion of 101 items.

He states that the time spent on regulatory issues becomes an obstacle to the rise of IR professionals. “I can count on one hand the former IRs who are now C-level executives, despite working closely with strategic areas such as finance and business,” he says. “The problem comes from time allocation,” he adds. According to him, in Brazil, it is currently impossible for an IR professional to allocate more than 50% of their time to investor communication.

With this in mind, Ten launched a platform this month to manage the process collaboratively among different stakeholders – from various departments to external offices. Among its functions, the system allows for delivery control, simultaneous completion by various involved areas, setting deadlines, and access to filling instructions.

According to Maiara Madureira, a partner in the open companies area at the Demarest Advogados office, the process involved more people starting last year when the form began requiring information about companies’ ESG practices. “Before, filling out the form was very concentrated in investor relations or legal, but now you can’t exclude HR and sustainability,” she says. Depending on the company’s size, it is up to HR, for example, to collect each employee’s self-declaration about race and gender.

Among other areas typically involved in providing information are accounting, treasury, market intelligence, compliance, controllership, IT, governance, and risk analysis. “It requires a lot of organization and flexibility to deal with so many people,” says Carolina Melo. “You need to have empathy and give people time to deliver information,” she says. “You have to understand the other person’s side, but also understand that the company’s side is more significant, and when needed, you have to be persistent and demand.”

Maiara Madureira also has tips for IR professionals involved in the job. First and foremost, it is crucial to start early. “It is important to engage different areas from the beginning of the process so that they are well-informed about what needs to be done, because when it is not the core area that will fill out, the task keeps getting pushed to the end of the pending list.”

She also emphasizes the need for consistency in the information provided in the CVM form with that from other sources, such as ESG action reports or minutes. “Early work is needed to ensure that all information fits well together,” she concludes.

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Real State and private equity funds stand out in 2023 issuances

Jan 30, 2024

In 2023, there was an increase in the issuance of most securities, with only three assets experiencing a decline – stocks, debentures, and promissory notes. This information is part of the Economic Bulletin for the 4th quarter released by CVM (Brazil’s Securities and Exchange Commission), with consolidated data for the year. A total of US$ 127.31 billion (R$ 632.7 billion) in securities were issued, 10% higher than the US$ 115.73 billion (R$ 575.3 billion) in the previous year. Despite the progress, the issuances still fell below the US$ 148.29 billion (R$ 737 billion) recorded in 2021. Another point highlighted in the CVM report is the participation of issuances made under the rules of CVM Resolution 160, which accounted for 84% of the amount recorded in 2023.

The standout performers were real estate investment funds (REITs), with US$ 14.09 billion (R$ 69.9 billion) issued, more than double the US$ 7.34 billion (R$ 36.5 billion) raised in the previous year. Private equity funds (PE Funds) also saw issuances increase from US$ 6.1 billion (R$ 30.3 billion) in 2022 to US$ 18.53 billion (R$ 92.1 billion) last year.

On the flip side, the stock market, without an IPO for already two years, saw the values issued decline from US$ 11.55 billion (R$ 57.4 billion) to US$ 6.38 billion (R$ 31.7 billion). Completing the trio of assets with a decrease in primary issuances are debentures, with US$ 54.13 billion (R$ 269 billion) last year, a slight 9.5% year-on-year decrease to US$ 49.1 billion (R$ 244 billion), and promissory notes, with US$ 3.22 billion (R$ 16 billion) issued, three times less than the previous year.

The CVM’s Bulletin also indicates that the number of regulated participants increased by 7% compared to the end of 2022, now totaling 86,091 participants. The highest growth rate was recorded in the securities consultants sector, at 24.7%. Electronic platforms for participative investment, crowdfunding, continued to advance with a 26% increase.

Assets with the highest returns for the year include Bitcoin, surging by 133% in Brazilian reais. In investment funds, benchmark-related products performed well, with those tracking the IRF-M index – which measures the performance of short-term fixed-rate public bonds – achieving a 16.5% return. Funds benchmarked against the IMA-B index, composed of inflation-indexed public bonds, yielded an average return of 16%. Another market indicator that performed well in 2023 was the IFIX, related to real estate investment funds, with a 15.5% return. The U.S. dollar and gold ended the year with negative returns of 7.2% and 6%, respectively.

Regarding the risk scenario, particularly in the last quarter of the previous year, the CVM’s Bulletin points to improvement during a “strong bull market” in global and national equities and fixed income. There was a decrease in volatility during this period, partly due to the expectation of interest rate cuts in developed markets, with a decline in liquidity risk indicators and macro risk, respectively, correlated with the reduction in Brazilian sovereign risk and its peers.

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Exclusive funds change category to avoid tax

Jan 30, 2024

The funds of the so-called super-rich, investors who have exclusive products tailored to their needs, have accelerated their pace to avoid the changes implemented by Law 14,574 of 2023, which changed the taxation for closed-end investment funds, exclusive or not. A survey by Anbima (the Brazilian Financial and Capital Markets Association), at the request of Capital Aberto, shows that in the last quarter of last year, 31 exclusive multimarket funds were reclassified as equity funds, at the request of the managers. Of these, 13 were exclusive closed-end funds that made the move in time to avoid the “come-cotas” (a Brazilian periodic fund taxation mechanism) that became effective this year for this product category.

In some cases, only the classification changed, and in others, managers had to split the fund – stocks going to the new fund and fixed-income assets being redeemed or composing new multimarket funds. The move prevents semi-annual taxation of assets allocated in closed-end multimarket funds under the ‘come-cotas’ system. Until last year, although open multimarket funds had this type of advance payment of income tax on earnings, this did not occur in closed-end funds, which have a defined redemption period.

Those who did not adapt the portfolio to change the category and remained with a closed-end multimarket fund will become subject to taxation of 15% of earnings in long-term funds or 20% in the case of short-term funds (up to one year). Equity funds are taxed only at redemption at 15%.

“December was the deadline for managers to take equity resources allocated in multimarket to an equity fund without paying any tax in the migration process. Now, those who make this move are subject to paying the tax, as if it were a redemption,” explains Ricardo Santos, partner at Lefosse Advogados’ Wealth and Succession Reorganization practice. There were also, recalls Santos, closed-end funds that chose to anticipate the payment of income tax in 2023, with a lower rate of 8%, redeem the resources, and take them to individuals.

At Wealth High Governance (WHG), a manager with R$40 billion under its care, throughout last year, the reclassification of 12 exclusive multimarket funds to equities was promoted. One of the funds that went through this process at the end of the year was Patagonia FIA IE, an exclusive fund with nearly US$ 8,86 million (R$ 44 million) in net equity.

“The exclusive multimarket funds have always been the best solution for managing our clients’ resources, due to the freedom to move between different asset classes, the tax benefit, and meeting the needs of family succession. With the rule change, it was necessary to assess the distribution of assets and in many cases, the migration to equity funds made sense,” explains Limerci Cavariani, partner at Wealth High Governance. Cavariani adds that for low volumes of resources allocated in variable income, it is not always worthwhile to have an exclusive equity fund. The Patagonia fund, managed by WHG, had nearly 70% allocated in stocks – a rule to enter this category – and it was enough to request the change in classification.

The portion of fixed-income assets allocated in exclusive closed-end multimarket funds, adds Caraviani, has sought incentivized products, such as incentivized debenture funds. “It is possible to build an infrastructure debenture portfolio, composing 85% of the fund to have the exemption, and still allocate the other 15% to any asset that it will also enjoy the tax benefit. It is very interesting,” explains the manager.

The partner of Lefosse Advogados emphasizes that it is not only taxation that must be taken into account when migrating multimarket funds to equities. “These are products that make up the succession planning of families. Funds have more governance and allow control of heirs’ access to liquidity, which is not possible with managed portfolios, buying assets directly in individuals,” explains Ricardo Santos. “That’s why part of the exclusive multimarket funds’ resources also migrate to pension funds.” Caraviani, from WHG, reinforces the view and adds: “before it didn’t make sense to set up an exclusive closed-end fund for pensions. But now, for those who already paid the tax with a discount in 2023, it becomes interesting.”

Caraviani points out that there is an important wave of exclusive closed-end multimarket funds that chose to pay the tax in 2023, at 8%. “They chose to clean up the history and now, zeroed, have time to rethink the structures for this type of product.”

In Anbima’s survey, of the 31 exclusive funds that made the migration in the last quarter of 2023, 19 were open, which did not undergo a change in taxation. The fund with the highest net equity (NE) on the list is the PWM Challenger RT III Exclusive Open Investment Fund, managed by Perfin Wealth Management. The fund’s NE is around US$ 117 million (R$ 581 million). Sought by the report to understand the movement, the manager, which has US$ 5,8 billion (R$ 29 billion) under its care, did not have a spokesperson available for interviews. The manager with the most products on the list is Credit Suisse, which reclassified eight exclusive multimarket funds to stocks in the analyzed period, four of which are closed. The asset chose not to comment on the strategy for the exclusive products it manages.

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ESG funds underperform in returns and capital attraction

Jan 29, 2024

Last year, only six funds focused on companies and assets aligned with ESG principles were launched in the United States, compared to an average of nearly one hundred between 2020 and 2021. In Brazil, the sector is still in its early stages, with 70 funds registered in Anbima (Brazilian Financial and Capital Markets Association). Among the 34 funds presently available for investment through the XP Investimentos platform, only 11 managed to outperform the CDI (Brazil’s interbank interest rate) in the past 12 months. Looking at a more extended timeframe of 36 months, this achievement diminishes further, with just three funds demonstrating superior performance.

Globally, funds classified as “responsible investment” recorded net inflows of US$ 68 billion last year, as of November 30, according to LSEG Lipper data – a significant drop from the US$ 158 billion for the entire year of 2022 and US$ 558 billion in 2021.

The category gained significant momentum in 2020 and 2021 during the COVID-19 pandemic when low oil prices encouraged more investors to diversify beyond fossil fuels, and managers sought to demonstrate greater climate awareness. However, as conventional energy prices surged, the popularity of ESG funds plummeted.

Political backlash against ESG led by Republican politicians in the United States, along with suspicions of “greenwashing,” also dimmed the segment’s luster. According to the Brazil ESG Strategy report from Itaú BBA, 94% of surveyed global investors have identified the practice in corporate reports.

High-interest rates contributed to the results, in Brazil and abroad, by inhibiting company investments in high-cost green projects and discouraging the acquisition of risky assets in the financial market. In this context, Ável Investimento’s investment expert, Ismael Lopes, believes that the drop in the Selic rate (the Brazilian basic interest rate) could attract funds to ESG in the country. However, he believes that lower rates alone are not enough. “The big question is that today it is not very clear to Brazilians and the market what the incentive for these investments is and which funds invest in what,” he says.

Despite the less encouraging results, 85% of investors mentioned in Itaú BBA’s report, released this month, stated that ESG financial products provide returns equal to or higher than traditional ones. The study also suggests that, in the long term, the performance of ESG companies tends to increase.

Rafael Zlot, CIO of Fixed Income at Genial, agrees. Regarding the E (environmental) of the acronym, he says: “The use of natural resources seems to bring financial results in the medium and long term.” Regarding the G (governance), he states: “Governance issues also impact yields.” And about the S, the social pillar of the tripod, he exemplifies: “Aspects like diversity in the team contribute to better results.”

Launched in December 2020, Genial’s ESG fund, focusing on private credit, had a cumulative yield of 107% of the CDI. The assets are relatively small, around US$ 2 million (R$ 10 million). “At first, in 2021, it seemed like an explosion, that everyone would start an ESG business, but it didn’t catch on,” he says. “Not yet,” he emphasizes. “Sometimes these take time to mature. Real estate funds, for example, took a while to take off, and suddenly you have a flood of them,” he says.

Private Equity

“When we see launches of ESG funds, it is often in a private equity line,” he says. According to him, the segment attracts more investors, in part due to the possibility of having a more significant impact on the business. He compares: “In private equity, the manager actually injects equity into the company, which makes a difference.”

W Capital is one of the management companies aimed at the segment. Its focus is on reducing the carbon footprint of invested companies. Founding partner Guilherme Waetge explains how it operates: “As we always analyze financial, commercial, accounting, competitive advantages and everything else data. But, in addition, we look at the carbon footprint and the factors responsible for it to, together with the company, set goals for its reduction.” If the goals are not met, the company pays a fine, used to purchase carbon credits.

In the manager’s view, the strategy has at least two advantages. Firstly, it establishes objective criteria for the ESG performance of the funds to combat greenwashing. “Carbon is easy to metricize,” says Waetge.

Furthermore, the methodology avoids a common problem in ESG investments: the relatively limited range of investment options. “When you make a very large filter on the ESG issue, you cannot make a very large filter on financial performance because otherwise, the investment opportunities become very small.” However, this does not happen with companies targeted by the fund, he reasons. After all, there is no shortage of companies with carbon emissions to reduce.

W Capital’s first fund invested US$ 13.2 million (R$ 65 million) in the beverage manufacturer Better Brinks, which committed to reducing its carbon footprint by 30% in four years through changes in industrial processes and the vehicle fleet. The fund’s return target is an annual return of 35% to 45%. According to the manager, the investors are Brazilian fund of funds.

For the next fund, the management company is in the process of analyzing two more companies, with names not yet disclosed.

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Bradesco BBI projects GOL shares at US$ 0,20 with Chapter 11 filing in the U.S.

Jan 26, 2024

The closing session of the week at B3 (Brazil’s Stock Exchange) witnessed a sharp decline in GOL shares, reflecting the airline’s Chapter 11 bankruptcy filing in the United States. The stocks began to slide at the opening of the session, leading the losses with an 11% drop to US$ 1,15 (R$ 5.66) around 11 a.m. By the end of the day, they fell by 8.07% to US$ 1,21 (R$ 5.92). The Chapter 11 filing in the U.S., equivalent to Brazilian judicial recovery, was met with skepticism by the market. The company is expected to seek legal protection in Brazil as well. Most of the company’s debts are concentrated abroad.

A report from Bradesco BBI, signed by analyst Victor Mizusaki, reduced the target price for Gol’s shares (GOLL4) from US$ 2 (R$ 10) in the previous projection to US$ 0,20 (R$ 1), representing a potential 82% decline. The report recommends selling the shares and assesses the impacts of GOL’s announcement regarding the Chapter 11 filing in the U.S. The airline also stated that it would commit to a firm US$ 950 million debtor-in-possession (DIP) financing, pending judicial approval.

“The company does not have a significant operation in the U.S. to justify bankruptcy protection there, but, in our opinion, the judge may take into account the exposure of bondholders and aircraft lessors, similar to the LATAM Airlines Brazil case in 2020,” the report states. “There are no details about the restructuring plan since the judge needs to approve this request, and GOL needs to reach an agreement with lessors and other creditors.” According to Bradesco BBI, the outcome of restructuring about US$ 5.09 billion (R$ 25 billion) in liabilities “will likely eliminate minority shareholders due to the conversion of US$ 2.3 billion in debt into equity.”

What the market perceives as potentially improving the environment for airlines overall is the rescue plan being discussed and announced on Wednesday (24) by Minister of Ports and Airports, Silvio Costa Filho. The plan includes a US$ 810 million (R$ 4 billion) fiscal renegotiation package and a credit line of up to US$ 1.22 billion (R$ 6 billion) to be released by BNDES with financing from the Civil Aviation Fund of Brazil (FNAC). Congress needs to approve a bill to allow the use of FNAC for working capital financing.

Ibovespa rises with Vale and Petrobras

The benchmark index of the Brazilian stock exchange closed higher on Friday (26), supported by shares of Petrobras (PETR4) and Vale (VALE3), companies with the highest weight in the indicator. The Ibovespa advanced 0.62%, reaching 128,967. For the week, the index rose 1.04%.

Petrobras continued its positive trend in recent days, rising 1.73%, while Vale gained 1.76% in value during the session. The recovery in iron ore prices in Asia and rumors that former minister Guido Mantega would withdraw from a position on the miner’s board contributed to Vale’s performance.

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Financial institutions are prime targets for cyberattacks

Jan 26, 2024

Banks and other financial institutions are the runners-up in the preference of cybercriminals. The sector accounts for 31.1% of phishing pages – fake websites that steal user information, including passwords, or attempt to distribute malicious programs. The segment trails only behind retail/e-commerce, with 36.6%, and is followed in the ranking by telecommunication companies (22%). These insights are from the recently released Threat Landscape report by Axur, a global digital threat monitoring platform.

In the Deep & Dark Web, the scenario is similar, with 26.1% of suspicious mentions directed at the financial sector, also led by retail/e-commerce (45%) and technology companies ranking third (16.8%). “Financial institutions, such as banks, fund managers, and brokerages, are major targets because they are significant concentrators of money, inevitably attracting criminal activity,” says Thiago Bordini, Head of Threat Intelligence at Axur.

Innovative Crimes

Among the trends highlighted by the research are new forms of the so-called “ransomware.” Some criminals have shifted the focus from encrypting corporate network content and demanding ransom, usually in cryptocurrencies, for its return. Taking websites offline, only to recover them with payment, is also no longer news. Now, hackers are also targeting financial institutions with threats based on regulatory and legal costs, such as fines and compensations resulting from the leakage of customer data.

“Criminals charge a fee to decrypt, another fee to get the website back online, and yet another fee not to disclose information on the internet because they know that exposing this data not only poses a reputational risk but also a legal risk,” summarizes Bordini.

As an example, he mentions the case of the American company Meridian Link, a provider of digital solutions for banks, credit unions, and mortgage lenders. According to information from DataBreaches.net, the company’s network was breached by the ransomware group ALPHV/BlackCat in November.

As usual, the criminals demanded payment in exchange for not leaking data. However, as they claimed to have received no responses, they decided to innovate: they reported the victimized company to the U.S. Securities and Exchange Commission (SEC) for not notifying the agency, as required in the country (although the requirement came into effect in December, after the incident).

In Brazil, Bordini says there is no news of a similar crime, although financial or publicly traded institutions are obligated to report data breaches to CVM and the Central Bank.

But where do the stolen data go? In the case of fund managers, information about the valuation of companies and investors responsible for significant investments can be sold to competitors interested in strategic business information, says the expert.

Internal Assistance

According to him, criminals often access data with the help – paid – of employees or service providers. They may, for example, bribe managers to provide passwords or pay service providers to install keyboards or modems with devices for information theft.

Another trend highlighted by the report is attacks on supply chains. “If I attack a service provider, I automatically get all the companies below it,” says Bordini. Attacks on partners and suppliers with the aim of expanding potential access to a target have also become more common.

The report also points out the use of fake apps and artificial intelligence by criminals. It also revealed a 265% growth in the number of leaked debit and credit cards last year compared to 2022. Brazil was responsible for 7.25% of the total leaks, behind only the United States, the undisputed leader, with 49.85% of the 13.5 million leaks identified by Axur in 2023.

Credentials (access passwords and logins) also remain in the sights of cybercrime, with 4.2 billion leaks last year, as indicated by the report.

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Banks invest in FIDCs (Funds of Credit Rights) to provide credit without burdening their balance sheets

Jan 26, 2024

The investment in FIDCs (Funds of Credit Rights) by the treasuries of major banks, particularly in operations related to agribusiness, has become an alternative for institutions to inject resources into the productive chains of this sector without compromising their balance sheets. Within the structure of FIDCs, are securitized credits provided by major agribusiness trades to producers. The guarantees surrounding this structure are considered of high quality, which also encourages bank treasuries to invest in FIDCs. A source involved in structuring these operations, speaking on the condition of anonymity, mentioned that banks such as Citi, BTG, XP, BV and Itaú all invest in FIDCs as a way to finance various sectors, especially agribusiness.

Capital Aberto sought confirmation from the mentioned institutions, but only Itaú confirmed the use of this type of operation. “The bank structures FIDCs and participates as an investor in these funds, especially in the agribusiness and receivables environment for medium-sized companies and Tech,” the institution stated in a note. The other banks—Citi, BTG, BV, and XP—chose not to comment or were not available for an interview.

One significant advantage of this type of operation is that it improves the structure of the banks’ balance sheets. “We have seen many operations in this model, with banks placing senior FIDC quotas on their portfolios as a way to provide credit without increasing liabilities on their balance sheets. Since it is an investment, it is recorded as an asset. However, financial institutions lose control over the credits, which now belong to the administrators. Ownership becomes indirect, and this aspect must be considered,” explains Murillo Allevato, a partner at Bichara Advogados. “What can stimulate financial institutions to invest in these funds is the possibility of facilitating access to credit for companies, especially during times of increased overall indebtedness, which raises market institutions’ risk,” adds Vinícius Matarazzo, another partner at the advocacy firm.

One important risk indicator for banks, such as the Basel Index, takes into account the volume of loans and the capital of banks to measure the solidity of institutions. “In addition to seeking to expand access to credit for various segments, financial institutions also have an interest in promoting the development of the Brazilian capital market,” Matarazzo adds.

The choice to invest only in the senior quotas of FIDCs, up to a limit of 25%, is not accidental. Unlike the subordinate quota, the senior gives the investor preferential treatment in both redemptions and amortizations. Additionally, the profitability of this type of quota is fixed, resembling a fixed-income product.

Market capital experts at Bichara Advogados also highlight another point that explains the banks’ movement investing in FIDCs. “As long as it complies with the conditions defined by CVM 175, FIDCs join other funds that do not have come-withholding taxes. This is advantageous because it improves the profitability of the investor, in this case, the bank,” explains Allevato, adding that inquiries about this credit alternative began last year.

Marco Tulio Lima, Vórtx’s Commercial Head, reinforces that FIDCs have always been a solution for the capital market regarding financing the production chain, especially due to the shortage of working capital and high spreads for certain market segments, especially the Middle Market. “Notably, the cost of capital and delinquency explain much of this shortage. From another perspective, banks saw efficiency in acquiring senior quotas to further foster these structures to indirectly finance some production chains,” explains the Vórtx executive, a company that provides infrastructure solutions for the fund industry, including FIDCs.

Lima adds that the operations of banks investing in FIDCs, carried out in the Vórtx environment, follow the One Stop Shop model. “We are proactive in structuring until implementation with originators and investors, in technological facilitation in forming credit assignments, and in setting up some parameters to support the manager in monitoring eligibility criteria, among other services for these operations,” explains Lima, without naming the client institutions. “We see an increase in this type of operation, mainly related to the agribusiness and automotive chains.”

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Property auctions attract funds aiming at discounts

Jan 24, 2024

Property auctions are beginning to attract small real estate investment funds. This is the case with the microfund Domo, from the crowdfunding platform Osten Invest. The goal is to bring together small investors so that they can jointly acquire properties with significant discounts for later resale or rental. “There are financed properties reclaimed by banks due to the non-payment of borrowers, which come to the market with a 50% discount or more,” says Eduardo Consentino, auctioneer at Biasi Leilões, a company accredited to sell properties from Itaú and Santander portfolios.

He states that sales to investment funds increased by about 20% between October and December 2023 compared to the same period the previous year. In his assessment, part of the market’s heating is a result of the [Brazilian] Supreme Federal Court’s decision that allowed banks to repossess properties from defaulting borrowers without the need for a court order. The measure is valid for loan contracts with the provision of property recovery through fiduciary alienation.

In the search for opportunities, funds operate in different niches. “Some buy only apartments in São Paulo to resell later. Others focus on commercial properties, such as shops or bank branches,” exemplifies the auctioneer.

In the case of Domo, launched last year, 62 investors contributed between US$ 4,073 (R$ 20,000) and US$ 28,520 (R$ 140,000) for the purchase, renovation, and subsequent resale of a high-end house in a gated community in the state of São Paulo. With the US$ 407,373 (R$ 2 million) raised, the managers are now looking for a property of around 300 square meters that can later be resold for between US$ 710,000 (R$ 3.5 million) and US$ 810,000 (R$ 4 million), says Diego Scalvi, founder of Osten Invest. “The entire cycle is between 12 and 18 months, with a projected return of 19.19% per year,” says Anthony Miranda, the executive responsible for the business in partnership with Thiago Inaoka, from S3 Investimentos.

Rental

Miranda plans to launch five more funds this year. Unlike the current model, each of them will aim to acquire a portfolio of properties in judicial or extrajudicial auctions for later rental instead of resale.

Among the possible acquisitions, Miranda is considering the purchase of a state-owned bank branch on Avenida Paulista in São Paulo. The goal is to acquire the property, which he says is worth up to US$ 6.11 million (R$ 30 million) and is rented for US$ 30,553 (R$ 150,000) per month, for between US$ 1.4 million (R$ 7 million) and US$ 1.9 million (R$ 9 million).

Affordable properties are also in focus. With a market value of around US$ 50,000 (R$ 250,000), they can be acquired for between US$ 12,000 (R$ 60,000) and US$ 20,000 (R$ 100,000), says the executive.

Another fund under consideration aims to purchase a popular multifamily property in the United States. “We are trying to negotiate something around US$ 2.6 or US$ 2.7 million, which, after renovation, would have a value of US$ 6 million,” he says.

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The XP report outlines prospects for funds in 2024

Jan 24, 2024

The year 2023 posed significant challenges for investment funds, with macroeconomic events impacting assets and requiring managers to position themselves in the face of adversities. In aggregate, for the second consecutive year, the industry witnessed investors withdrawing funds. After a net outflow of R$ 162.9 billion (US$ 32.88 billion) in 2022, last year funds lost R$ 127.9 billion (US$ 25.81 billion). The expectation now is to stem the outflow of funds and, if possible, return to growth in 2024. Just as some fund classes diverged from others and performed well, this year’s outlook is more favorable for certain asset classes. A report released by XP Investimentos [Brazilian investment management company] provides an overview of 2023 and projects expectations for the year.

The data in the report comes from Anbima (The Brazilian Financial and Capital Markets Association) and XP’s own database, segmented by various fund classes and subclasses. In addition to summarizing the state of the sector in 2023, the study includes a survey of fund managers signaling a constructive outlook for the fund industry in 2024.

Who fared well in 2023

Contrary to multimarket funds, which experienced a negative flow of R$ 134.3 billion (US$ 27.11 billion), Private Equity Funds (FIPs) stood out with notable growth, experiencing a net inflow of R$ 42 million (US$ 8.48 million). In terms of performance, according to the report authored by Clara Sodré, a fund analyst at XP, the standouts were the “riskier” funds. International Equity Funds (hedged) recorded gains of 23.94% in 2023. Both Long Only and Long Biased equity funds also had some of the best performances in recent times.

Products “liquid” vs. “illiquid”

Another important highlight from the XP report is the comparison between the performance, in terms of fundraising, of liquid funds and “illiquid” funds, such as FIDC (Credit Rights Investment Funds) and FIP. Last year, the net fundraising of liquid investment funds, as a percentage of Net Asset Value (NAV), was negative at 1.60% (loss). Meanwhile, illiquid funds had a positive net fundraising of 5.94%. In 2022, illiquid funds had already outperformed liquid funds, advancing 1.53% in NAV compared to a decline of 2.31%, respectively.

In the report, XP emphasizes that even fixed-income funds, which benefit from high interest rates, faced difficulties in 2023 due to negative events in private credit. The report also makes a point: “It is important to differentiate between open-end fund structures, which allow continuous applications and redemptions, and closed-end structures, which limit redemptions until the fund’s maturity.” Regarding the performance of Private Equity Funds (FIPs), the report notes that they continued to grow amid a high-volatility environment.

Credit Funds

Perhaps the greatest challenges for fund managers occurred in private credit fixed-income funds, with events involving major companies shaking the market. Last year, the repricing of [the retail company] Americanas’ securities combined with events related to Light (Electric power distribution company), and the outflow from more conservative funds, led to a significant spread widening, especially in the most liquid debentures with good credit ratings.

The high interest rate levels and risk aversion impacted the flow, issuances, and consequently, the returns of the funds, which gradually recovered throughout the year with expectations of interest rate decreases. Despite the recovery observed in these funds, when considering the CDI (Interbank Deposit Certificate) benchmark, only 26 out of the 75 analyzed funds ended the year above the index. On the other hand, when compared to the main credit indices, 87% of investment funds are above the IDEX-CDI. According to XP’s perspective, the advantageous spreads this year allow for a more conservative allocation, with managers maintaining selectivity in their focus.

Macro Multistrategy Funds

Regarding multimarket funds, the report notes that the last months of 2023 brought relief to the recent performance of the class, especially for Macro funds. The favorable positions in Brazilian risk assets by many managers were the main contributors to positive returns, driven by stock market gains, the appreciation of the real, and the decline in real interest rates. Adding strategies that are less correlated with each other and with other portfolio positions, increasing return expectations without necessarily adding risk, is the primary role of these investment funds, which have a more tactical profile and use different instruments to extract results from local and global markets.

In the report, Clara Sodré states that Macro managers should stand out, provided they have “good diversification in Long & Short and Quantitative strategies,” in addition to global multimarket funds.

Managers’ Perspectives

XP conducted a survey with 32 asset management firms, asking about their outlook for 2024 and the main asset classes and opportunities they see in the current scenario. In summary, in addition to the constructive outlook for the industry, pension funds stood out in terms of investment vehicles, credit continued to be a growth alternative, and opportunities for the Brazilian stock market were highlighted among asset classes. “Overall, asset managers foresee the growth of new products, strategies, and management teams for the following year.”

When asked about the asset classes that present the greatest opportunities for the next year, 25% of asset management firms pointed out opportunities in the Brazilian Stock Exchange (B3), indicating a positive sentiment toward the stock market. “This aspect reflects confidence in the economic recovery and the growth potential of the Brazilian economy,” highlights the XP analyst. Following closely were Private Credit and Brazilian Interest Rates.

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Debentures and CRIs for retail companies are on the rise

Jan 23, 2024

In the wake of the interest rate decline, the issuance of debentures and Real Estate Receivables Certificates (CRIs) for retail companies is expected to increase this year. However, there is also a tendency for increased collateral requirements by creditors. This assessment comes from Márcio Paiva, director of the infratech Bloxs Capital Partners. According to the company’s data, the retail sector issued US$ 1.65 billion (R$ 8.19 billion) in debentures last year. For CRIs, which are used, for example, in the payment of store rents or in the anticipation of receivables from real estate sales, the amount was US$ 490 million (R$ 2.42 billion).

“I believe that in 2024, there will be a significant increase in terms of volume”, says Paiva. “As the Selic (Brazilian basic interest rate) has maintained a downward trajectory, companies are likely to seek issuing securities to fund themselves and eventually improve the cost of capital for their debts”, he argues.

However, he cautions that after the setbacks faced by [the retail company] Americanas, the losses incurred by [the fashion retail company] Marisa and the difficulties experienced by Magazine Luiza (one of the biggest Brazilian retail companies), market selectivity will be higher. “I believe that only very qualified companies, with a triple-A rating, will avoid the request for stronger guarantees.” He also believes that rates could be “slightly higher,” although partially offset by the Selic retraction.

As possible guarantees, he mentions shares, investment in subordinate series of the same issuance, and non-operational liquid assets, such as real estate, among others.

However, he does not expect new increases in the Coverage Ratio on the Outstanding Balance. “From experience, I can say that the market easily accepted a coverage ratio of 110% until 2021, in the case of a CRI, for example,” he says. “Today, people ask for a minimum of 120% or 130%, and I find it difficult for them to demand more than that because otherwise the operation wouldn´t make sense for the company.”

Sales and interest

Depending on the projections of the Brazilian Institute of Retail Executives and Consumer Market (Ibevar) and Fia Business School, retail sales will remain lukewarm at the beginning of this year, with an expected increase of 1.41% in the first quarter compared to the same period last year and a decrease of 0.88% compared to the last quarter of 2023.

According to Claudio Felisoni, president of Ibevar and professor at FIA, the results reflect high interest rates for consumers in commerce. “Despite the fact that the basic rate has been reduced as a result of inflation containment, the truth is that interest rates on the consumer side have fallen very little, from 89% per year to 87% per year between 2022 and 2023,” he says.

For Márcio Paiva, of Bloxs Capital, the impact of the interest rate drop should reach the retail consumer in the second semester. “The first to benefit are the large corporations. And then comes the rest of the scattered economy. There is a significant delay, at least six months,” he concludes.

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Distressed funds are fine-tuning their bets for 2024

Jan 23, 2024

The distressed funds, which thrive on problematic or special situation assets, foresee a positive 2024 with more diversified origination sources. Fund managers are optimistic about the profitability of assets already in their portfolios, acquired in recent years, and new opportunities to enhance their portfolios. In the real estate sector, there are operations involving contract cancellations. In agribusiness, crop failures may lead companies to file for judicial recovery, and in publicly traded companies, high indebtedness attracts swap operations proposed by the funds—involving debt and shares. These are some of the opportunities mapped out for 2024.

A common thread in the discussions of executives from distressed asset fund management firms, as heard by Capital Aberto, is that the macroeconomic scenario can be either good or bad, but there is always an opportunity for this type of product. “Come rain or shine, there is always some default due to poor management or a negative operational cycle. The opportunities may change, but we have five or six boxes of distressed assets to access, and this balance helps us in management,” comments Mateus Tessler, a partner at Jive Investments.

Matheus Shelman, a partner at Strategi Capital, shares a similar view. “When the economy is doing poorly and interest rates are high, there are many judicial recoveries, defaults, emerging assets for us to assess. And when interest rates fall, what is in the portfolio performs well. There are several cycles to be taken advantage of.”

Tessler r considers 2024 a very positive year. One of the manager’s strategies is to support the debt of publicly traded companies through swap operations. This year, Tessler highlights, these operations are favored by the prospect of improvement in the stock market and the increasing flow of resources into equities.

Another sector mentioned by the Jive partner is agriculture, which experienced a drop in soybean prices in 2022 and then hydrological problems in the 2023/2024 cycle. “Probably, this should be the year of a lot of judicial recovery in agribusiness. This is an opportunity that arises due to the specific moment of agribusiness.”

Jive is on its fourth distressed fund—the first already with a complete cycle, the second in the final phase of payments to unit holders, the third beginning the capital return process (disinvestment), and the fourth in the investment phase. “This last one has a one-year investment period and will acquire assets for two more years. We are looking at opportunities.” On average, Tessler notes, distressed funds deliver a 20% return to investors.

At Strategi Capital, in addition to the expectation of a good return with assets acquired in 2023, the manager’s attention is also focused on agribusiness and the real estate sector. “Last year, many people needed special credit. And it was an interesting opportunity for distressed funds to allocate capital and with a slightly higher return. The drop in interest rates this year brings a certain comfort, whether you like it or not, in receiving the funds,” explains Matheus Shelman.

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Focus Report reinforces the trend of declining inflation and a lower dollar

Jan 22, 2024

The Brazilian financial market has revised its projections for 2024, with a downward adjustment in both the inflation forecast and December’s exchange rate.According to the Focus Bulletin projection, released on Monday (22) by the Brazilian Central Bank (BCB), the variation of IPCA (Extended National Consumer Price Index) is projected at 3.86% for this year. Last week, it was 3.87%, and four weeks ago, 3.91%.

As for the exchange rate, there was a decrease from R$ 4.95 last week to the now projected R$ 4.92. A month ago, the market projected R$ 5.00. For 2025, the exchange rate remained stable at R$ 5.00, but a month ago it was R$ 5.05. For 2026, there was also a decrease, from R$ 5.10 a month ago to R$ 5.06 last week and R$ 5.05 in the current report.

The expected appreciation of the real is largely due to the expectation of positive results for the trade balance. “We have a situation in Brazil where the trade surplus is being revised upward all the time,” says economist André Perfeito.

According to the latest Focus report, the trade  balance is expected to close 2024 with a surplus of US$ 76.90 billion – an increase of almost US$ 2 billion compared to the last projection. Projections for 2025, 2026, and 2027 were also revised upward to R$ 70 billion (US$ 14.05 billion), R$ 71 billion (US$ 14.25 billion), and R$ 74 billion (US$ 14.85 billion), respectively.

“Sustaining this flow of dollars allows us to withstand a lot of disagreement from other areas of the Brazilian economy that do not please the market, such as a potential fiscal deterioration,” evaluates the economist.

In his analysis, the influx of dollars should also collaborate with the stock market. “If the real appreciates, the tendency is for the stock market to appreciate as well because if the currency of the issuer of those stocks improves, the stocks of that country have to improve,” he says. In this scenario, Perfeito considers the movement of dollars out of B3 to be “specific.” This year, until January 17, R$ 59.3 million (US$ 11.90 million) in net terms have already left B3.

“The foreigner has left Brazil a bit because he has already earned a lot and because he entered the expectation of a smaller or more prolonged drop in interest rates in the United States,” he says. “But this movement is specific; what we are seeing is a scenario of low interest rates in Brazil, which makes the stock market rise.”

Regarding foreign direct investment, the projection remains at US$ 65 billion for this year. For 2025, the projection increased from R$ 70 billion (US$ 14.05 billion) to R$ 75 billion (US$ 15.05 billion).

Interest tax rate and GDP

The Focus Report forecast for the Selic [Brazil´s basic interest rate] remained at 9% for the end of the year and 8.5% for 2025, 2026, and 2027. Regarding GDP, the projection is for growth of 1.60% – a slight increase of 0.01 percentage point compared to last week’s projection.

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IPO stocks launched after 2018 significantly underperform the Ibovespa index 

Jan 22, 2024

Keeping a close eye on the resurgence of investor appetite for risk assets, amid cuts in the Selic[Brazilian basic interest rate] and the prospect of monetary easing in the United States, companies are considering a comeback in initial public offerings (IPOs) on the B3 stock exchange.The stock exchange has not seen a single primary stock offering since 2012. Economic improvement and the need to raise funds for investment also reinforce the interest in conducting an IPO. The risk in this favorable scenario is that companies may rush to take advantage of the opening without being adequately prepared.

A study conducted by the business boutique Seneca Evercore evaluated the performance of IPO stocks launched since 2018. Out of 82 IPOs, 74 remain on the stock exchange. More than half of the stock offerings, 52.7%, came from the technology, retail, and real estate sectors. So far, only 16 stocks have shown positive performance compared to their IPO fixed prices, while 13 have managed to outperform the Ibovespa in the same period. The rest are in the red.

“It is a very small number of companies that outperform the Ibovespa [the main Brazilian  performance indicator of stocks]  Brazil has sporadic IPO windows, every 3 or 4 years, and companies want to take advantage. Many of them aren´t prepared for the move, but are encouraged to go to the market,” comments Daniel Wainstein, senior partner at Seneca Evercore. “A company with inconsistent performance doesn’t have much of a problem if the stocks are private, but in the public environment, they are heavily penalized if the balance sheet is poor for two or three consecutive months.”

Wainstein highlights the points necessary for a company to go public on the stock exchange, including consistency in Ebitda or profit growth, a sufficient size to avoid being overlooked and lacking liquidity, good governance, and a business plan ready for the use of raised funds. Another aspect mentioned is the importance of having received investments from professional investors, such as Private Equity funds. They should also have delivered results. “This requires the company to have undergone due diligence and professionalized itself. They learn to deal with a private partner before the public offering.”

According to the Seneca Evercore partner, the eagerness to seize opportunity windows without proper preparation is one of the reasons for failures in the stock market. “In every window, there is exuberance in the number of companies going public, without proper scrutiny. Losing credibility in the stock market is easy; recovering takes time.”

He emphasizes that IPOs are expected to return in the second semester. “But the question I would pose to companies is whether it is worth rushing to take advantage of the window or if it would be better to organize the structure to go to the market,” Wainstein questions.

In the analysis, the boutique separated the 74 companies that remain on the stock exchange into four groups based on performance, comparing them with the growth rate of profit and revenue. In Group 1, the best-performing, there are 18 companies whose stocks, in aggregate, rose by 33.4%, with revenue advancing by 36% and net profit up by 22%. On the other hand, Groups 3 and 4, the worst-performing, include 37 companies whose stocks fell by 54.9% and 85.6%, respectively.

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Capital market emissions closed December on the rise, but 2023 shows a decrease of 14.9%

Jan 22, 2024

Capital market emissions reached US$ 93.62 billion (R$ 463.7 billion) in 2023, a decrease of 14.9% compared to 2022. Despite the contraction, the sector showed signs of recovery throughout the year, with the best monthly result of US$ 15.04 billion (R$ 74.5 billion) recorded in December. The data is from Anbima (The Brazilian Financial and Capital Markets Association).

“Throughout 2023, especially from June onwards, there was an increase in the volume of issued securitie and in investor diversification, as well as increased liquidity in the secondary market,” says Guilherme Maranhão, president of the Capital Market Structuring Forum of Anbima.

Debentures

Debentures led the fundraising rankings, with a total of US$ 47.71 billion (R$ 236.3 billion) in offerings, driven by the performance of the last quarter ( US$ 19.04 billion or R$ 94.3 billion). Nevertheless, there was a 12.7% decrease compared to the previous year.

The electric power sector stood out in the issuance of bonds, with R$ 62.4 billion, followed by transportation and logistics (US$ 6.18 billion or R$ 30.6 billion) and sanitation (US$ 5.73 billion or R$ 28.4 billion). In the analysis of the allocation of resources, 30.9% went to infrastructure investments – a higher percentage than the 20.2% in 2022.

Anbima also shows that the average term of debentures increased from 6.3 years in 2022 to 8.6 years in 2023. The time is even longer when considering only incentivized debentures: 14.3 years in 2023 compared to 12.7 years in 2022.

Securitization

In securitization, CRA (Agricultural Receivables Certificate) ended the year with US$ 8.70 billion (R$ 43.1 billion) on emissions, a growth of 2.1%. The result of CRI (Real Estate Receivables Certificate) remained almost stable, with a 0.5% decline and US$ 9.65 billion (R$ 47.8 billion).

Conversely, FIDCs (Credit Rights Investment Funds) fell by 16.4%, to US$ 7.81 billion (R$ 38.7 billion).

The biggest positive variations compared to 2022 came from hybrid products. REITs (Real Estate Investment Funds) reached US$ 6.04 billion (R$ 29.9 billion), with a growth of 20.9%, and Agro-Industrial Financial Bills (Fiagros) reached US$ 1.78 billion (R$ 8.8 billion), with an expansion of 20.8%.

Anbima’s numbers also show that the stock market was supported by follow-on operations (subsequent stock offerings), totaling US$ 6.26 billion (R$ 31 billion) in the period. Compared to 2022, there was a 46% decrease.

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The new Fiagro multimarket fund may reduce management costs

Jan 19, 2024

Still to be created, the new Fiagro multimarket fund promises more flexibility to managers and investors by allowing the blending of different agribusiness assets into a single product. This is what the new rules proposed by CVM in the draft under public consultation until the end of the month anticipate. To understand the advantages of the new product and the lingering questions, Capital Aberto spoke with Bruno Lundi, CEO of Eco Gestão de Ativos, and Aline Marques, partner and investment specialist at Ável.

Currently, there are three categories of the fund: Fiagro-FIDC, which invests in credit rights of agribusiness; Fiagro FII, which allows investments in CRAs, LCAs, and rural properties; and Fiagro-FIP, which allows investment in stakes of open or closed agribusiness companies. According to current regulations, assets from different categories cannot be combined into a single fund.

The new possibility of diversification is welcomed by Lundi. ‘The change provides more versatility to bring innovations to the investor, and consequently, turn it into results,’ he says.

“According to him, the new rule, if regulated, will also allow funds to cut costs with operations currently necessary for compliance with regulations. This is the case for Fiagro FII, currently prohibited from having Rural Producer Notes (CPRs) in their portfolios. ‘A real estate Fiagro basically acquires land, CRAs, or other types of agribusiness-exempt assets that are not credit rights,” says the manager.

Due to the restriction, he states that, to include CPRs in the portfolio, it is necessary to securitize them with a CRA structure. ‘With the new multimarket fund, it would be possible to incorporate CPRs directly.’

For him, the change will bring savings. Without the need to structure and securitize the CPR to turn it into a CRA, the manager cuts costs in the operation. ‘Consequently, I can reduce the rate for the borrower and be more competitive or have more profitability for the investor, or even a hybrid of the two, which I think will be the reality.’

Last year, Eco’s Fiagros raised about R$ 700 million (US$ 141,87 million). For this year, the estimated amount is between R$ 800 million (US$ 162,14 million) and R$ 1.5 billion – a plan that, according to him, is independent of the launch of new funds.

According to the draft under public consultation, the fund will be considered multimarket whenever the concentration of each asset class is equal to or less than one-third of the portfolio. However, it is still not clear what regulation will be followed if a category exceeds this portion. In Lundi’s assessment, this restriction could be a problem, ‘especially when you limit without defining what happens when you exceed it.’

Due to the lingering doubts, he considers it early to predict whether the new multimarket fund will attract more investors. ‘A more diversified fund tends to generate less risk, which eventually helps in the selling thesis, but it doesn’t necessarily happen that way,’ he says. ‘Much will depend on how the final regulation will turn out,’ he adds.

It is also not clear who will be able to invest in the new market, emphasizes Aline Marques. ‘What will be the requirement for multimarket Fiagros that invest in stakes since currently these funds are restricted to qualified investors?’ she exemplifies.

‘As a general view, the new Fiagro will make things easier, but there is still missing information to understand the public’s adherence,’ she concludes.”

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Issuances close December on the rise, but there is a 14.9% decrease in 2023

Jan 19, 2024

“Capital market issuances in Brazil reached R$ 463.7 billion in 2023, reflecting a 14.9% decrease compared to 2022. Despite this contraction, the sector demonstrated signs of recovery throughout the year, achieving its best monthly result of R$ 74.5 billion (US$ 15,10 billion) in December, according to data from Anbima.

“Throughout 2023, particularly from June onwards, there was an increase in the volume of issued securities, greater diversification of assets and investors, as well as increased liquidity in the secondary market,” stated Guilherme Maranhão, President of the Capital Market Structuring Forum at the organization.

“The reduction in the basic interest rate also contributed, along with the behavior of the exchange rate and the performance of the U.S. economy, dispelling fears of a recession,” he added.

Debentures led the fundraising ranking, amassing a total of R$ 236.3 billion (US$ 47,89 billion) in offerings, driven by a strong performance in the last quarter, with R$ 94.3 billion (US$ 19,11 billion). Nevertheless, there was a 12.7% decrease compared to the previous year.

The electric power sector stood out in securities issuances, reaching R$ 62.4 billion, followed by transportation and logistics (R$ 30.6 billion (US$ 6,20 billion)) and sanitation (R$ 28.4 billion (US$ 5,76 billion)). In the analysis of resource allocation, 30.9% was directed towards infrastructure investments – a higher share than the 20.2% in 2022.

Anbima’s data also reveals that the average term of debentures extended from 6.3 years in 2022 to 8.6 years in 2023. The duration is even longer when considering only incentivized debentures: 14.3 years in 2023 compared to 12.7 years in 2022.

Regarding securitization, the CRA (Agricultural Receivables Certificate) closed the year at R$ 43.1 billion (US$ 8,74 billion), marking a 2.1% growth. The result of CRI (Real Estate Receivables Certificate) remained virtually stable, experiencing a 0.5% decrease and reaching R$ 47.8 billion (US$ 9,69 billion).

Conversely, FIDCs (Credit Rights Investment Funds) experienced a 16.4% decrease, totaling R$ 38.7 billion (US$ 7,84 billion).

The most significant positive variations compared to 2022 came from hybrid products. FIIs (Real Estate Investment Funds) achieved R$ 29.9 billion (US$ 6,06 billion), representing a growth of 20.9%, and Fiagros, R$ 8.8 billion (US$ 1,78  billion), with an expansion of 20.8%.

In public offerings of fixed income and hybrid products, individual investors stood out among subscribers, accounting for 20.1% of the volume in 2023, nearly double the share recorded in the previous year, which was 11%.

Anbima’s numbers also indicate that the stock market was supported by follow-on operations (subsequent stock offerings), totaling R$ 31 billion (US$ 6,28 billion) in the period. Compared to 2022, there was a 46% decrease.

In the foreign market, the volume of issuances increased by 179%, totaling US$ 15.5 billion, with US$ 12.5 billion in corporate fundraising.”

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Anbima seeks to standardize the quarterly fee statement created by CVM 179

Jan 19, 2024

The resolutions of CVM (Brazil’s Securities and Exchange Commission) numbers 175, 178, and 179, although focusing on different segments of the market — respectively, funds, investment advisors, and transparency of compensation for advisors and distributors — share a common point. All aim to bring rules for increased transparency in the offering of products to investors, including the disclosure of compensation for various market players. Two provisions of CVM 179, focused on the transparency of distributor compensation, were originally scheduled to take effect on January 2nd, but were postponed to November 1st. Capital Aberto reached out to Anbima (Brazilian Financial and Capital Markets Association), the entity that requested the extension, to understand the reasons.

In the announcement regarding the extension, CVM stated that with the prolongation, ‘intermediaries have additional time to finalize the necessary adjustments to comply with the rule.’ Luciane Effting, Vice President of the Distribution Forum at Anbima, explained the reasons for the deadline extension in an interview with Capital Aberto.

“There are two actions demanded by the resolution 179 that require standardization and adaptation of systems. In addition to the distributor having to indicate the compensation at the time of offering a product, a quarterly statement with all amounts charged to the investor will also be required,” Luciane explains. Anbima is working to standardize the quarterly statement. “The layout may vary from distributor to distributor, but the standard, the format, must be the same for everyone. This phase is being completed,” she adds. The other action, according to the executive, requires distributors to adapt their systems and routines to meet the requirements of the resolution 179.

“The systems in each location need to be adapted to facilitate the delivery of this information. There is a complexity involved, and we understand that it would be necessary to extend the deadline,” Luciane said. Regarding CVM’s clear message that the deadline ‘would not be extended,’ Luciane believes that companies now have sufficient time to comply.

Another argument from Anbima in favor of the extension was the large number of regulatory changes in recent years, including not only norms 179, 178, and 175, but also rearrangements such as open finance and open investments, and innovations in mark-to-market and suitability rules. “There is a large number of adaptations that fund managers, administrators, and distributors have to make. It has consumed a lot of effort from everyone,” Luciane comments.

The quarterly statement that will be sent to investors, if they also have investment funds, will include separate fees for management, administration, and distribution, as required by another norm, CVM 175. Capital Aberto contacted banks and brokerages to understand the challenges of simultaneous adaptations, but most preferred not to comment. Banco do Brasil (BB) only sent a note stating that it is adapting to the new requirements and emphasizes the importance of CVM 179 for society. Self-regulation is contributing to better compliance with the rule and transparency, with advantages for the investor.

At SVN Investimentos, an office associated with XP and with over R$ 20 billion in custody, adaptations are underway. “Although SVN already considers this transparency as a premise, this prerogative becomes a legal requirement and should also align with changes in the disclosure of information from XP Investimentos to clients,” says Rafael Assad, founding partner of SVN. “The quarterly statement requires SVN to adapt systems, processes, and train advisors. Despite the seemingly simple preparation of a client report, this statement brings regulatory responsibility, and any error can result in a penalty from CVM, affecting the client relationship.”

The office also has an asset, SVN Gestora, which is impacted by another norm that is gradually coming into effect, CVM 175. This rule determines that costs related to the distribution of investment funds be itemized. In Assad’s view, the changes were necessary, pose challenges, but are positive for everyone. “Speaking of asset managers and investment houses, it becomes clearer how our peers are operating, making it possible to better price services and products, compared with other players,” comments the executive. “All regulatory frameworks that have substantial changes in operations and products have a large and laborious adaptation process that we are working on,” concludes Assad.

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Funds attract net inflow of R$ 59.1 billion in the second week of the year

Jan 18, 2024

Investment funds recorded a positive net inflow of R$ 59.1 billion (US$ 11,99 billion) between January 8th and 12th, according to data released by Anbima on Thursday (18). Regarding the month, the accumulated positive amount is R$ 77.5 billion (US$ 15,73 billion).

Fixed income led the inflow ranking, with R$ 60.5 billion (US$ 12,28 billion) in net investments. Two highlights stood out in this category. The first one was funds investing in government securities with maturities of up to 21 business days (low sovereign duration), with R$ 23.1 billion (US$ 4,69 billion) in net inflows. Also noteworthy were those investing at least 80% of their assets in government securities (investment-grade free-duration), totaling R$ 14.2 billion (US$ 2,88 billion).

Other funds that remained in the positive were Credit Rights Investment Funds (FIDCs), with a positive net inflow of R$ 1.4 billion, Pension funds, with net inflows of R$ 783.3 million (US$ 158,96 million), and Private Equity Funds (FIPs) with R$ 348 million (US$ 70,62 million).On the contrary, multimarket funds experienced R$ 3.5 billion in net withdrawals. Funds with more outflows than inflows also included equity funds, with net redemptions of R$ 309.3 million (US$ 62,77 million), currency funds (R$ 105.6 million/ US$ 21,43 million), and Exchange Traded Funds (ETFs) with R$ 41.8 million (US$ 8,48 million).

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Brazil records a positive foreign exchange flow of USD 3.575 billion until January 12th

Jan 18, 2024

The report on Brazil’s foreign exchange flow, released this Thursday (18/01) by the Central Bank, recorded a net inflow of dollars into the country in the first two weeks of the year. The balance remained positive at USD 3.575 billion until January 12th.

There was a positive inflow in both the commercial and financial accounts. Through the commercial channel – exports minus imports – the balance for January was positive at USD 2.099 billion.

In the financial account, which includes profit remittances, interest payments, as well as foreign direct investments and investments in the stock market, the balance also remained positive, with a net inflow of USD 1.476 billion.

Usually released on Wednesdays, the foreign exchange flow data was released this Thursday due to the Central Bank employees’ movement for better salaries.

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Crisis at Gol weighs, and airlines give back part of the gains on the stock market in 2023

Jan 18, 2024

In the wake of the potential Chapter 11 bankruptcy filing in the United States, the crisis at Gol has escalated, with the company losing R$ 293 million (US$ 59,46 million) in market value on B3 in just two days. The estimate is that the company accumulates around R$ 20 billion (US$ 4,06 billion) in debts. Of this total, US$ 1 billion (R$ 4.9 billion) is related to non-payment to leasing companies that provide aircraft in a lease format. However, airlines have been facing market challenges for some time.

A survey conducted by Quantum Finance at the request of Capital Aberto shows that this year, the stocks of the two airlines listed on B3 – Gol and Azul – plummeted by 24.75% and 21.61%, respectively. These results nullify a considerable portion of last year’s gains when the companies rebounded from three consecutive years of losses caused by a decline in passengers and flight suspensions during the Covid-19 pandemic. In 2023, Azul recorded a 45% increase, and Gol saw a 54% rise on B3, surpassing the Ibovespa, which advanced 22%.

In this scenario, filing for bankruptcy may not necessarily be bad news for Gol. For example, Latam benefited from Chapter 11 – a term that refers to Chapter 11 of the United States Bankruptcy Code – by successfully negotiating its debt with creditors.

Industry Concerns

To better understand the company and sector’s situation, Capital Aberto spoke with Ygor Araújo, industry and transportation analyst at Genial Investimentos. In the analyst’s view, there are two significant concerns on the radar of airlines: exchange rate volatility and oil prices. “Airlines have a significant portion of their liabilities and costs denominated in dollars and generate revenue in Brazilian real, leading to a mismatch between revenue and expenses, creating margin pressure,” explains Araújo. “Gol, due to its issues, has a more limited capacity to expand its fleet. Boeing is facing a series of problems, affecting aircraft deliveries, which inevitably hampers the company.” One of the consequences of the reduced aircraft supply, the analyst adds, is that the growth capacity of airline operations becomes limited.

Long-term Demand

In the Brazilian aviation sector, not everything is bad news. The Genial analyst points out that demand from the stronger corporate sector today, compared to the pre-pandemic period (2019), according to Gol’s disclosed data, indicates improvement for the companies. “The sector still has a lot to offer in the long term. Brazil is a country with relatively low air travel per capita. So, there is room for improvement in this regard. The government is trying to address this by implementing programs like Voa Brasil [which offers tickets for up to R$ 200 for retirees with income up to two minimum wages and Prouni (scholarship) students].”

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New agribusiness multimarket fund arouses legal confusion

Jan 17, 2024

Created in 2021, Fiagros (Investment Funds in Agroindustrial Productive Chains) have become popular among managers and investors in Brazil, largely due to the income tax exemption for individuals. In December, the 86 existent funds in the category totaled assets of US$ 4.16 billion (R$ 20.5 billion), double the amount recorded 12 months earlier. The new rules proposed for the sector by the Brazilian Securities and Exchange Commission (CVM), with a draft in public consultation until the end of the month, could encourage the sector’s growth even further. 

Fiagros have the potential to be even larger than real estate funds, given the diversification of the agribusiness model and supply chain, said Bruno Gomes, Superintendent of Securitization and Agribusiness at CVM, in an interview with Anbima. However, the new legislation also raises concerns, especially among lawyers specialized in the financial market, who are worried about the lack of clarity of the rules that will govern the new ‘multimarket’ Fiagro.

In order too better understand what needs clarification, Capital Aberto interviewed three specialists: Rafael Perito, partner at Ferraz de Camargo e Matsunaga Advogados; Matheus Rossi, partner at Bocater Advogados; and Juliana Regueira, head of agribusiness and contractual at VBD Advogados.

Currently, there are three categories of the fund: Fiagro-FIDC, which invests in credit rights of agribusiness and is restricted to qualified investors; Fiagro FII, which allows investments in CRAs (Agribusiness Credit Receivable Certificates), LCAs (Agribusiness Letter of Credit), and rural properties; and Fiagro-FIP, which allows investment in shares of open or closed agribusiness companies. With the new CVM rules, it will be possible to mix different types of assets into one ‘multimarket’ product.

Under current regulations, Fiagro cannot mix assets from different categories. The same product, for example, could not have investments in rural properties, receivables, and participation in an agribusiness in its portfolio.

“Today, if a manager wants to mix investment modalities from different types of Fiagro, they will have to set up a conventional multimarket fund, without the attractiveness of Fiagros” income tax exemption,’ says Matheus Rossi.

According to the draft in public consultation, the fund will be considered multimarket whenever the concentration of each asset class is equal to or less than one-third of the portfolio. But the question remains: what if one category exceeds this portion? It would be the case, for example, of a Fiagro that invests 35% in credit rights, 34% in real estate assets, and 31% in company stakes. “Today it is not clear what would happen in such a situation”, says Juliana Regueira. “We are eagerly awaiting the end of the consultation to get the answers”,’ she adds.

“In my understanding, the classification of the multimarket fund is residual. So, for example, if you have more than one-third of the portfolio consistent with real estate funds, the fund would be governed by the rules of Fiagro-FIIs”, says Rafael Perito.

In his assessment, if this interpretation is confirmed, the diversification of assets in the new funds may be limited. “The portfolios of real estate Fiagros have minimum percentages of certain assets, such as receivables related to rents or agricultural leases, which would limit the investment of a diversified fund in other Fiagro categories”, he states.

It is also unclear how the rules of the new Fiagros would be if, over time, there is a change in the weight of different asset categories in the portfolio. Would a fund subject to Fiagro-FIDC rules change to Fiagro-FIIs rules if real estate assets became predominant?

In Rossi’s view, the CVM draft opens a door for a Fiagro that has real estate-related assets, credit rights, and stakes in companies in its portfolio to be subject to the regulations of the three different categories. “These rules can be contradictory, which worries the market”.

Once the legal tangle is resolved, the new Fiagro is expected to attract investors and please asset managers, believes Perito, whose firm serves both managers and companies issuing papers bought by the funds.

“It will be possible to encapsulate, in the same product, different types of allocation, strategies, exposure to risks, and distinct returns”, he says. “Multidirectional strategy provides greater security”, continues Perito.

In his assessment, greater diversification will help the new Fiagros attract the minimum of one hundred shareholders necessary for income tax exemption after the change in legislation last year. Until then, 50 shareholders were enough to obtain the tax benefit.

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Focus Report forecasts lower inflation, increase in trade balance and dollar at R$ 4.90

Jan 16, 2024

The Focus Report of the Brazilian Central Bank (BCB), released this Monday (15), once again signaled a lower IPCA (Brazil’s most important inflation index), now estimated at 3.87% – a reduction of three percentage points compared to last week’s projection. 

Economists surveyed by the Brazilian Central Bank for the report also  estimated a lower dollar, at R$ 4.90 by the end of the year. This drop refers, mostly, to the expected growth in the Brazilian trade balance, now estimated at US$ 75 billion, compared to last week’s US$ 70.5 billion. For GDP, the growth forecast was maintained at 1.59%. The Selic rate (Brazil’s interest tax rate) remained at 9% for the end of the year.

Below, you will find the main points of the report and comments from Rafael Antunes, partner at the investment advisory company Inove Investimentos, and Natasha Fernandes, investment specialist at the investment advisory firm Ável.

The forecast for inflation measured by IPCA is 3.87% for 2024 – a slightly lower variation than the 3.90% projected in last week’s bulletin and 0.06 percentage points below the expectation of four weeks ago.

As for the projections for 2025 and 2026, there was no change, with the IPCA variation expected at 3.50% for both years.

“The expectation is that inflation, at least for the next six or seven months, will remain controlled, in line with the target”, points out Rafael Antunes.

For Natasha Fernandes, the drop in interest rates in the external market and commodities are partly responsible for the expectation of well-behaved inflation. However, next year the scenario may change. “The target for 2024 and 2025 is quite challenging, given the change in the president of the Central Bank this year, which always leaves the market apprehensive,” forecasts Rafael Antunes.

Economists predict the dollar quoted at R$ 4.90 at the end of 2024 – a drop from the R$ 4.95 forecast in the report on the 8th. The decline is partly due to the expectation of a reduction in interest rates in the United States and consequently devaluation expected for the US currency in global markets.

“Today we are going through a period where the expectation of a lower dollar is not only in relation to the real, but in relation to a number of currencies, as a result of the FED’s [interest rate cut] speech,” says Antunes.

The trade balance also has an influence on the expected reduction in the dollar. “As Brazil has an advantage over the world in relation to global production of food and [commodities such as] iron ore, there is a tendency for this quotation to persist in the next Focus reports, if this scenario still holds,” adds Natasha Fernandes

Projections for 2025 indicate growth in the trade balance, estimated at US$ 68.5 billion, compared to the US$ 66.59 billion forecasted in the previous report.

The Focus Bulletin’s forecast for public debt remained at 64.25% [of the GDP]. For 2025, the projection is 66.55%, compared to 66.40% in last week’s report. For 2026, the estimate of public debt fell from 69.50% to 69.20%.

The Gross Domestic Product (GDP) this year, according to the report, is expected to grow by 1.59%, the same variation pointed out last week, and 2% in 2025 and 2026, also identical to the last report.

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Arbor Capital seeks investments from pension funds

Jan 15, 2024

Brazilian pension funds have assets exceeding US$250 billion (R$1.2 trillion) invested in the market, aiming to meet their actuarial goals and ensure the retirement of participants. Convincing large foundations to diversify their investments beyond traditional fixed income is not an easy task, but it pays off. This is the perspective of the equity fund manager Arbor Capital, which has recently partnered with the consultancy Brunel Partners, focused on professional investors, to approach foundations and secure a share of pension funds resources. The expectation is to close the first deal by March.

Focusing on global equity investment, Arbor has been looking for pension fund foundations, with the support of Brunel Partners, to demonstrate the benefits of including international assets in pension fund portfolios, something that is still irrelevant in their investments. Consolidated data from the Brazilian Association of Closed Pension Entities (Abrapp) shows that pension funds had 80.5% of their resources in Fixed Income as of last September – the most recent available data. Of the portion in equity, 6.9% was in stocks, and the rest was in equity funds. The portion allocated to foreign assets is minimal, at 0.8%.

‘Foundations are in a constant process of professionalization and evolution. After some problems in the past with problematic investments, they now have robust compliance and various areas involved in investment decisions with teams that are very familiar to the market. These are complex processes that take time, and our job is to facilitate it,’ says Marco Túlio Coutinho, vice president of Institutional Clients at Brunel Partners.

The downward trajectory of the Selic rate, which compresses fixed income returns, is an important driver at this moment and should encourage foundations to review their portfolios. ‘Pension funds invest very little, less than 1%, in funds like Arbor’s, and this will naturally increase due to the greater sophistication of the Brazilian market, but of course, falling interest rates accelerate the change,’ says Leonardo Otero, a partner at Arbor Capital.

He refers to the Arbor FIC FIA fund, which invests mainly in foreign stocks but without currency risk (hedging). It is a local fund that, in Coutinho’s view at Brunel Partners, is more interesting for foundations to access the foreign market. ‘It is a manager focused on foreign stocks, without other assets or macro exposure, and it is a local fund, which offers more legal protection to foundations,’ he says. Arbor’s fund has an eight-year track record and has accumulated a return of 394%. In 2023, it rose by 55%.

Another point that, in Leonardo Otero’s view, favors the inclusion of international assets in pension fund portfolios is the greater possibility of diversification. ‘The American stock market, for example, is much larger than ours. It has more options by sector, and a diversity of companies that improve the portfolio. It has the advantage of decorrelation,’ says  Otero. ‘Service is another important attribute. If pension funds invest directly abroad, no matter how large the check is, they are small out there; they will hardly get the proper attention. For us, any percentage they invest is enormous, and they are treated that way.’

Another argument to convince Brazilian pension funds of the importance of looking at foreign assets is to seize the window of opportunity and position themselves now for the medium and long term. ‘The perspective of foundations is never tomorrow, but in five, ten years. But it is essential to remember that foundations are giant ships that take time to change direction,’ explains Coutinho of Brunel Partners. ‘Foundations have robust analysis processes and their own investment cycle. We don’t sell; they buy the product on their terms. Our role is to bring the parties closer.’

The partner at Arbor Capital avoids discussing goals for 2024 and informs that the focus now is to receive the first check from a pension fund, ‘always the most challenging.’ Since last year, Brunel Partners and Arbor have been visiting foundations, presenting the fund, and explaining the importance of including foreign assets in portfolios. ‘If we look at the next five years, I see that attracting at least R$1 billion from pension funds to the product is indeed feasible.’

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Brazil leads ranking of return on equity among emerging markets, reveals Itaú BBA survey

Jan 15, 2024

Brazil is gaining popularity among foreign investors interested in emerging markets. This is revealed in a report  by Itaú BBA based on discussions with 100 investors during a roadshow in North America, Europe, and Brazil. According to the bank’s survey, Brazilian companies top the Return on Equity (ROE) ranking with 17.7% over the past five years. Indonesia (15.5%) and Mexico (13.9%) follow in the next positions. The Latin American average is 15.9%, with Argentina at the bottom (6.5%).

The survey also highlights Brazil among emerging markets when considering the combination of estimated profit revisions and valuation discounts. The attractiveness of Latin American companies is partly a result of reduced interest in China, which, according to some investors, has “lost by a walkover” due to the more conservative approach of the global market towards the country.

Key points from the report:

• The banking sector was the most popular among both foreign and Brazilian investors.
• Large banks are preferred for operating in the domestic market, and stocks in this segment are also on investors’ radar.
• The report notes “considerable demand” for the consumer sector, but also a “lack of consensus on how to approach it.” Questions about Lojas Renner (fashion retail company) arose in almost every one of the 100 roadshow meetings. Vivara (the largest jewelry store chain in Brazil), a consensus among local investors, is also starting to attract foreign attention.
• In Europe, there was significant demand for “cash-and-carry” names, especially Assaí (wholesale company).
• Natura is also gaining attention in discussions among both Brazilians and foreigners
• Mercado Livre (Argentine e-commerce company) was considered the most well-regarded case (including by hedge funds), followed by quality banks and Localiza (Brazilian car rental company), among investors in emerging markets who participated in the roadshow that served as the basis for the report.

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Smooth sailing ahead for Real Estate Funds

Jan 10, 2024

The Real Estate Investment Funds (REITs) could have an exceptional year, according to product managers. There are plenty of elements to support the market’s optimism. REITs, being a combination of Fixed Income through monthly dividend payments and Variable Income with shares traded on B3 (the Brazilian Stock Exchange), benefit from both the economic recovery, heating up the real estate sector, and the lower Selic rate (benchmark interest rate) that attracts investors to Variable Income and appreciates the shares.

The strong increase in REIT fundraising (follow-ons) in the second half of last year is an indication of managers’ confidence in an even better scenario for 2024. The beginning of the year also reinforces this view. After a nearly 16% increase in 2023, the B3’s Real Estate Funds Index (Ifix) already broke its ceiling on January 8, closing at 3,327 points.

When it comes to fundraising, managers have nothing to complain about. Last year, the total amount raised by REITs was R$26.5 billion (U$ 5,44 billion) , surpassing the R$21.4 billion (U$ 4,39 billion) in 2022, including new funds and follow-ons. The distribution of fundraising throughout the year was concentrated in the second semester, with 74% of the funds. “If we break it down by quarter, the acceleration trend becomes even clearer. The first and second quarters accounted for 26% of the total funds raised, with 13% in each period. In the third quarter, it increased to 31% of the total funds, and the last quarter reached 43%,” comments Mauro Dahruj, partner at Hedge Investments.

For this year, the manager believes the sector will remain hot and highlights good opportunities for investments in brick-and-mortar real estate funds, with assets such as shopping malls, logistic warehouses, and office spaces. “The lower benchmark interest rate unlocks the entire economy; the real estate sector invests, leasing conditions become healthier, and investors seek to allocate resources in the real economy,” explains Dahruj from Hedge Investments, adding that for both ends – managers and investors – the time is now. “The beginning of the interest rate decline cycle is when opportunities arise, prices become attractive. At the end of the cycle, everything is more accurately priced.”

Last year, Hedge Investments raised R$620 million (U$ 127,29 million) in a follow-on for its shopping centers fund, the Hedge Brasil Shopping Investment Fund (HGBS11), one of the top 10 subscriptions in the shopping market. “There are opportunities in all segments, but we see shopping centers with the highest fundraising potential this year,” adds Dahruj.

TG Core Asset, the manager of three REITs, all focused on real estate development, closed 2023 with R$1.1 billion raised. The last subscription closed on December 31 and raised R$616 million (U$ 126,47 million). “We have a history of quickly allocating resources. Half has already been invested, and in the next three months, we will conclude the allocations,” comments Henrique Leão, chief economist and head of Research at TG Core. The REIT traded on the asset’s exchange is TG Ativo Real. The other two – TG Real State and TG Renda Imobiliária – are CETIP (Clearing House for the Custody and Financial Settlement of Securities) registered.

“The interest rate decline scenario is not only good for prices that flash on the investor’s cell phone screen, but for all other variables. The cost of capital is cheaper for developers, and credit improves for the buyer, explaining the recent warming of the sector that will continue. The interest rate unblocks all parts of the market,” says Leão. “It’s difficult to talk about issuances, but we expect to continue delivering a good level of return, and if we have an interesting prospective pipeline, I understand that for unitholders, it is beneficial to issue new unit subscriptions. The entire context makes us believe that the pace of the REIT industry raising funds will remain strong.”

Securities REITs lose ground but remain attractive

The optimism of Fator Gestão’s executive director, Rossano Nonino, includes securities REITs with portfolios filled with CRIs. “In recent years, there has been a shrinkage of brick-and-mortar REITs, which have already started their recovery, but not to the point of making securities funds unattractive. They may decrease in the investors’ portfolio share, but they will still be important,” he comments. Industry data shows the shift in investor interest. Securities REITs, which represented 2/3 of the industry four years ago, then fell to 50%, with high-interest rates channeling interest toward CRIs. Now, in Nonino’s view, they should regain some space.

“There is an important phenomenon where there is a lack of money to finance the construction of residential and commercial real estate, with high withdrawals from savings accounts. The search for alternative funding will bring more CRIs into the market with good returns,” evaluates the executive at Fator Asset. The perspective for fundraising this year, according to the executive, is likely to materialize through follow-ons rather than new REITs being launched. “There are cost savings for the manager; larger REITs offer liquidity for the unitholder, and it facilitates the decision on which assets to allocate the raised funds to.” The asset itself has the Veritas fund, a CRI fund, with R$ 1,7 million (US$ 350 million) in assets under management and four others with assets between R$ 100 million (US$ 20 million) and R$ 300 million (US$ 61 million), which may be merged into one. “We are considering it.”

Last year, Fator Asset raised approximately R$ 120 million (US$24 million) in the Verità Multiestratégia REIT (VRTM11). “It was the first subscription for this fund, which invests in CRIs, other REITs, and brick-and-mortar, a hedge fund of REITs. We will grow the product this year,” highlights Nonino. Fator Asset’s plans are ambitious. For all REITs it manages, it intends to raise over R$ 1 million (US$ 205 million) in the market. “Today, we have R$ 4 million (US$ 820 million) under management in REITs, and we plan to grow around 30%. We have a significant appetite. With the CDI at 9%, unitholders will still have significant returns on securities REITs and, I believe, a capital gain on the stock market between 10% and 20%. It will be a great year.

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The new Brazilian infrastructure debenture is expected to attract issuers and asset managers. 

Jan 10, 2024

The new infrastructure debentures, created by a law sanctioned this Wednesday (10) by President Lula, are expected to attract issuers, funds, and investors. This assessment is shared by Ulisses Nehmi, CEO of Sparta, a fund manager company focused on private credit, and Márcio Paiva, director of the investment bank Bloxs Capital Partners. Unlike incentivized debentures, where individual investors benefit from income tax exemption, in the new investment option, the tax incentive goes to the issuers — concessionaires, permit holders, and authorized companies in the public services sector.

For these companies, the Law 14,801 establishes a 30% reduction in the interest paid to bondholders from the Income Tax and the Corporate Social Contribution (CSLL) calculation base. “I think this new law was a great measure because the sector has a very large fundraising need,” says Paiva. “Until now, the legislation was somewhat limited because it only incentivized individuals with limited investment capacity.”

Nehmi shares a similar perspective. “Today, most funds are aimed at institutional investors with regular taxation,” he says.’The largest amounts are precisely in funds like retirement funds, those directed towards pension funds, and those aimed at the general public, which do not benefit from incentivized debentures and can now take advantage of infrastructure debentures.'”

Although the direct beneficiaries are the issuers, the funds also are benefited, as Paiva evaluates. “If it becomes cheaper for the issuer, funds can have more margin on the other side of the table. They can say: give a little over here too, because then I’ll take it”, he says. “It’s a win-win situation.”

The funds raised by the new debentures should be invested in projects for economic-intensive research, development, and innovation, with debentures issued until December 31, 2030.

The government’s intention is to encourage investments in railway construction, highway duplication, rural road network improvement, and the integration of various transportation modes. The exact definition of the areas that can receive the raised funds still depends on regulation.

Paiva predicts that other sectors, such as energy and sanitation, will also benefit. “There is significant pent-up demand for investments, which can now become viable with the new debentures”, he says.

The recently sanctioned law could give benefiting companies the possibility to extend the debenture terms with attractive rates for investors. According to Nehmi, extending the deadlines of the options is a significant challenge for companies.

“To compensate for the risk, investors demand higher returns for longer terms, which significantly increases the issuance cost,” he says. “Thus, the only option available is incentivized debentures, limited to individual investments.”

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Anbima seeks a six-month postponement for CVM 175 rules scheduled for April and December

Jan 9, 2024

The new rules for investment funds, instituted by Resolution 175 of the Brazilian Securities and Exchange Commission (CVM), came into effect in October of last year. The plan for implementation spans throughout 2024, allowing managers, fiduciary administrators, and other industry participants time to adapt. However, a request made on Tuesday (9) to the CVM by Anbima (Brazilian Financial and Capital Markets Association) could delay deadlines initially set to be met by industry participants throughout 2024.

The requested extension is for six months and applies to the segregation of fund fees and the multiclasses structure — rules from CVM 175 that were supposed to take effect in April and December. According to Anbima, the request is motivated by operational impacts arising from the tax reform.

In response to inquiries, the CVM confirmed that it has received Anbima’s request to alter this year’s schedule, stated that it is evaluating the request, and there is no set deadline for a decision.

Launched at the end of 2022, CVM 175 replaced the old Instruction 555 and took effect in October of the previous year, with phased implementation throughout 2024.

In the first phase, aspects such as defining the roles of essential service providers and their responsibilities, greater freedom for retail funds to invest in crypto assets—limited to 10% of assets—and limited liability based on each unit holder’s participation, among others, became effective.

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Structured and pension funds stand out in a challenging year for the segment

Jan 9, 2024

For the second consecutive year, the investment fund industry has seen redemptions surpassing contributions, according to a report from Anbima (Brazilian Financial and Capital Markets Association). Funds lost R$ 127,9 billion (US$26.14 billion) in resources last year, following redemptions of R$ 162,9 billion (US$33.3 billion) the previous year. In December, according to the association, investment funds experienced the largest decline in fundraising throughout 2023, finishing the period with R$ 74,5 billion in negatives (US$15.23 billion in negatives). The decline was not uniform across different fund categories. Structured funds stood out in net inflows, with Private Equity Funds (FIPs) leading the list with a positive balance of R$ 42,1 billion (US$8.61 billion) in 2023. Credit Rights Investment Funds (FIDCs) also recorded net inflows of R$ 24,1 billion (US$4.93 billion) for the year. Another class with net inflows during the period was Pensions, with R$ 19,3 billion (US$3.24 billion).

On the other side, Multimarket funds showed the worst result, with net outflows of R$ 134,3 billion (US$27.45 billion). Portfolios investing abroad (such as Multimarket funds investing abroad) were the most affected, ending 2023 with R$ 49,6 billion (US$10.1 billion) in the red. Fixed Income funds and Equity funds also closed the year in the negative, with net redemptions of R$ 59,8 (US$12.2 billion) and R$ 17 billion (US$3.4 billion), respectively. Following them were Currency funds, with R$ 1,9 million (US$390 million), and Exchange Trade Funds (ETFs), with R$ 318,6 million (US$65.1 million).

Prospect of Improvement

The figures released by Anbima indicated an improvement trend in the last months of 2023. There was a slowdown in the outflow movement in the second semester, which ended with a negative balance of R$ 5,6 billion (US$1.14 billion) compared to a negative balance of R$ 122,3 billion (US$25 billion) in the first half of the year. “In the first semester, we had a challenging scenario that combined a lack of predictability about the reduction of the Selic rate (the Brazilian basic interest tax), resilient inflation, and cases, although very sporadic, of private credit. What became evident throughout the year is that investors started to seek fixed-income securities, especially those exempt from income tax,” noted Pedro Rudge, the vice-president of Anbima.

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Fund managers unveil strategies to draw investments from exclusive funds

Jan 9, 2024

The Brazilian asset manager Sparta is in talks with family offices and wealth managers for the launch of new funds tailored to the segment. Integral Investimentos will launch two new funds: one Real Estate Investment Fund (FII) and one Pension Fund. TG Core Asset is also seeking new investors for its Real Estate Investment Funds (FIIs). In common, the strategies of these three asset managers are largely driven by the expectation of the arrival of new resources – a result of the migration of money previously invested in exclusive funds, which lost attractiveness this year with the end of the exemption of “come-cotas” (system allows for the periodic collection of income tax).

“It’s natural for a portion of these funds to abandon exclusive funds, creating demand for funds that offer the benefit of income tax exemption, such as real estate funds, agricultural funds (Fiagros), and infrastructure funds (FI-Infras),” says Ulisses Nehmi, CEO of Sparta.

“We saw much less desire for these types of structures until the discussions about the new taxation began because, in general, a significant portion of the resources from partners such as family offices and wealth managers were invested in exclusive funds.” With that in mind, Nehmi reveals ongoing discussions on investment strategies for launching new infrastructure funds tailored to the segment.

“We have been discussing different fund formatting options, with and without leverage, with and without income,” he says, expecting significant fund movement until the end of May when exclusive funds will collect the first “come-cotas” taxes of the year.

REITs and Pension

Conversations with family offices are also on the rise at Integral. “We talk to multifamily offices to understand the capital movement (with the change in taxation of exclusive funds),” says the CEO of the asset, Vitor Bidetti. “And part of the construction of our new Real Estate Receivables Investment Fund (CRI) is related to this migration of funds,” he adds.

Focusing on high-end residential properties, the new fund aims to raise R$ 200 million, mostly from clients of these family offices. The asset manager is also increasing its involvement in pensions, launching a multi-insurer fund with a greater focus on fixed income.

Core Asset follows suit. “We have a client who will withdraw half of the resources from an exclusive fund to buy assets from a portfolio of real estate funds – including ours,” says Diego Siqueira, CEO of the company.
“We imagine that other people will also transfer part of their investment portfolio to tax-exempt assets, such as real estate funds and Real Estate Receivables Investment Operations (CRI),” he adds. The arrival of these new funds was considered by the corporation when setting the target of raising R$ 1.60 billion this year – a 40% increase compared to 2023.

Succession Planning

However, not everyone is betting on a massive transfer of funds from exclusive funds. “It’s too early to say it’s a trend. We have seen some migration to instruments with income tax exemption, but I don’t think it will be a super-relevant thing, mainly because funds are used for governance and succession issues,” says Jan Gunna Karsten, CEO of the multifamily office Brainvest.

“The exclusive fund has tax issues as its main foundation, but there is also an important succession tool,” adds Bruno Stuani, head of commercial at Genial Gestão. “Talking to clients and partners, we understand that some will keep the exclusive fund structures as they are today and pay the taxes due for succession and operational ease.”

In this case, the advantage comes from the fact that many investors use funds to leave shares as an inheritance to chosen beneficiaries. There is also the possibility of making a lifetime donation, such as with the exclusive fund, and retaining the usufruct of the assets. “This avoids lengthy disputes that often occur in the transmission of values in succession,” he says.

Nevertheless, Stuani has observed reallocation of resources from exclusive funds. “Regarding fixed income, we saw a migration to investments to take advantage of the tax benefit of incentivized certificates, such as debentures,” he says.

Clients of Azimut Wealth Management also transferred resources. “We saw a migration to tax-exempt assets, such as Real Estate Receivables Certificates (CRI), Agribusiness Receivables Certificates (CRA), and Real Estate Letters of Credit (LCIs),” says its CEO, Wilson Barcellos. “I believe there will be an increase in investments in Private Pension Plans (PGBLs) and Free Pension Plans (VGBLs).”

But he considers: “Each client has its characteristics. There are, for example, those who like the stock market, and the stock market does not have tax exemption,” he concludes. “The investor cannot move to a specific type of asset solely because of the exemption.”

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Mentions of financial products on the rise among industry influencers

Jan 5, 2024

Finance influencers addressed financial products in 96.8 thousand posts during the first half of 2023 – an increase of 25% compared to the last six months of 2022. The data is from a research study conducted by Anbima (an association that represents financial institutions) with the Brazilian Institute of Research and Data Analysis (Ibpad).

The data reveals a significant increase in the coverage of financial products by finance influencers in the first half of 2023. The 25% increase compared to the second half of 2022 highlights the growing influence of these professionals in the financial landscape, prompting regulatory bodies, such as CVM (the Brazilian Securities and Exchange Commission), and Anbima to consider the need for regulation.

The average engagement of 4.4 thousand likes, comments, and shares per post demonstrates the relevance and impact of these influencers’ posts on investor education and guidance.

The study also highlights that out of 515 monitored influencers, 508 mentioned specific financial products in their posts. Cryptocurrencies topped the ranking, representing 26.1% of mentions, driven by controversies involving celebrities. In second place are currencies, with 25.9% of mentions, followed by dividends at 15%.

Regarding audience engagement, Certificates of Deposit (CDBs) came first, with an average of 10,956 interactions per post, followed by Treasury Direct. This product surpassed real estate, which led in average interactions in the second half of 2022. Despite being the favorites of the audience, CDBs are the last choice for influencers in content production. Treasury Direct has the second-best average interactions, with 10,175.

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Brazil’s retail default rate anticipated to hover around 5.80%

Jan 3, 2024

The default rate for retail consumers in January is expected to range between 5.44% and 6.19%, with an estimated average of 5.82%, according to projections from the Ibevar (Brazilian Institute of Retail Executives and Consumer Market) and FIA Business School. If confirmed, the rate will be close to the actual level recorded in October, which was 5.91%.

However, delays in payments are expected to increase. If debts with delays exceeding 90 days are considered, the estimated average is 5.82%, ranging from 5.44% to 5.82% – higher than the 4.28% recorded in October.

Ibevar President and FIA Business School professor Claudio Felisoni shared his insights on expectations for retail delinquency.

What are the prospects for delinquency in 2024?

Despite the anticipated increase in January due to the detected rise in payment delays, it can be said, in principle, that the delinquency situation in 2024 is expected to be better than that recorded in 2023. This is explained by two separate but connected factors. The first is the decline in inflation. Inflation is a tax because it erodes real income from families. Additionally, it must be said that it is a regressive tax, meaning it disproportionately burdens families more exposed to liquidity problems. Second, the decline in inflation has led the Central Bank to reduce the benchmark interest rate. Although the effects of the benchmark rate are small on the ground, the reductions, albeit small, also contribute to a more promising scenario regarding individual delinquency.

What is the impact of the expected delinquency reduction on debt securities of retail companies, such as debentures?

The expected reduction in delinquency implies an improvement in the scenario for the retail sector. However, I believe the impact on sector bonds will not be so significant, at least in the short term. These securities depend much more on the expected sales volume, which, in turn, is associated with sustainable growth in income and credit.

What is the reason for the predicted increase in payment delays in January?

Delays are linked to a seasonal movement. At the beginning of the year, expenses such as taxes, travel expenses, and the purchase of school supplies accumulate, among others.

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Fund managers identify opportunities in the post-rally market

Jan 2, 2024

In the wake of the year-end rally, managers interviewed by Capital Aberto remain optimistic about the prospects for the beginning of 2024. The private credit market deserves attention due to pent-up demand from last year and interest rate reductions. This combination is expected to bring more companies to the capital market in search of funds, according to Ulisses Nehmi, CEO of Sparta. “With increased investor demand, there will likely be a corresponding increase in the volume of issuances,” he says.

“We believe in the continuity of the flow to the private credit market, due to spread premiums, as well as in equities, due to the attractive valuation level of the stock exchange,” adds Bruno Stuani, Head of Commercial at Plural Gestão.

Seasonality also aids the beginning of 2024. “Typically, the start of the year is very good, especially for emerging markets,” says Gustavo Menezes, manager of the macro and fixed income area at AZ Quest.

But risks also exist. “It will be a year with much less weight in the market; assets are much more well-priced, not as asymmetric as last year,” continues Menezes.

Outside the borders, the American elections also concern managers, with the potential to interfere with the expected interest rate decline.

Check out the main excerpts from interviews with the three analysts:

Gustavo Menezes, AZ Quest

Promising Start

“We closed 2023 in a much better position than we started, with Haddad’s recovery agenda practically approved. The external scenario, although still very challenging, enters the year in a much more comfortable position.

American interest rates, as well as the interest rates of the countries involved, stabilized in the last quarter of the year.

So, I believe that the first quarter will be a continuation of what we saw in the last quarter of 2023, only with the asset prices at a much higher level. The stock market had a significant repricing, especially in the last quarter, but we believe there is still room for good performance.”

Seasonal Push

“Typically, the start of the year is very good, especially for emerging markets. At the end of the year, the foreign exchange flow is always quite negative, as it is a period of profit remittances, dividends, and portfolio investment redemptions for year-end closing. Normally, the first month is positive, with the return of flows and unlocking of investment plans and decisions.”

Trump Risk

“The main risk for 2024 comes from the American elections, a process that has already started quite messy due to all the legal issues. He is leading in the polls. And he is a volatile person by nature. This will bring many challenges, especially in the second semester, but the debate is already starting.

We saw Trump’s external trade policy, with a lot of friction, with the tariff issue for China and Europe. He also has a very extreme immigration policy.

The American market is going through a period of high demand and low labor supply. And a good part of this labor supply comes through immigration.

Restricting immigrants could put pressure on prices. This can make the Fed’s job difficult and leave the American interest rate higher than priced.

There is also the fact that his implemented policy has always been about reducing taxes, which is worrisome since the American fiscal situation has deteriorated a lot in the post-pandemic period.

Ulisses Nehmi, Sparta

Better Credit

Last year, the situation with Americanas and Light distorted prices. Part of it has already recovered, and there is a part to be recovered throughout this year. We are also very optimistic for this year because when there is a Selic rate cut cycle, in general, there is an improvement in the credit quality of issuers.

Escape from Income Tax

For the quarter, we believe there may be a significant reallocation of resources with the taxation of exclusive funds. The investor with more wealth likes returns but doesn’t like to pay taxes, right? So, there may be a portion that goes to retirement, but we mainly think there will be demand for tax-free fixed-income assets for individuals, such as incentivized debentures, LIG, LCI, LCA, CRI, CRA. They should also go to funds that carry these exemptions and invest in this type of asset, as is the case with real estate funds, agricultural funds, and infrastructure funds.

More Issuances

With increased investor demand, there will likely be a corresponding increase in the volume of issuances, with companies raising funds.

This helps balance supply and demand. In the first half of last year, the new issuance market closed for a few months with issues at Americanas and Light.

When funds started rising again, this movement resumed. But, it hasn’t normalized yet. Part of it remained pent up. Now we have expectations of a very robust pipeline of new issuances throughout this semester.

Additionally, as interest rates fall, it becomes easier for companies to raise funds.

Want to know more about where the market is heading? Check out our course The Future of Finance.

Bruno Stuani, Plural Gestão

Risks and Opportunities

The focus remains the same as in 2023, that is, monitoring activity, inflation, and employment data in the United States to identify when the Fed will ease its monetary policy. Meanwhile, in Brazil, in addition to being influenced by the American dynamics, we are attentive to the government’s efforts in fiscal discipline and the conditions for the interest rate cutting cycle.

Having said that, we believe in the continuity of the flow to the private credit market, due to spread premiums, as well as in equities, due to the attractive valuation level of the stock exchange.

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The Investment Funds Landscape in 2024

Dec 26, 2023

A constructive scenario. A cleaner road. A decompression environment. Inflation on a benign trajectory. The much-desired predictability. All these positive expressions were mentioned by experts in the investment fund market, interviewed by Capital Aberto throughout last week, in interviews assessing the ending year and the prospects for 2024. Approval of the Tax Reform, a decrease in interest and inflation rates in Brazil, signals from the U.S. Federal Reserve indicating a similar direction, and improvements in the macroeconomic scenario in Europe are factors that, when combined, point towards better days with more opportunities for gains. This is especially relevant for managers who remain cautious after numerous impactful news stories that required strategy changes and significant portfolio withdrawals over the past two years.

Now, there is a noticeable dose of optimism, but without euphoria. The fund market is becoming attractive again, indicating some willingness to take risks. However, investors are still somewhat hesitant. Despite some recovery in the current semester, net inflows in the fund industry remained negative this year, totaling around R$ 116.8 billion (US$ 23.8 billion) until December 14, according to data from the Brazilian Association of Financial and Capital Markets Entities (Anbima).

In the fixed-income sector, losses for the year were reversed only in December, with inflows reaching R$ 2.9 billion (US$ 591 million). However, over the 12-month period, net outflows amount to R$ 113.9 billion. In the context of larger redemptions than deposits, multimarket funds lead the industry’s decline, with R$ 109 billion (US$ 23.2 billion) in net outflows for the year and negative R$ 112.8 billion over the last 12 months. Equity funds follow with the worst results, experiencing R$ 24.3 billion (US$ 4.95 billion) in net outflows this year until December 14.

In this scenario, the numbers call for caution. “Brazilians have had their fingers burnt before, so they become more careful when it comes to taking risks,” says Florian Bartunek, founder, partner, and chief investment officer of Constellation Asset Management, managing R$ 8 billion (US$ 1.6 billion), an amount expected to remain stable compared to 2022.

For him, the major theme for 2024 is the decline in interest rates, both in Brazil and abroad. Common sense suggests that this trend always prompts investors to seek riskier assets for higher returns. However, Bartunek believes this migration will take some time. “Interest rates are dropping, but they are still high. In the credit market, you can find papers with attractive returns, without taxation, and with very low risk. The investor thinks – should I really go to the stock market? If I can earn 11% per year without taking risks, investing in good companies?” In this sense, credit funds are likely to gain strength.

He recalls the talked-about “psychological barrier” of 1% per month. “If the interest rate falls below 1% per month, people start getting nervous, and it’s already below that. Still, the change should take some time to happen.”

Another relevant topic, according to the manager, is the taxation of exclusive funds, those created for individuals with substantial wealth. Under the new law 14,754, enacted in December, exclusive closed-end funds are now taxed at a rate of 15% for long-term and 20% for short-term, with the “come-cotas” (semi-annual tax already applied to fixed-income, foreign exchange, and multimarket funds open to the general public).

“This tax change impacts the attractiveness of these securities, especially in multimarket funds. These investors are likely to migrate mainly to equity and credit funds,” says Bartunek.

Credit Funds

Taking stock of the 2023 fund market, Fernando Cavallete, portfolio specialist at Itaú Asset Management, states that credit funds, especially incentive credit funds, are indeed the highlight. Until November, the assets of these funds in the asset totaled R$ 6 billion (US$ 1,22 billion), a leap of almost 60% compared to 2022. Throughout the year, their net inflow surpassed the R$ 2 billion (US$ 407 million) mark. This amount includes funds of incentive debentures indexed to CDI (Interbank Deposit Certificate, a benchmark interest rate) to IPCA (inflation index), funds listed on the stock exchange, open-ended, in short, “it’s a segment that has attracted a lot of attention because we are still in a high-interest-rate environment,” he says.

Itaú Asset Management is the largest private manager in the country, with R$ 886 billion (US$ 181 billion) in assets under management, over 2.6 million clients, and a 13.3% market share in the fund market.

In 2023, the manager opened 27 new investment strategies and more than 130 funds. “There was a bit of everything, a lot of fixed income, variable, multimarket, the new ‘Janeiro’ family, created by Bruno Serra,” says Cavallete. The former director of monetary policy at the Central Bank, where he worked for four years, Serra “came back home” in September. He worked for almost a decade in Itaú’s treasury, leading the fixed-income area. The ‘Janeiro’ (“January”) family includes two funds: one fixed income and one macro multimarket, with their pension versions.

Despite the expected monetary easing by the Central Bank – the bank predicts a Selic rate of 9.5% or even 9% by the end of the year – the current remuneration levels, along with credit spread and tax exemption, make an attractive package in Cavallete’s evaluation.

According to Cavallete, at Itaú, these funds consist of assets representing more than 50 economic groups. Among the invested sectors, sanitation has stood out in the last 12 months, with significant growth in debenture issuances.

Infrastructure

“Tax-exempt assets should have a special appeal to investors, and today the options are plentiful, ranging from real estate, agribusiness, and infrastructure. In this class, we see a great appeal to the infrastructure sector, which generally has assets linked to inflation, which are very attractive, and has issuers with high predictability,” says Ulisses Nehmi, CEO of Sparta, focused on private credit and with R$ 10 billion (US$ 2 billion) under management.

Nehmi also assesses that the Selic’s (Brazil´s benchmark interest rate) decline will be the main factor behind investment decisions in the fund market in 2024. “In this process, the investor tends to move away from high-liquidity applications, typical of seeking refuge in times of high uncertainty. With this, they fill each of the cascade boxes: private credit, real estate funds, multimarket, and stocks.”

Sparta predicts a growth of 20% in 2023 compared to 2022, following this pace in 2024. “Practically all classes should benefit, to a greater or lesser extent, as clients seek alternatives to better capitalize on their capital,” comments Bruno Stuani, director of Genial Investimentos with R$ 60 billion (US$ 13 billion) under management. He also sees private credit funds well positioned to capture part of this resource. “But it’s worth paying attention to equity funds, which are currently at their lowest historical allocation levels,” he says. “We intend to follow the same growth rate of 30% for 2024.”

The Flavor of the Moment

The apparent consensus around credit funds should also be viewed with caution, according to Marcelo Mattos, CIO of Inter Asset, which manages assets totaling around R$ 7.8 billion. “Investors are always trying to find the flavor of the moment. And put all their bets on it, and that’s dangerous,” he says. “At the end of 2022, there was a rush to private credit, and right away, at the beginning of 2023, some events already spoiled the scenario: Americanas, controlled by the wealthiest group of entrepreneurs in Brazil. No one could predict what happened,” observes Mattos. “Light, Via Varejo, smaller companies like Credz, all these are examples of unexpected events that affected the market.”

Investors were startled. The funds were heavily impacted. The other side of this story, according to the manager, is that the losses could have been much greater if individual investors had directly bet on the shares of these companies. “These events in 2023 reinforce, for me, the importance of the fund industry, for its diversification, distribution, and the perspective of managers. It is very important to outsource and professionalize investment because this expertise in times of crisis counts a lot.”

Equity

In the equity market, Brazilian investors demonstrated their optimism at the end of this year, showing an appetite for the stock exchange. On Thursday (21), the Ibovespa closed above 132,000 points, a new historical high, also leading to a 0.49% drop in the value of the dollar, which stood at R$ 4.88 for the spot market.

For Pedro Gomes, director of Fitch Rating, equity funds may gain competitiveness in 2024 in the face of a decline in global interest rates and a more favorable economic environment. In an interview with Valor, he stated, however, that managers will need to better assess the fees charged to investors. “An annual management fee of 2%, as practiced by multimarket funds, is expensive for the shareholder. In recent years, fixed-income funds, including private credit, have had a reduction in management fees, but we haven’t seen that to the same extent in equity funds,” he told the newspaper.

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Americanas agreement brings relief, but impact on retail expected to be minimal

Dec 21, 2023

The approval of Americanas’ judicial recovery plan on Tuesday with surprising support from 91.14% of the 1,860 voters during the general creditors’ meeting (GCM) brings some relief to the market, according to analysts, as it signals the survival of the retail group, which shocked the country earlier in the year by revealing a R$25 billion accounting fraud. However, the agreement is unlikely to have a significant impact on the overall recovery of the retail sector, which has been struggling with high debt, consumer default, and still expensive credit.

The company filed for judicial recovery (JR) on January 19, and its debts now amount to R$50.1 billion (US 10,3 billion), considering the values of other companies in the group. Without them, the debt is R$42.5 (8,7) billion.

Speedy Assembly

Filipe Denki, a specialist in judicial recovery and partner at Lara Martins Advogados, was impressed with the speed of the assembly and the voting on the Americanas agreement. “I’ve been working for over 15 years, and I know that accelerating the procedure so much is not common,” he says.

“It is very difficult for a general assembly to be convened in the first call. The approval quorum was very high, which is also not common,” he observes.

In his opinion, the fact left a negative impression that they “wanted to resolve the situation quickly to try to calm the crisis and the investigation of the fraud.””We don’t know if the crimes that were committed will be properly investigated,” he says.

 Vitor Antony Ferrari, a partner at the Mazzucco e Mello law firm, thinks similarly: “Certainly, Americanas’ history will bring benefits to the control of operations and management of publicly traded companies. However, we are unlikely to have swift legislative regulation for the investigation and correct punishment of cases like this.”

Creditors

But not everything is a reason for pessimism. “The approval of Americanas’ recovery plan will certainly cause a significant increase in its value in the market, as a result of renegotiating its liabilities with its creditors,” Ferrari continues. “Creditors now also know that the group will have at least external control and a specialized business forum to address demands arising from credits subject to the effects of recovery,” he adds.

Increasing Judicial Recoveries

Although it represents some relief on the horizon for creditors, Denki believes that 2024 will still see an increase in judicial recovery processes. In 2023, there was already a significant growth in requests, according to the Serasa Experian Bankruptcy and Judicial Recovery Indicator.

November recorded a record 175 JR requests, 8% higher than October and 197% higher than the number in November 2022. In the cumulative period from January to November, there were 1,303 processes, an increase of 72.4% compared to the same period in 2022. “The worst of the JR crisis is yet to come,” says Denki.

According to his analysis, the effects of the economic downturn usually come with a delay of two or three years. “We are seeing the impacts of the problems of 2020/2021 today, and the expectation for 2024 is still grim. The slowdown in these requests will only come in 2025,” he says.

Credit Denki believes that this situation is unlikely to, however, increase the cost of credit. “Banks always say that the increase in JR processes raises the cost of credit,” he says. “But what we observe in practice is that this did not happen because the market is becoming more sophisticated, creating funds specialized in JR and securitization, with many new competitors,” he points out. The strongest message from the approval of the Americanas agreement, in his view, is that in times of crisis, JR can indeed be a very useful tool to help retailers reorganize their liabilities and continue operating.

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New rules foster transparency and the consolidation of asset managers in Brazil

Dec 20, 2023

This year, legal experts specializing in tax law, asset managers, fund administrators, and investment advisors are working as hard as ever as they strive to align their portfolios with the latest regulations set forth by the Brazilian Securities and Exchange Commission (CVM) in the financial market. The ongoing implementation of CVM Resolution 175, scheduled to continue in phases until the conclusion of 2024, and the enactment of the new Law 14,754, introducing alterations to the taxation of exclusive funds and offshore investments, among other modifications, are exerting substantial pressure on the schedules of these professionals.

 However, according to sources interviewed by Capital Aberto, the new regulatory agenda of the CVM will lead to the modernization of the Brazilian market, yielding improvements in transparency and governance and bringing it closer to more developed countries. Another prediction is an increase in the consolidation of asset managers due to the significant growth in operational costs.

“The CVM regulatory agenda seeks to promote greater predictability, transparency, and engagement with market participants regarding its normative role in the capital market. This dialogue is part of an effort focused on a more open, inclusive, and democratic environment,” said Antonio Berwanger, market development superintendent at the CVM, in a statement.

One of the most significant changes is the increased responsibility of asset managers in operations. “In the past, the administrator was practically responsible for almost everything. Hiring service providers, and asset contracts, among other functions. The administrator was the first to be held responsible if something went wrong with the fund,” explains Priscila Carmona Maya, a lawyer and partner at Champs Law, a law firm specializing in the financial market.

Higher costs and consolidation

Now, the legislation makes it clear that it is the manager who must hire the fund distributor, an investment consultant, a rating agency, the co-manager, etc. According to the lawyer, all these new structures have a very high cost. “Small asset managers, for example, don’t have the resources to have an internal legal department,” she says. “That’s why the consolidation or acquisition of smaller managers by larger ones is expected to intensify.”

Drawing a parallel, this has been happening for some time and continues to grow in the investment advisor market. Diego Ramiro, president of the Brazilian Association of Investment Advisors (Abai), representing 160 member companies and 7,000 investment professionals, says that this merger movement is also happening between investment advisory firms and asset managers. “We see asset managers becoming partners in investment advisory firms, or the latter seeking to have their own management area. This is  a closer commercial relationship between the parties, which did not exist before”, he says.

“There is a trend of consolidation among small single-strategy asset managers to join forces to absorb costs and gain strength to meet all the requirements of Resolution 175,” says Luís Ravasi, director of institutional relations at Suno Asset, with over 160,000 unit holders and R$ 1.6 billion under management. “In this race, those who already have well-implemented and efficient control and governance processes are ahead.”

Exclusive Funds

 Law 14,754, which comes into effect in January, is also causing concern for some lawyers. In the case of exclusive funds, generally created by families with large fortunes, they will now be taxed, for income tax purposes, at 15% of the earnings in long-term funds or 20% in the case of funds up to one year. Longer application periods will have lower rates due to the progressive income tax table.

“We are in a race against time to analyze and reorganize the portfolios of these funds to avoid the taxation of their stock (accumulated gains) in May 2024,” says Priscila Maya.

For Ulisses Nehmi, CEO of Sparta, with R$ 10 billion under management, Law 14,754 is expected to cause a significant reallocation of investments in 2024, and tax-exempt fixed income should grow in interest. This is due to the attractiveness of exemption, current high rates, and expectations on the political and fiscal side. “In particular, we believe that incentivized debentures (and infrastructure investment funds) may become more attractive, both due to the greater predictability of the infrastructure sector and the number of opportunities.”

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Platforms drive growth for asset managers in a challenging year

Dec 19, 2023

In a very challenging year for the capital market, marked by periods of high volatility and uncertainties, some asset managers experienced significant growth both in the number of investors and in the value of assets under management. In their assessment, they highlight the importance of partnerships with digital investment platforms in promoting their products—a trend that has been gaining momentum year after year.

According to a survey by the financial information company Comdinheiro, as reported by the newspaper Valor, digital platforms now account for 15% of the country’s fund investments. A decade ago, their share was only 1.9%. In the third quarter, the amount invested in retail funds through these “supermarkets” reached R$ 233.4 billion.

Online Growth

Among the asset managers that progressed with the help of these platforms is AZ Quest. The company increased its number of investors by 25% this year, reaching 180,000. In terms of assets under management, it grew by 5% to R$ 24 billion.

With a constant search for new partners, the company has made 95% of its fund offerings available on platforms.

According to Ronaldo Zanin, co-head of commercial at AZ Quest, the asset manager currently operates on 25 investment platforms. “The support of these partners, as well as that of investors and allocators, allowed us to stand out both in absolute and relative terms throughout the year,” he says.

At Plural Gestão, the expected growth this year is over 30%, with a 20% increase in fixed income and private credit, 15% in equities, and 40% in illiquid/structured investments, according to Bruno Stuani, the commercial head of the asset manager, which is present on all major investment platforms.

The company is expected to end the year with R$ 60 billion under management, compared to R$ 45 billion at the end of 2022.

“Our product range is extensive and mostly represented on digital investment platforms. Our strategy for 2024 is to offer alternatives with more risk as the macro scenario provides us with conditions,” Stuani says.

For Stuani, the biggest challenge of 2023 was adverse market conditions on multiple fronts. “Clients were bombarded by numerous micro-events, such as the Americanas case, and by the start of a new, less fiscally conservative government, while the global scenario assessed how far the rise in U.S. interest rates would go,” he says.

New year

Looking ahead to the new year, he believes the role of investment platforms will also be important in breaking the inertia of individual clients, who have been accustomed to the benefits of more traditional products for a long time.

“We believe that the downward trend in interest rates, expected to intensify in 2024, will break this inertia and force clients to seek other alternatives to capitalize on their funds,” he says.

Despite the relevance of digital platforms to the operation of asset managers, the Comdinheiro study shows that the growth rate has slowed down. After a peak increase of 110% between 2018 and 2019, this year’s total investment increased by only 7% compared to 2022.

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Corporate debt market takes positive turn amid lingering skepticism

Dec 18, 2023

A cautious optimism defines the mood of corporate debt market managers at the end of 2023, providing some relief after a first semester described as having the “patient in the ICU,” in the words of an expert. A more stable macroeconomic scenario, with falling inflation and interest rate reductions, along with the prospect of further Selic rate decrease signaled by the Central Bank this month, have brought relief and a renewed interest in fundraising through debt securities issuances such as debentures, agribusiness receivables certificates (CRA), and real estate receivables certificates (CRI).

In November, according to data from Anbima (National Association of Financial and Capital Market Entities), capital market issuances totaled R$ 44.5 billion, nearly double (+96%) the amount raised in the same month last year. However, the total from January to November still remained 18% below the same period in 2022, reaching R$ 384 billion.

Among the total, debentures stood out, with issuances of R$ 25.4 billion in November, a 196% increase compared to the same month in 2022, and R$ 196.6 billion in the first eleven months, a 16.3% decrease compared to the same period last year.

Resumption of the Flow

The drop in the Selic rate makes corporate debts cheaper, favoring fundraising through the issuance of these securities, according to Marianne Moraes, a private credit manager at Inter Asset, a company of Banco Inter with over R$ 9 billion under management. “The improved scenario should unlock the fundraising flow for companies that have been holding back their refinancing needs until now,” she says.

The trend is to maintain a higher demand for incentivized debentures—an option for individuals with tax exemptions financing infrastructure projects. “In November, there was an increase in institutional issuances as well, but still at a slow pace, below historical volumes, as the drop in interest rates invites investors to look at other risk assets, competing with these issuances,” she notes.

The record for debenture fundraising was set last year when the volume exceeded R$ 270 billion, according to Anbima. The survey also shows that the main destination for the funds was infrastructure investment, accounting for 29% of the total.

Companies have struggled over the past two years due to increased financial expenses due to high-interest rates. The situation, already challenging, worsened with the recovery of Americanas and many other bankruptcies, according to Thiago Figueiredo, manager and investment director at Intrabank, a management company focused on structured funds and private credit management.

With R$ 1.3 billion under management, Intrabank has already transacted over R$ 4 billion in credit operations in less than three years. “In recent months, the situation has stopped getting worse. Those who managed to survive this year are now able to breathe and return to the fundraising market.”

Refinancing

According to Figueiredo, many companies with debts linked to the CDI (interbank interest rate) are returning to the market to refinance amounts with lower interest rates. “One of our major challenges is the debt rollover capacity of weaker sectors, such as the textile industry, retail, especially through these new financial instruments, such as CRA and CRI, which have tax exemption.”

Figueiredo explains that since operations, for example, with CRAs are more complex and expensive, Intrabank significantly increased the issuance of commercial notes this year, which have a lighter legal structure and are traded directly with the company, besides not having IOF incidence.

In the last six months, the manager structured commercial note issuances totaling R$ 250 million, compared to only R$ 30 million in the entire year of 2022.

According to Anbima, the total value of commercial note issuances in the country until November was R$ 23.3 billion, compared to R$ 42.8 billion in 2022. In securitization instruments, CRA stood out in November, with R$ 4.8 billion in fundraising, a 272.6% jump compared to November 2022. Next is CRI, with R$ 4.0 billion and a 15.4% decrease in this comparison. In the year-to-date, CRA offers (R$ 35.1 billion) are 12.4% below the same period last year, while CRI offers (R$ 38.9 billion) show a positive variation of 1.1%.

Exiting the ICU

“The patient spent three months in the ICU and is now stable,” jokes Murilo Barreto, distribution director at Bamboo, a digital debt capital market (DCM) platform, which connects companies intending to issue debts to institutional investors. “The first semester was chaotic. Now, it’s impossible to say that 2024 will be a fantastic year, but it will certainly be better if everything remains constant.”

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Dec 15th, 2018

Vórtx debuts in the credit infrastructure market

Vórtx, a leading player in the financial market with over half a trillion Brazilian reais in assets on its platform, announced this Friday that it will start offering credit infrastructure to its clients through a Direct Credit Society (SCD).

With this move, the company, already providing infrastructure services for corporate debt, investment fund structuring, and banking services, will integrate banking credit solutions as a service into its portfolio for other companies interested in acting as banks or credit operators.

These solutions include infrastructure for billing systems, financing, account opening, payments, and credit card issuances, among others.

The initiative was made possible by the authorization Vórtx received from the Central Bank this Friday (15) to expand its service portfolio into credit infrastructure through a Direct Credit Society (SCD) that becomes part of the conglomerate.

Credit Infrastructure

Currently, Vórtx serves over 300 funds with approximately R$40 billion in PL (Patrimonial Liquidity) and more than 5,000 series of securities totaling approximately R$650 billion. This entire chain, which relies on credit services from other market players, is now the target audience for the company’s credit infrastructure arm.

To better understand how Vórtx and its clients will benefit from the new business unit, we spoke with Juliano Cornacchia, co-founder, and CEO of Vórtx. Check out the key excerpts from the interview:

With the new license, Vórtx will further complement its range of market infrastructure services. What was the vision behind this?

In this positioning, we have three major pillars of activity in market infrastructure: investment funds, corporate debt, and banking services. But what was missing? A significant portion of our capital market transactions depends on the collateral that gives rise to the securities that go to the capital market. These collaterals are largely originated in financing operations. A retail company, for example, provides a CCB [Bank Credit Note] taken by the customer to an investment fund or for a securitization operation. It was this financing leg that was missing in our chain. But we always had it on our roadmap.

So, when I negotiate with my client, I will offer everything. I will offer, for example, fund administration, custody, accounting, registration, settlement, and credit. In this package, it will certainly be cheaper because I have scale with this client.

How will Vórtx benefit from the new business unit dedicated to credit infrastructure?

Today, I consume CCBs from other players. So when a third party originates credit, they use their onboarding process, and then, when they go to the capital market, I have to validate everything again. From today, when the securitizer buys credit to do business with us, calculating the paper price in the capital market will be much easier. This is because we calculated the CCBs. When the funds buy, we originate them. So, it’s much simpler, faster, and cheaper for the client. If he is already a significant client on my fund platform, and if it’s just one more service, I’ll offer a marginal price because I already earn with him in other places.

In addition to cost reduction and speed, in what other ways can Vórtx’s clients benefit from the new focus of activity?

Today, the client creates a fund, and then he goes after the assets. And he has to get someone to bankroll. Anyway, there is a connection process. In the model I am proposing today, when the client buys a fund service, there is already a bankroll plugged into his ecosystem.

What differentiates Vórtx from the competition?

There are players that bankroll for funds. Some players bankroll for debt. But there is no one like us, with 100% in one place.

What is the expected revenue?

For 2024, we are thinking about R$100 million, related to the approximately 300 clients of ours who already use this service. We propose to serve all the clients who are already connected with us. So the goal is to reach the thousand clients we already have here.

It is a very relevant business unit because, as the company naturally grows, we create a pool of clients. On average, since 2016, we have grown assets annually between 70% and 80%. So we will also grow in this new segment.

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Dec 14, 2023

Funds achieve third-highest result of the year in Brazil

Investment funds had net inflows of R$ 8.5 billion (US$ 1,7 billion) in November, marking the third-best monthly performance of the year, according to data from the Brazilian Financial and Capital Markets Association (Anbima). Pedro Rudge, Anbima’s vice president, noted an improvement in the market outlook due to the slowdown in U.S. interest rates, resulting in significant gains in the industry. Most fund classes ended the month with positive net inflows, and the majority of fund types showed positive returns.

Hyago Scienza, a partner and investment advisor at Ável, predicts that good results are likely to continue, especially in funds with assets in variable income, as investors are more willing to take on higher risks. Sectoral equity funds were the leaders in profitability for the month, reaching 20.09%, according to Anbima.

Regarding the retreat of interest rates, the Macro Economic Advisory Group of Anbima projects that the Selic rate will reach 9.5% by the end of 2024.

Fundraising had notable performances in different segments in November:

• Fixed Income: recorded the highest inflows of the year, with R$ 25.4 billion (US$ 5,13 billion) in net inflows. More than half of the contributions went to funds investing in short-term government bonds.
• FIDCs (Credit Rights Investment Funds): ranked second, with a positive balance of R$ 6.1 billion (US$ 1,2 billion), with a focus on funds investing in credit rights from agribusiness, industries, and commerce.
• Multimarket Funds: experienced the largest loss of the year, with R$ 30.7 billion (US$ 6,2 billion) in net redemptions. The outflow was distributed across the entire class, influenced by competition from fixed income and funds with assets in unfavorable situations.

• Equity Funds: achieved the third consecutive month of positive net inflows of R$ 1.9 billion (US$ 383.8 million), after eight months of losses.

• ETFs (Exchange Traded Funds): recorded a net inflow of R$ 1.2 billion (US$ 242,4 milllion), recovering after three negative months, in line with the improvement in risk markets.

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Market analysts pull back on inflation and dollar projections for 2023, says Central Bank report

Dec 11th, 2023

The financial market’s forecast for this year’s GDP growth has increased from 2.84% to 2.92%, according to the Focus report released today by the Brazilian Central Bank, compared to the previous bulletin. As for inflation, the expectation for IPCA (Extended National Consumer Price Index) in 2023 has decreased from 4.54% to 4.51%.

The inflation expectation thus resumes a downward trajectory after last week’s increase, which had interrupted a seven-week consecutive decline.

Inflation:

• For 2024, the forecast for inflation measured by IPCA is 3.93%, compared to 3.92% in last week’s report.
• For 2025 and 2026, the predictions remain at 3.5% for both years.

Dollar:

• The projection for the dollar’s exchange rate is R$ 4.95 for the end of this year, compared to the previously forecasted R$ 4.99.
• For the end of 2024, the forecast is for the U.S. currency to be at R$ 5.00, compared to R$ 5.03 the previous week. The prediction for 2025 remains at R$ 5.10.

Selic:

• On the eve of the last Copom meeting of the year on Wednesday, there were no changes in the Selic forecast, which, according to market expectations, is expected to end the year at 11.75%.
• For the end of 2024, analysts estimate that the basic rate will fall to 9.25%. The forecast for the end of 2025 and 2026 is Selic at 8.5% per year for both years.

Primary Result:

• The projection for the primary result for this year has decreased from a deficit of 1.10% to 1.20% of GDP. For 2024, the decline is from 0.80% to 0.76% of the deficit. The forecast for 2025 remains at -0.50%.

Public Debt:

• The projection for the net public sector debt remains at 61% of GDP in 2023.
• For 2024, there was a decrease from 64.1% of GDP to 63.95% of GDP.
• The 2025 projection increased from 66% of GDP to 66.1% of GDP, and the 2026 projection decreased from 67.7% of GDP to 67.55% of GDP

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The fund industry experienced a negative net inflow of US$ 648.6 million in November

Dec 11th, 2023

Fund managers experienced a second consecutive month of negative net inflows in November, with a deficit of R$ 3.12 billion (US$ 648.6 million). These findings are from Quantum’s monthly survey, conducted with 811 investment managers operating in Brazil.

According to the survey, 35.3% of asset managers had positive net inflows, while 48.2% had a negative balance. Another 16.5% reported neutral inflows, with the same volume of investments and withdrawals.

Top 5

Sicredi fund manager led the October inflow rankings with R$ 11.3 billion. The other top 5 included Kinea Investimentos (R$ 3.9 billion), Bradesco Asset Management (R$ 3.27 billion), BB Asset Management (R$ 2.8 billion), and EFPC CAPEF (R$ 1.8 billion). Among these, only Bradesco Asset Management remained among the top five in October.

According to the research, the overall ranking of the five managers with the highest assets under management (AuM) remained unchanged, led by BB Asset Management (AuM of R$ 1.6 trillion).

The other four positions were held by Itaú Asset Management (R$ 695.7 billion), Bradesco Asset Management (653.7 billion), Caixa Asset (505.5 billion), and Brasilprev (R$ 376.8 billion)

Market Scenario

In the assessment of the November scenario, Quantum highlighted optimism in the markets, driven in large part by positive expectations regarding inflation data in the U.S. This scenario also raised expectations that the Federal Reserve had completed its tightening monetary cycle.

On the domestic front, the spotlight was on the stock market, benefiting from the “significant influx of foreign capital.”

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Analysts sound alarm as productive investments decline in GDP

Dec 5th, 2023

The Brazilian GDP, with a 0.1% quarter-on-quarter variation in the third quarter compared to the second quarter, reached its highest level in the historical series initiated in 1996. The surge amounted to 7.2% in comparison to the pre-pandemic level in the fourth quarter of 2019. 

However, not all news is positive for the market. Experts such as Lucas Farina, an economic analyst at Genial Investimentos fund manager, and Vinicius Moura, an economist and partner at Matriz Capital, draw attention to the retreat in Gross Fixed Capital Formation by 2.5% compared to the previous quarter, seasonally adjusted. This metric gauges productive investments in assets such as machinery and capital goods, providing insights into the future trajectory of the economy’s productive capacity.

Here are the key excerpts from the analyses of Farina and Moura, as well as the insights from Darwin Dib, an economist at Gauss Capital fund manager.

Genial Investimentos 

Investments

“What caught my attention the most in this third-quarter GDP result was the continued decline in both gross fixed capital formation and the investment and savings rates. This is somewhat concerning, not in terms of growth for the current year, but in terms of future growth. As we know, the investment rate expressed in gross fixed capital formation is crucial for the economy to grow healthily in the future. Therefore, this decline implies a negative bias for the coming quarters and for 2024.”

Resilience

Looking from the supply side, we observed a loss of momentum in the agricultural sector, with a 3.3% decline on a quarterly basis, following a robust growth in the first quarter that also had a spill-over effect into the second quarter of this year.

On the side of industrial activities and services, there was a slight positive surprise, with both growing by 0.6% on a quarterly basis, proving to be quite resilient to an economy still experiencing the delayed impacts of a higher interest rate (bearing in mind that the Selic [Brazil’s basic interest rate] remained around 13.75% for about a year, from August 2022 to August 2023). Therefore, we should also anticipate some deceleration in the industry and, especially, services due to this and the higher base effect.“

Argentina Effect

“Imports fell by 2.1% following the economic slowdown. However, exports grew by 3%, in our opinion, still influenced by what we can call the ‘Argentina effect.’ In recent times, Argentina has implemented a series of restrictions on exports, reacting to both prices and quantity. For example, there was a quantity limit on meat. This benefited Brazilian exports.

But the newly elected government has promised to eliminate these limits. So, in the coming quarters, we should see Argentine exports competing again with Brazilian exports. This should exert a bearish bias on export growth in the upcoming quarters.”

Lucas Farina, economic analyst at Genial Investimentos

Matriz Capital

Capital Goods

“Among the sectors that surprised negatively, we have Gross Fixed Capital Formation (FBCF). There was a significant drop, indicating a reduction in the internal production of capital goods and in construction, as well as in the import of capital goods. This may suggest a possible cooling in investments, affecting the economy.”

Industry

“The industrial sector suffered a decline, especially in areas such as machinery and equipment, chemicals, automotive, and metallurgy. This may indicate specific challenges within these sectors.”

Last Quarter

“For the next quarter, I believe that household consumption may slow down, reflecting a possible decline in economic activity between October and December. First, due to the reduction in government stimuli. Second, due to a less favorable economic condition with the increase in inflation, even more so if there is a lack of control over government spending.”

Vinicius Moura, economist and partner at Matriz Capital

Gauss Capital

Real Growth

“The result released today should stimulate market revisions for the real GDP growth in 2023 because even if the GDP remains stagnant in the fourth quarter, we will close the year with real growth in the range of 3.0%.”

Interest Rate Outlook

“That said, I do not believe that the result of this third quarter will change the trajectory of cuts to the Selic rate, nor the prospect of accelerating the cuts to 75 bps from the second Copom meeting of 2024, given the need to make a more significant reduction in the real ex-ante interest rate.”

Darwin Dib, economist at Gauss Capital

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Why the capital market is expected to continue surpassing savings accounts in real estate funding

Dec 4, 2023

In this year, for the first time in history, the volume of resources originating from the capital market surpassed the share of savings in real estate credit funding, as revealed by data from Abecip (Brazilian Association of Real Estate Credit and Savings Entities). That this trend is not a fleeting occurrence but rather a lasting shift according to Vitor Bidetti, co-founder and CEO of the real estate-based fund manager Integral Brei.

Here are the main excerpts from his interview: 

Saving accounts

“The savings account has been losing ground in the investment universe for some time due to its low profitability. From the perspective of real estate credit funding, the savings account has always been an inappropriate type of funding because it is a one-day funding. It is a type of investment with daily liquidity for a credit period of up to 30 years. This is an old problem that should be overcome with the prominence that the capital market has been assuming.”

Aligned assets and liabilities

“In the capital market, assets and liabilities are matched. Those who hold a Real Estate Receivables Certificate (CRI), for example, are real estate funds, which have no deadline, closed-end funds, insurers, or pension funds. So the terms of the asset and liability are matched, which is much healthier.”

Outlook

In this context, the capital market already represents 38% of funding today. The savings account represents 36%, and it is decreasing. We are in a scenario that points to the basic interest rate being in single digits by the end of 2024. This creates a very important incentive for the real estate sector as a whole, and new issuances of real estate funds, CRIs, etc. will surely come. In real estate funds alone, for example, this year we will have something like R$ 20 billion in new issuances. Next year, in a scenario of lower interest rates, this number should be much higher.

The era of CRIs

Within real estate funds, Real Estate Receivables Certificate (CRI) funds, for example, are currently the big stars. They already represent 45% of IFIX.

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Check out the market expectations for December and the coming year

Dec 1st, 2023

The closing chapter of the year started on Friday, fueled by the most substantial monthly surge in the stock market in three years — an impressive 12.54% rise in the Ibovespa index in November. This starkly contrasts with the challenging conditions prevailing at the year’s outset, characterized by uncertainties, persistent inflation, heightened global interest rates, and a consequential 7.16% decline in the stock market during the initial quarter.

Now, attention turns to what to expect for December and the beginning of 2024. To discuss the opportunities and risks that may arise, Capital Aberto interviewed four experts: Luiz Eduardo Portella, partner at Novus Capital; Anna Reis, chief economist and partner at Gap Asset; Daniel Delabio, founding partner at Exploritas; and Bruno Stuani, commercial head at Plural Gestão

On Monday, we will publish the views from Delabio and Stuani. Check below the main excerpts from the interviews with Portella and  Reis:

Novus Capital 

Overcoming Adversity

“We had that horrible first quarter, with assets deteriorating significantly in Brazil. But then, the approval of the spending cap brought predictability for the coming years. This made it possible to project that the [public] debt will not explode in 2026.

Now, we are entering a more benign period in the external scenario as well. U.S. inflation is showing more positive signs, and we are also in a process of global disinflation. We have Fed directors signaling that they are satisfied, opening up space to start an interest rate cut cycle in the middle of next year, which benefits emerging countries.”

Interest rates

“Within the emerging markets, geopolitics favors Brazil. The country has natural resources and has had a strong harvest. We do not depend on anyone for energy. Another positive point is that we are close to the United States.

We have everything to attract investment. There is a positive outlook for us to return to single-digit interest rates. We work with the scenario of cuts of 0.5 points to the level of 9.75%. It would even be possible to reach 9% if a cycle of interest rate cuts begins in the U.S. in mid-2024.

In addition, we will close 2023 with a record trade balance. So, there is the prospect that the dollar will continue to fall.”

December Outlook

“November was an exceptional month, characterized by a substantial surge in stocks, stable currency conditions, and global interest rate closures. While December may not replicate the robust strides of November, strong indications suggest the persistence of positive momentum, concluding the year on a favorable note.”

Risks on the Horizon

“Challenges include the impact of a potent El Niño, inducing weather instability and affecting local harvests, thereby posing an inflationary risk.

We are also looking at the U.S. election next year. We expect a lot of volatility because the government there needs to hold back spending – something difficult in an election year. Therefore, at some point, as there are strong issuances there, the market may demand a premium, and interest rates may rise again. The situation indicates that we will have a recession at some point next year in European countries and in the United States as a result of the interest rate hike [in 2023]. 

Recessions in the United States end up impacting Brazil. In these cases, with uncertainty about companies, the stock market falls. But, on the other hand, the recession helps bring interest rates down, which would benefit some assets.”

Luiz Eduardo Portella, Novus Capital

Gap Assets

Good surprise

 “We are coming to the end of the year with better-than-expected growth and lower inflation than the initial expectation. The Focus report showed the market expected a 0.8% advance for GDP, which will now close near 3%. As for inflation, the market had more than 5%, and we will close near 4.5%.

We managed well this year, even with complications from an international perspective and the noise caused by the back and forth [of the government’s discourse] on fiscal policy.

We successfully deflated the economy, with relative success, without much sacrifice in terms of GDP slowdown or increased unemployment. Along with this, the Central Bank managed to start cutting interest rates at a pace that seems to be cruising speed.

Another positive news of the year was our spectacular trade balance.”

Year-end

“The big question is on the fiscal side. Our view is more optimistic, due to the important things that the minister Fernando Haddad signaled, such as the commitment to seek to zero out the deficit and generate some primary surplus.

 But to achieve ambitious primary targets, you need a lot of revenue. According to our calculations, about 2 percentage points of GDP are needed by 2026 in tax increases or review of tax expenditure. The tax agenda was left until the last minute, now on the year-end agenda. But we have indications that things will move on in Congress.”

Risks for 2024

“If the amendment to the LDO (Budgetary Guidelines Law) that limits contingencies in 2024 is not accepted, we will have a change in target already in March, in the first year of the framework, which would be quite negative.

On the inflation side, I think the risks are more to the upside. In addition to El Niño, there is the recomposition of the states’ losses of ICMS revenue during the Bolsonaro government. But this would be a short-term impact.

Anna Reis, Gap Assets

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Partnership between Vórtx and MB makes cryptocurrency in Brazilian real accessible to investment funds

Nov 30, 2023

Vórtx and Mercado Bitcoin announced a partnership this Wednesday that will allow fund managers under Vórtx to acquire cryptocurrencies in Brazilian real seamlessly through integration with the MB Prime Services platform.

This pioneering initiative is made possible thanks to CVM Resolution 175, which allows investment funds to acquire crypto assets in Brazilian real from exchanges in Brazil.

Before this new regulation, this operation was only allowed for individuals. Investment funds had to operate through foreign exchanges.

One of the conditions imposed by the resolution, however, is that the exchange must have authorization from an international regulatory body. MB fulfills this requirement through a subsidiary in Portugal authorized by the country’s central bank.

“The previous ecosystem involved several limitations, such as reduced windows for acquisition, high costs, and operational inefficiency,” says Marcelo Cherri, Head of Solutions at Vórtx.

“With a partner in Brazil, I no longer need to close the exchange. Previously, I closed with an international exchange, converted the Brazilian real into the currency or dollar, sent it to them, and settled.”

“Now, I can buy in Brazilian real, and as an administrator, I already capture the movements made by the Mercado Bitcoin market,” adds Cherri.

In addition to gaining efficiency and reducing costs, the service also increases security and brings greater reliability to transactions in crypto assets.

“The platform allows managers and administrators to manage permissions. One buys, another approves, and we release transfers. Always with dual-factor authentication,” explains Guilherme Pimentel, Director of Products at MB.

“MB Prime Services is a set of tools that allows for a more sophisticated and controlled buying and selling. In this sense, the participation of administrators here is very relevant,” adds Pimentel.

According to Cherri, the first investment fund operations using the new platform were closed on Tuesday.

Since Resolution 175 allows for the allocation of up to 10% of the assets of multimarket funds in cryptocurrencies, there is a theoretical potential allocation of up to R$ 160 billion in this segment.

For Cherri, the service offering consolidates Vórtx’s innovation strategy.

“We’ve had several innovations here in the crypto world, the first crypto ETF, etc. This consolidates our position as a one-stop-shop and being at the forefront when clients want to operate new assets and use new instruments,” he says.

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Inflation preview comes above expectations, but the market sees a ‘benign trajectory’

Nov 28, 2023

The National Consumer Price Index 15 (IPCA-15), which is considered a preview of the country’s official inflation, was 0.33% in November of this year.

The rate was above the 0.21% from the previous month’s preview but below the 0.53% from the November 2022 preview.

The index also exceeded the market analysts’ estimate of 0.30%.

The data was released on Tuesday (28) in Rio de Janeiro by the Brazilian Institute of Geography and Statistics (IBGE).

With this result, IPCA-15 accumulates 4.30% for the year and 4.84% in 12 months.

Despite the result being slightly above the market’s expectations, analysts say that inflation should continue on a “benign trajectory.”

“The main upward deviations from our projection came from volatile items such as food and airfares,” said Alexandre Maluf, economist at XP. “However, the main metrics came in line with our expectations, not altering our view of the short-term deflationary process in Brazil.”

According to Alexandre Lohmann, chief economist at Constância Investimentos, “the quarterly moving average is at -0.12%, putting a downward bias on the Focus median for the next year.”

“The IPCA continues its very benign trajectory, once the El Niño shock in Q1/Q2 2024 has passed, the return of food prices could help the IPCA return to the Central Bank’s target.”

The Focus survey released on Monday by the Central Bank alongside the market shows that the expectation is for IPCA to end this year with a cumulative increase of 4.53%, reaching 3.91% in 2024.

Eight of the nine expenditure groups surveyed by IBGE showed price increases in the official inflation preview for November, with a highlight for food and beverages: 0.82%.

This was the first price increase for food since the preview of May this year, in other words, in five months.

With Agência Brasil.

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Ibovespa Rebalancing: Get to know the favorite company to join the index

Nov 27, 2023

As part of its regular four-month schedule, B3, the Brazilian Stock Exchange, will announce on Friday the first preview of the rebalancing of the Ibovespa, B3’s main index, which will take effect on January 2.

With the reassessment of the index, there is the possibility of companies entering and exiting the index, and a potential alteration of the relative weight of companies in the indicator.

The market’s high expectation for the Ibovespa rebalancing is the confirmation of Isa Ceetip’s inclusion in the index.

In recent reports, BTG, XP, and Itaú BBA investment banks are betting on this movement.

“Cteep experienced a boost in its average daily trading volume due to recent discussions about the potential sale by Eletrobras (ELET6) of its stake in the company,” wrote Carlos Sequeira, Osni Carfi, and Guilherme Guttilla in a report from BTG sent to clients.

Even if the ADTV returns to levels before the announcement of this possible transaction, we believe there is still a great chance that the company will be included in the index.

The company’s shares closed Friday’s session at R$ 24.69, up 7% for the year so far.

In the third quarter of the year, the company achieved a regulatory net profit of R$ 474.5 million ($97.8 millions) , a 22.7% increase compared to the same period in 2022.

For the January-to-September period, the amount was R$ 1 billion ($206 millions), a leap of 81.7% compared to the nine months of the previous year.

Net revenue was R$ 1 billion in the last quarter, a growth of 18.8% compared to the same period in 2022. In the cumulative nine months, the volume reached R$ 2.9 billion ($597 millions) , representing an increase of 21.5% compared to the previous year.

Regulatory EBITDA totaled R$ 876.6 million ($180.7 millions)  in the last quarter, a 17.9% increase compared to the same period of the previous year. In the January-to-September period, the amount reached R$ 2.3 billion ($474 millions), an increase of 25.8%.

IsaSA CeetpEETP emerged from the division of assets of CESP (Companhia Energética do Estado de São Paulo) as part of the privatization program of the São Paulo state government.

In 2001, the company incorporated the Empresa Paulista de Transmissão de Energia Elétrica (EPTE), a result of the demerger of Eletropaulo.

The company is present in 18 states and operates a transmission network through which 30% of all electricity transmitted in Brazil and 94% in the State of São Paulo pass.

Privatization took place in 2006 through an auction on the stock exchange. The multilatin business group ISA took control of the company by acquiring 50.1% of ordinary shares (with voting rights).

Ibovespa Rebalancing

To be included in the B3 Ibovespa portfolio, listed companies need to meet certain requirements:

• Traded in 95% of trading sessions during the validity period of the last three portfolios (approximately 1 year),
• Financial turnover equivalent to at least 0.1% of the spot market’s financial volume in the same period, and
• Be among the assets representing 85% in descending order of the Negotiability Index (IN), which measures the volume traded by an asset on the exchange.
• Not be a penny stock (shares traded at a value below R$ 1.00 or around $0.20).

In the last change in September, the stocks of PetroReconcavo ON (RECV3) and Grupo Vamos ON (VAMO3) became part of the index, and Meliuz ON (CASH3) exited.

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Capital markets recovers in October, and issuances surpass those of 2022 for the month

Nov 24, 2023

After the best result of the year in September, capital market issuances returned to strong performance in October, according to data from Anbima (Brazilian Association of Financial and Capital Market Entities).

Issuances last month reached R$ 46.1 billion, the third-best result of the year, behind only the R$ 57.8 billion in September and the R$ 46.7 billion in June.

From January to October, the cumulative fundraising was R$ 337.3 billion, a decrease of 24.4% compared to the R$ 445.9 billion recorded in the same period in 2022.

But all this decline is still a reflection of the market’s retraction in the first months of the year.

The monthly average of issuances in the second semester exceeds R$ 40 billion, almost double the average value in the first semester, around R$ 20 billion.

The October result also surpasses the one recorded in the same period last year by 8%.

Once again, debentures lead the fundraising, with R$ 28.5 billion in October, the second-best performance of the year, with a 24.8% increase compared to the same month in 2022.

Most issuances in this period were directed towards ordinary business management (38.2%) and infrastructure investments (34.8%).

Securitization instruments (CR, CRI, CRA, and FIDC) also performed well in October.

The combined volume of issuances reached R$ 12.2 billion last month, exceeding the monthly average for 2023.

In this segment, the highlight of the month was CRA (Agricultural Receivables Certificates).

In October, issuances reached R$ 6.1 billion, the highest value in 2023, with a growth of 75% compared to the same month last year.

Real Estate Investment Funds (FIIs) also achieved their best performance of the year in October, with R$ 3.7 billion, a 141.6% increase compared to 2022.

In the first ten months of the year, the volume of FII issuances totaled R$ 20.8 billion, an increase of 39.9% compared to January to October 2022.

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Vórtx takes over fiduciary administration of Warren’s funds

Nov 22, 2023

Vórtx has announced that it will now be undertaking the fiduciary administration of investment funds for Warren Investimentos.

With this agreement, 126 funds, representing R$6.6 billion in assets under administration (AUA), will be managed by the infratech company, which already has over half a trillion reais in assets on its platform.

“This is a partnership that brings together two companies that share the commonality of placing technology at the core of their services and operating with their own platforms, each with its own specialization,” says Juliano Cornacchia, co-founder, and CEO of Vórtx.

“The move is in line with the strategy we implemented last year to enter the liquid funds segment, which until then was dominated by more traditional, less technological banks. Additionally, a distinguishing factor is that we are 100% independent.”

The deal will allow Warren to focus more on management and distribution, activities that are at its core.

For Tito Gusmão, CEO and founder of Warren, the partnership is strategic: “With Vórtx, we can focus on our wealth management service, creating and distributing good investments, with the assurance that the fiduciary administration of our funds is in qualified hands.”

With R$19 billion under management, Warren is an independent investment brokerage and wealth management firm.

The company, headquartered on Faria Lima and with eight other offices throughout Brazil, is known for its fixed-fee model and focus on long-term planning and investment for its clients.

Warren also has a fund manager, Warren Asset, an institutional brokerage, Warren Rena, an ecosystem for financial professional support, Warren Pro, and solutions in foreign exchange, insurance, pension plans, and capital markets.

The agreement strengthens Vórtx’s position as a national independent fiduciary administrator, expanding into a market that, until its emergence, was dominated by major banking players, particularly in the liquid funds segment, and having proprietary technology as a differentiator embedded in its DNA.

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Brick-and-mortar funds boost the rise of REITs, shopping paper surges

Nov 21, 2023

The so-called brick-and-mortar real estate funds, whose returns come from the gains the fund makes from the rents of the properties in its portfolio, had an average appreciation of 15.23% in 2023.

The segment easily outperformed the IFIX, an index composed of shares of Real Estate Investment Funds listed on the stock and organized over-the-counter markets of B3.

During the same period, until November 14, the IFIX had a variation of 11.07%.

On the other hand, paper real estate funds, composed of securities linked to the real estate market, such as CRIs (Real Estate Receivables Certificates) and LCIs (Real Estate Credit Letters), only had an increase of 5.03%.

These figures are from a survey conducted by Quantum Finance.

According to Quantum, the positive result of the IFIX comes after a long period of difficulty during the pandemic when many commercial properties remained closed.

The segment also benefits from “inflation control and the signaling of a cycle of cuts in the Selic rate.”

Among brick-and-mortar real estate funds, there was also a significant variation.

According to Quantum’s data, brick-and-mortar funds that invest in shopping centers stood out.

These securities had an appreciation of 26.18% from the beginning of the year until now, even surpassing the Ibovespa, which recorded an increase in the range of 18%.

The worst performance in the segment was from slab brick-and-mortar funds, with an increase of 9.79%. Funds investing in logistics rose by 12.13%, and rural brick-and-mortar funds increased by 13.49%.

For the future, Quantum states that “there is an expectation of increased economic activity with lower interest rates ahead, which may mean growing demand for commercial properties, benefiting REITs that invest in physical spaces, the so-called brick-and-mortar REITs.”

However, the reduction in interest rates is expected to decrease the attractiveness of paper real estate investment funds.

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Mergers and acquisitions: the market shrinks, but two segments stand out

Nov 17, 2023

Mergers and acquisitions operations in Brazil totaled R$ 19.8 billion in October, with a total of 145 recorded transactions. As a result, year-to-date transactions of this type amount to R$ 178 billion, involving a total of 1,617 deals.

These results are still below those recorded in 2022. From January to October of last year, there were transactions totaling R$ 260 billion. The year-over-year decrease was 31.5%.

In October alone, this year’s performance represents a 28.6% decrease compared to the R$ 27.8 billion moved in the same month in 2022. The volume of transactions fell less, by 12%, compared to the 164 transactions in 2022.

The information is part of the monthly report on the sector from TTR Data (ttrdata.com) in collaboration with TozziniFreire Advogados (tozzinifreire.com.br).

The Internet, Software & IT Services sector is the most active with 308 transactions, despite a 26% decrease compared to 2022, followed by the Business & Professional Support Services sector with 254 transactions.

Contrarily, two sectors, however, showed positive performance.

Private Equity transactions reached R$ 22.8 billion, a 41% increase in mobilized capital, although with a 15% reduction in the number of transactions.

The Asset Acquisitions segment recorded 233 transactions and BRL 26.3 billion until October, reflecting a 26% growth in operations compared to the same period last year.

The transaction highlighted by TTR Data in October 2023 was the completion of the acquisition of 51% of the Bluefit gym network by MC Brazil Fitness Holding, a subsidiary of Mubadala. The transaction value is R$ 464.1 million.

Brazilian companies turned primarily to the United States, conducting 28 transactions totaling R$ 4.7 billion until October 2023, followed by the United Kingdom with nine operations.

On the other hand, the United States and the United Kingdom led investments in Brazil, with 137 and 43 transactions, respectively.

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What the market thinks about the error in Magalu’s financial statement

Nov 16, 2023 – Denyse Godoy

The week has been full of intense emotions for the Magazine Luiza investor.

On Monday night (13), along with the disclosure of the third-quarter financial results, the company reported having identified errors in accounting entries totaling nearly R$ 830 million. According to a public statement, the inclusion of so-called “bonuses in certain commercial transactions” in the balance sheet was incorrect. In response, the retailer’s stocks plummeted by 9.7% shortly after the opening of the Brazilian Stock Exchange on Tuesday (14). Following a holiday on Wednesday (15), the shares surged by 24.4% on Thursday.

So, what is the market thinking now about Magalu? The main analyses at this moment are:

• The “accounting errors” of Magalu are different from those of Lojas Americanas.

The strong negative reaction of Magalu’s stocks on Monday (13) is mainly explained by the fear that it might be a problem similar to what Lojas Americanas had. Lojas Americanas, which released its financial results on Thursday (16), explicitly stated that they had experienced fraud by the previous administration. In the case of Magalu, after the initial scare, the conclusion is that indeed an error occurred. “The accounting issue with Magalu doesn’t seem to be problematic going forward. As Wando would say, what’s done is done, and what will come, will come,” says Felipe Pontes, a partner at L4 Capital. However, this does not mean that the case will have no consequences. “What happened resulted in bonuses to executives who were paid based on fictitious profits. And now? Will the minority bear this or will they get it back?” Pontes questions. According to his calculations, in 2022 alone, the six statutory directors of the company received about R$ 5 million in participation in the retailer’s results that were inflated.

Update: Magalu disputes these claims. According to its press office, the retailer incurred losses throughout 2022. “Furthermore, the investigation of the complaint, approved by an audit, ruled out any bonuses paid to executives because of such bonuses,” the press office said in a message to Capital Aberto.

• The financial and operational improvement displayed in the balance sheet is more important.

Magalu’s net revenue in the third quarter of this year was R$ 8.6 billion, representing a 2.6% decrease compared to the same period last year and a 0.1% decline from the second quarter of 2023. Compared to the market’s average projection, according to Bloomberg’s survey, it was only 1.5% below. The adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) totaled R$ 487.5 million, with a 0.7% year-on-year decrease, a 3% quarter-on-quarter decrease, and 7.8% below the market consensus according to Bloomberg. The net debt/EBITDA ratio fell to 1.9x from 3.6x in the third quarter of 2022 and 2.2x in the second quarter of this year. “Undoubtedly, in quarterly terms, this was a strong result for the company. In our analyses, we always pointed out that Magalu operated with a much lower margin compared to its main competitor, Casas Bahia (BHIA3) – which, in its ‘golden times,’ maintained a profitability above 30%. However, in recent quarters, while the competitor has been undergoing a heavy restructuring, with inventory clearance and a sharp drop in profitability, Magazine Luiza is moving in the opposite direction: capturing growth in the marketplace and bringing profitability into the group,” says Iago Souza, a retail sector analyst at Genial Investimentos.

All things considered, the prevailing view is one of caution.

“We see good margin evolution, a good pace of growth in the 3P segment, and sequential leverage reduction. However, we remain cautious regarding the recovery of discretionary consumption and await a better understanding of the mitigation of risks associated with new accounting reclassifications and controls established for supplier funds. We maintain a neutral recommendation,” said Carlos Soares, an analyst at Mirae Asset Wealth Management.

“The results of the third quarter reinforce our cautious view on Magalu, especially regarding the cash flow dynamics – because cash burn remains a concern – hence our neutral recommendation for the stock,” said Vitor Pini, an analyst at Banco Safra.

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Fitch: Private credit market experiences “significant improvement” in Brazil

Nov 16, 2023

The private credit market in Brazil has largely overcome the restrictions caused by the crisis initiated with the default of giant retailer Americanas in January.

In the third quarter of the year, issuances reached R$ 72 billion ($17.4 billion), a value 46% higher than in the second quarter.

In comparison with the third quarter of 2002, there is still a decrease of 11%. However, on a monthly average, the period from July to September already surpasses that of the entire previous year.

These data are from the report “Indicators of Credit for Brazilian Companies” by the credit rating agency Fitch Ratings.

According to the report, “spreads are gradually decreasing but remain above historical levels for more vulnerable companies and sectors, as creditors are selective.”

“The local debt market has improved significantly after months of restrictions, opening up space for refinancing and reducing liquidity risks,” says Fitch director Renato Donatti.

According to Donatti, positive data such as controlled inflation, lower interest rates, and a resilient job market have not yet translated into demand, which remains weak.

“Fitch predicts fewer downgrades in the coming months, after the peak in 2023,” adds the executive.

The fundraising of Brazilian companies has also improved in the foreign market.

According to Fitch’s report, bond issuance in the third quarter reached US$ 9.5 billion ($1.9 billion), more than double the US$ 4.5 billion from the same period in 2022.

Despite this, Fitch believes that international bonds will continue to be volatile in the coming months due to an adverse external environment characterized by high-interest rates and turbulence in the Middle East.

For the Brazilian economy as a whole, Fitch has raised the GDP growth projection for 2023 from 2.3% to 3.2%.

The revision is supported by the strong performance of agricultural production, the resilience of the job market, and the expansion of social spending, including an increase in the minimum wage.

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S&P Global Outlook: Brazilian companies plan to increase investment in 202

Nov 14, 2023

The decrease in interest rates promoted by the Central Bank and predictions of relatively controlled inflation have left Brazilian companies more optimistic and with plans to increase investments in 2024.

This is the conclusion of the October edition of the S&P Global Brazil Business Outlook quarterly report.

According to the survey, “hiring plans, capital expenditure, and budgets allocated for research and development (R&D) were revised upward.”

“Some companies intend to open new offices, while others aim to allocate resources for product diversification, new technologies, and artificial intelligence,” commented Pollyanna De Lima, Associate Director of Economics at S&P Global Market Intelligence.

There is also, according to Pollyanna, a greater willingness of companies to conduct recruitment rounds next year, “with stronger hiring intentions in manufacturing companies and their service providers.”

Despite the optimism, however, the report notes that “concerns about competitive conditions dampened sentiment regarding profitability.”

The positive sentiment among Brazilian companies that make up the S&P panel is the second-highest among the 12 countries with comparable data.

In Brazil, the net balance of panelists predicting growth is 40%, a figure second only to that recorded in Russia.

Optimism is higher among goods producers, with a net balance of 49%, the highest value since June 2022, than among service providers.

According to the report, manufacturers highlight, among the positive factors, tax reform, new product releases, investment plans, efficiency gains, price stability, and accommodative monetary policy.

“The trajectory of inflation expectations seems to point towards overall stability in 2024,” argues Pollyanna.

“If this materializes, consumers could plan spending with greater certainty, businesses could commit to long-term investment decisions, and the Central Bank could continue reducing the benchmark policy rate to more business-friendly levels.”

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Buena Vista and Vórtx launch the first international dividend ETF

Nov 14, 2023

On this Tuesday, the Brazilian market welcomed the first international dividend ETF, SPYI11, launched by Buena Vista Capital in collaboration with the administrator Vórtx and with Guide Investimentos as the lead coordinator of the offering.

The index is composed of companies such as Apple, Disney, Berkshire Hathaway, Walmart, Pepsico, and Nike, among others, and the shares are available on the market starting at R$ 100 each.

The ETF offers the possibility of receiving monthly dollar-denominated dividends, which can be an interesting alternative for investors looking to protect their capital against currency fluctuations. This also opens the opportunity to benefit from global companies that offer attractive yields.

“This launch is aligned with our innovative DNA. In 2022, looking at the growth of the ETF market in Brazil and its potential, we invested in creating the ‘Vórtx ETF Platform,’ an ecosystem designed to serve this industry,” explains Marcelo Cherri, head of solutions at Vórtx.

“We structured the first ETF in Latin America that invests 100% in Bitcoin, the first Ethereum ETF in Brazil, the world’s first DeFi ETF, and it was only natural for Vórtx to be the administrator of the first local ETF with international exposure and monthly dividend payments to investors,” he adds.

“In the United States, ETFs with covered call strategies (products that trade options contracts to generate monthly income) are already a well-established class with several examples of such ETFs managing billions of dollars. The SPYI11 will be the first in this category in Brazil to generate this ‘synthetic dividend,’ explains Renato.

According to Renato Nobile, manager and analyst at Buena Vista Capital, SPYI11 was designed to track the performance of the 500 largest companies in the United States while generating monthly revenue distributed directly to the investor’s account.

“In this way, investors can diversify their portfolios, gain access to international markets, and generate extra income more conveniently and efficiently,” says Nobile.

For Guide’s Head of Investments, Luis Gustavo Pereira, the innovative nature of the ETF is an excellent option for those looking to generate recurring income.

“The exposure to large companies in the American market, liquidity equal to stocks, and competitive product cost are factors that make it even more attractive,” says Pereira.

In the company’s history of pioneering and innovation, there is also the milestone of being the first national independent fiduciary administrator to enter the liquid fund fiduciary administration market.

Among the main advantages, it is important to highlight that

Like other investment products, it also has an administration fee of 0.83% per year, and taxes are the same as those for variable income assets.

15% IR on capital gains on the sale of shares, paid by the investor through DARF in the month following the sale of the shares;
15% IR on monthly dividends charged directly at the source

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Inflation forecast within the target range and decreasing for the fifth consecutive week

Nov 13, 2023

The median inflation forecast, measured by the National Consumer Price Index (IPCA), from financial market analysts for 2023, dropped from 4.63% last week to 4.59% this Monday.

The forecast is from the Focus Bulletin, a survey released weekly by the Central Bank (BC) with the expectations of financial institutions for key economic indicators.

It is the fifth consecutive week in which the inflation forecast for this year remains within the inflation target range, set at 3.25% with a variation of 1.5 percentage points up or down.

For 2024, the inflation projection according to the Focus Bulletin had a slight increase of 0.01 percentage point, going from 3.91% to 3.92%. However, it is the third week in which the index shows an increase.

Inflation ForecastFor 2025 and 2026, the forecasts are 3.5% for both years. The inflation target for the next three years is 3%, also with a margin of 1.5 percentage points up or down.

Last week, IBGE released the October IPCA, which was 0.24%, below the market forecast of 0.29%. For the year, IPCA has accumulated an increase of 3.75%, and in the last 12 months, it’s 4.82%, below the 5.19% observed in the immediately preceding 12 months.

“The highlight of the month was the benign behavior of prices in the service sector,” says Rachel de Sá, chief economist at Rico Investimentos.

“Inflation in the service sector is one of the factors most closely watched by the Central Bank because prices in the sector tend to be more difficult to control once disseminated throughout the economy,” explains Rachel.

For the financial market, the Selic, the basic interest rate of the economy, is expected to end 2023 at 11.75% per year, assuming a reduction of 0.5 percentage points in the next Copom meeting in December.

For the end of 2024, the market estimates the Selic at 9.25% per year.

The projection of financial institutions for the growth of the Brazilian economy this year remains at 2.89%, unchanged from the previous estimate.

For 2024, the expectation for the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – is a growth of 1.5%.

For 2025 and 2026, the financial market projects GDP expansion of 1.93% and 2%, respectively.

The forecast for the exchange rate is R$ 5 for the end of this year.

For the end of 2024, the forecast is that the U.S. dollar will be at R$ 5.08, an increase of three cents compared to last week’s forecast.

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See which investments have outperformed inflation in recent years

Nov 13, 2023 – Denyse Godoy

On the last Friday (10), the IBGE (Brazilian Institute of Geography and Statistics) reported that the IPCA (Consumer Price Index), the country’s official inflation indicator, was 0.24% in October. The variation was lower than the market expected, which was 0.26%.

Surpassing inflation – or protecting the purchasing power of money – is the primary goal of any financial investment. See below how 14 types of investments have performed in this mission in recent years, according to calculations by Einar Rivero, one of the country’s leading experts in financial data. Only in the longer term do the majority of investments outperform inflation, and in the three intervals, there are three applications that always lost: currencies (dollar and euro) and stocks of smaller companies (small caps) traded on the Stock Exchange.

12 months – IPCA: 4,82%

• Bitcoin: +112,99%
• BDRs: +25,24%
• CDI: +13,38%
• IMA geral: +12,65%
• IDIV (Índice de Dividendos): +12,51%
• Poupança: +8,43%
• IFIX: +7,03%
• Ibovespa: +4,8%
• IHFA: +3,84%
• Ouro: +1,81%
• Euro: +1,41%
• Dólar: -5,08%
• Small caps: -9,01%

3 years – IPCA: 23,51%

• Bitcoin: +118,45%
• IDIV (Dividend Index): +34,27%
• CDI: +31,02%
• IMA: +26,16%
• IHFA: +25,8%
• Savings account: +19,21%
• BDRs: +15,82%
• Ibovespa: +14,99%
• IFIX: +13,37%
• Dollar: -7,22%
• Gold: -12,82%
• Euro: -15,94%
• Small caps: -17,43%

5 anos – IPCA acumulado: 31,61%

• Bitcoin: +655,45%
• BDRs: +123,71%
• Gold: +92,31
• IDIV (Dividend Index): +81,91%
• IMA geral: +49,77%
• CDI: +43,36%
• Índice de fundos multimercados IHFA: +43,16%
• IFIX: +40,59%
• Ibovespa: +38,99%
• Dollar: +30,66%
• Savings account: +27,56%
• Small caps: +24,49%
• Euro: +23,43%

Moderate inflation reinforces market optimism about interest rates

Nov 10, 2023 – Denyse Godoy

The future trajectory of interest rates in Brazil and the United States is one of the main concerns of the financial market at the moment due to the high degree of uncertainties.

After three consecutive cuts of 0.5 percentage points since August, the Selic, the Brazilian benchmark rate, is at 12.25% per year. There is an almost consensus among experts that, in its December meeting, the Copom (Monetary Policy Committee of the Central Bank) will make a new reduction of 0.5 pp, bringing the country’s reference rate to 11.75% per year. The biggest question at the moment concerns the level of the Selic at the end of the current easing cycle, in the middle of next year. Although most analysts expect it to be at 9% per year, there are optimists betting that interest rates could fall to as low as 8.5% per year in 2024.

The group with more positive expectations gained arguments this Friday (10) with the release by IBGE (Brazilian Institute of Geography and Statistics) of the IPCA (Broad Consumer Price Index) for October. The indicator recorded a 0.24% increase in prices last month, less than the 0.29% projected by the market and the 0.26% in September.

Read below analyses on the IPCA, with projections for the index:

Andréa Angelo, inflation strategist at Warren Investimentos:

“The reading of the October IPCA brought widespread bearish surprise and showed good qualitative openness in the cores and in the main service measures. We highlight that the seasonally adjusted and annualized average of the cores in the last three months is at 3%, in the center of the inflation target. Among the bearish surprises, we highlight ride-sharing, personal hygiene (we suspect there may be anticipation of Black Friday discounts), and automobiles. On the other hand, fresh foods, especially fruits and tubers, brought a bullish surprise. We saw a turnaround from negative to acceleration of these prices since mid-October, for November we have a significant increase in home food, but we can already identify that vegetable prices in wholesale collections have started to stabilize. Looking ahead, we see downside risk in our projection for the 2023 IPCA, which is at 4.5%, due to the possibility of a reduction in gasoline prices. For 2024, we maintain our projection of 4.4%.”

Alexandre Maluf, economist at XP Investimentos:

“In our opinion, the underlying measures of the October IPCA confirm that the second phase of disinflation in Brazil has progressed more quickly than expected. Were it not for fiscal uncertainties and the rise in interest rates in the U.S., the Central Bank would have room to accelerate the pace of the Selic rate reduction. Even so, we maintain our forecast that the Copom will act cautiously and deliver cuts of 0.50 pp in the coming meetings. Finally, we maintain our IPCA projections at 4.5% in 2023 and 3.9% in 2024.”

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Investment funds lose R$ 4.7 billion in October

Nov 10, 2023

Investment funds closed October with R$ 4.7 billion ($960 millino) in net outflows, according to the balance sheet released by Anbima (Brazilian Association of Financial and Capital Markets Entities). With this result, the industry accumulates a year-to-date net outflow of R$ 70.2 billion ($ 14.3 billion).

The movement interrupts a recovery that had been occurring since July but was caused by the negative performance of multimarket funds, which alone recorded a loss of R$ 13.37 billion ($2.73 billion).

Nevertheless, in the opinion of Anbima’s Vice President, Pedro Rudge, the contraction in the industry was circumstantial.

“The October result reflects the worsening of the economic scenario, especially internationally, and not a structural outflow of resources from the industry as occurred in the first half of this year,” said Rudge.

Despite the industry’s negative result, two classes recorded the highest monthly inflow of 2023: FIDCs (Credit Rights Investment Funds) and equity funds, with R$ 11.1 billion ($2,26 billion) and R$ 10 billion ($2.04 billion) in net inflows, respectively.

Pension funds, with R$ 1.5 billion ($306 million), and FIPs (Private Equity Funds), with R$ 282.9 million ($57,7 million), also ended October in the black.

Multimarket funds had a negative performance for the second consecutive month, recording R$ 13.4 billion ($2,73 billion) in net outflows. Year-to-date, net redemptions were R$ 64.9 billion ($13.2 billion).

In addition, fixed income returned to negative performance after three months in the black, with R$ 11.6 billion ($2,37 billion). Funds investing in medium and high credit risk assets recorded R$ 15.5 billion ($3,16 billion)  in net inflows; however, the rest of the class pulled the overall result down.

The accumulated amount for FIDC in 2023 and in the last 12 months was R$ 16.3 billion ($3,32 billion) and R$ 31.8 billion ($6,49 billion), respectively. FIPs, in turn, recorded a gain of R$ 283 million ($57,7 million) and maintain a positive inflow of R$ 42.4 billion ($8,6 billion) this year.

Among the types with the highest net assets, fixed income funds investing in short-term government bonds (low-duration investment-grade type) had a return of 1.02% in October.

On the other hand, freely managed equity funds, which do not have a specific concentration strategy, had a negative return of 4.35%. Despite this, the year-to-date registers gains of 5.69%.”

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Tax reform advances in the Senate; understand the impact on the marke

Nov 8, 2023

The Senate votes on the Constitutional Amendment Proposal for Tax Reform this Wednesday, after Senator Eduardo Braga’s base text was approved by a vote of 20 to 6 in the Constitution and Justice Committee.

The proposal transforms five taxes (ICMS, ISS, IPI, PIS, and Cofins) into three: Goods and Services Tax (IBS), Contribution on Goods and Services (CBS), and Selective Tax (IS).

The CBS (federal) and IBS (state and municipal), which tax consumption, are forms of Value Added Tax (VAT) that apply only to the stages of commerce that add value to the product or service, avoiding double taxation.

Each new tax will have a transition period, and the tax rate will be determined later through ordinary legislation.

The government estimates that to maintain the current tax burden, the rate should be around 27.5% of the product’s value.

Capital Aberto spoke to five experts about the potential impact of the new law on the financial market and companies in the sector.

Serur Advogados

The reform is expected to benefit industries more in the short term, as it eliminates issues in the sector, such as restrictions on the use of tax credits that increase the cost and reduce profitability of industrial activities.

The export market is also expected to benefit for similar reasons, as the reform can eliminate some structural deficiencies that have a fiscal impact. This could bring advantages to sectors like agribusiness. In terms of sector impact, the reform eliminates some distortions in consumption taxation in Brazil, benefiting sectors with higher production costs or those focused on exports.

Additionally, some sectors may benefit from more favorable regimes. For example, hotels and amusement parks may have a lower tax rate. The exact impact is not yet clear, as many details will be determined later through complementary legislation.

In the case of the financial market, which includes financial services and insurance companies, they may receive differentiated treatment regulated by subsequent legislation. While these sectors may not have a lower tax rate, they could have specific provisions that align with their unique characteristics, similar to practices in other countries. Therefore, it’s not possible to estimate the exact impact of the reform on these specific sectors yet.

Aristóteles de Queiroz Camara, Partner

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Machado de Carvalho Advocacia

It’s important to keep in mind that the tax reform is still subject to debates and negotiations in Congress, which means its provisions may change before final approval.

The reform could influence the dynamics of the capital market by altering the tax burden on financial transactions. For instance, a potential reduction or simplification of taxes on capital gains and dividends could encourage investment in stocks, promoting the capitalization of companies through the stock market.

Sectors heavily reliant on external financing, such as technology and infrastructure, may become more attractive to investors, as a reduced tax burden increases the potential return on investments. Moreover, simplifying the system could lower compliance costs, making Brazilian companies more competitive.

As for the taxation of financial sector companies like brokerage firms and asset managers, a review of PIS/COFINS rates is expected, as these currently represent a significant portion of their cost structure. The reform may propose the consolidation of these contributions into a single, broader-based tax with a lower rate, potentially resulting in a more favorable tax regime.

Mozar Carvalho, Founder

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Juveniz Jr Rolim Ferraz Advogados

Despite claims that the reform’s main objective is not to increase the tax burden, certain sectors of the economy could be affected. The intent to reduce the complexity of the tax system does not necessarily mean a decrease in the tax burden. Legal disputes, including those related to federal fiscal federalism renegotiation, the authority to levy and collect new taxes, and the control of the legality of tax imposition, may arise.

In the financial market, contrary to the proposed changes, there could be an increase in tax complexity and fiscal burden, as the reform is expected to benefit companies that can generate more tax credits from input purchases and offset them in subsequent transactions.

Unlike the manufacturing sector, brokerage firms and asset managers have a simplified production chain, with their largest expenses typically being payroll, which does not allow for tax credit.

Rangel Fiorin, Partner

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Tortoro, Madureira e Ragazzi Advogados

The historic change in the tax system will bring Brazil closer to major economic powers and lead to a less complex tax system, ultimately improving the investment environment.

The concept of utilizing tax credits is one of the pillars of the tax reform and is expected to benefit primarily publicly traded companies in export sectors with domestic production and those in the “capital goods” category.

Furthermore, there are expectations of improvement in the agribusiness sector, particularly with a focus on exports, which will be exempt from certain taxes.

On the other hand, service sector companies may be more exposed to a potential increase in the tax burden, as the “personnel cost” will not generate tax credits and represents a significant portion of their expenses.

For companies in the financial sector, such as brokerage firms and investment managers, the Constitutional Amendment Proposal for Tax Reform proposes specific regimes (except for those remunerated through fees and commissions, which will remain under the general regime). However, clear rules on the topic have not been defined yet and will be determined by complementary legislation (defining the calculation base and rates).

Currently, some points require observation and critical analysis, such as shifting taxation to the destination (another pillar of the Reform) that may complicate the practical definition of who is the actual recipient of financial services, increasing compliance and regulatory costs in the sector.

It’s important to note that decisions regarding the abolition of JCP (interest on equity) and the taxation of dividends will likely be addressed in the next stage of changes.

Paola Andrade and Marcelle Lombardi, Tax Specialists

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Five things that will show the way for the market until the end of the year

Nov 6, 2003 – Denyse Godoy

Will there be an end-of-year rally in the Brazilian stock market? Some investors and finance influencers are betting that the Ibovespa, the country’s main stock index, has the potential to rise by 10% in the next two months and reach the 130,000 point mark by the end of December. This percentage is higher than what the index has already advanced in 2023, which is about 7%.

Is this optimism exaggerated? To set expectations properly, experts point out the five main factors that will determine the direction of the market in this final two-month period. Here they are:

1 – Fiscal Target

After President Luiz Inácio Lula da Silva once again advocated for increased government spending, the market is anxiously awaiting the outcome of the efforts by Finance Minister Fernando Haddad to try to maintain a zero deficit in the public accounts, at least until March 2024. In that month, the Bimonthly Report on Revenues and Expenditures will be released, and the government will know for certain whether there will be sufficient revenue to cover the expenses projected for the year.

Last Friday (3), Lula stated, “For those in the Treasury, good money is money in the Treasury. For those in the Presidency, good money is money invested in infrastructure.” At the end of the day, Haddad had a meeting with the President at the Alvorada Palace, arguing that if the 2024 budget is too tight, the fiscal target could accommodate a deficit of up to 0.5% of the Gross Domestic Product (GDP).

It is still unclear how the change in the fiscal target would be submitted to the National Congress. While the Chief of Staff, Rui Costa, supports a modifying message to the Budget Guidelines Law (LDO), Alexandre Padilha, from institutional relations, wants an amendment.

2 – Interest Rate Reduction

The Brazilian Central Bank’s Monetary Policy Committee (Copom) began reducing the Selic rate, the basic interest rate of the economy, in August and still has one more meeting this year to decide how the rate-cut cycle will continue. The meeting will take place on December 10 and 11, and the expectation is for another 0.5 percentage point reduction, bringing the rate to 11.75% per year. The main discussion at this point concerns the level of interest rates at the end of this descent. According to the Focus Bulletin, a weekly survey by the Central Bank with market experts, the median projections are 9.25% by the end of 2024 and 8.75% by the end of 2025.

3 – US Interest Rates

While there is a solid consensus that interest rates in Brazil will continue to decline, the situation in the United States is much more complicated. In the meeting last week, the Federal Reserve’s monetary policy committee decided to keep the US basic interest rate unchanged in the range of 5.25%-5.5% per year, a level it has been at since July. Investors continue to closely monitor data on the state of economic activity to understand whether the peak of inflation has truly passed and whether interest rates may start to fall again in the first half of 2024.

4 – Conflict between Hamas and Israel

Despite popular and diplomatic protests in various parts of the world, Israel refuses to accept a ceasefire in the Gaza Strip to help the civilians affected by the armed conflict. Over the past weekend, Israel claimed to have isolated the City of Gaza after a strong attack. U.S. Secretary of State Anthony Blinken is making another visit to the Middle East in an attempt to find a solution to end the conflict, but a resolution appears to be far from reach. Uncertainties regarding future developments include the involvement of other parties in the war and the expansion of the conflict in the region.

5 – Tax Reform

The eagerly awaited proposal for tax reform, highly anticipated by the business sector, is expected to be discussed in a session of the Committee on Constitution and Justice (CCJ) of the Brazilian Federal Senate, called for this week by Senator Davi Alcolumbre (DEM-AP). The goal is to vote on the proposal in the committee and in the plenary of the Senate by the following Thursday (9/11) and then return it to the Chamber of Deputies the next day.

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Market maintains its main predictions despite the debate about the deficit

Nov 6, 2023

The predictions of financial market analysts for nearly all major economic indicators remained stable or slightly changed compared to the previous week, according to the Central Bank’s survey consolidated in the Focus Report.

The report on this Monday was the first to capture the impact of President Lula’s statements on Friday, October 27th, which reopened discussions about the primary deficit target for 2024.

The market’s median predictions now point to a primary deficit of 0.80% of GDP in 2024. The number is slightly higher than last week (0.78%) but lower than the value recorded four weeks ago (0.83%).

The inflation forecast for this year remained at 4.63%. This is the fourth consecutive week in which the index has appeared within the tolerance range of the target, which is 3.25% with a margin of 1.5 percentage points up or down.

For 2024, the IPCA (inflation) forecast according to the Focus Report is 3.91%, slightly higher than last week’s 3.90%. For 2025, the forecast remained the same: 3.50%. In both cases, the target is 3%, with a tolerance range of 1.5 percentage points.

For this year, the expectation for economic growth remained at 2.89%. As for 2024, Gross Domestic Product (GDP – the sum of goods and services produced in the country) is expected to be 1.5%. For 2025 and 2026, the financial market projects GDP growth of 1.9% and 2%, respectively.

Finally, the financial market’s forecast for the exchange rate is R$ 5 for the end of this year. For the end of 2024, the forecast is that the U.S. currency will be R$ 5.05.

There were also no changes in the estimates for the basic interest rate of the economy. The market continues to work with a Selic rate of 11.75% at the end of this year and predicts 9.25% at the end of 2024 and 8.75% in 2025.

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Light’s debenture holders will be able to vote via WhatsApp in the assemblies on the 8th and 9th

Nov 6, 2023

Holders of Light’s 15th and 22nd issuance debentures will be able to vote via WhatsApp at the Debenture Holders General Meeting (AGD) scheduled for this Wednesday and Thursday, November 8 (15th Issuance – LIGHA5) and 9 (22nd Issuance – LIDHD2).

The meetings are set for 2:30 PM, and voting is already open.

The WhatsApp voting service was launched by the fintech Vórtx to simplify the capital market even further.

The debut of WhatsApp voting in fixed income took place in October at the four debenture holders’ meetings of the Rio de Janeiro-based electric energy company, Light.

To participate, interested investors need to access the link on the Vórtx website for a WhatsApp chat with Vicky, Vórtx’s Virtual Assistant.

Vicky will request authentication through questions about personal data, present the privacy terms, which the user must agree to, and present the questions being voted on.

The investor can then choose from the provided alternatives by typing the number of the option they wish to select. The data is sent directly to a Vórtx platform, which tallies the votes alongside real-time votes received.

The items for voting on the Agenda at the meeting are as follows:

A. Ratify all measures taken by the Fiduciary Agent in defense of the Debenture Holders’ interests in the Judicial Recovery, whether in the judicial and/or extrajudicial sphere;

B. Ratify all measures taken by the Legal Advisors in defense of the Debenture Holders’ interests in the Judicial Recovery, whether in the judicial and/or extrajudicial sphere;

C. Authorize the Legal Advisor to vote for the suspension of the General Creditors’ Meeting (AGC) for a period of up to 45 (forty-five) days from the date of the AGC minutes if this resolution is submitted to the AGC;

D. Approve or reject the Judicial Recovery Plan (PRJ) presented up to the date of this notice’s publication, to be voted on in the Judicial Recovery proceedings and made available for the Debenture Holders’ analysis.

E. In case an Addendum to the PRJ is presented during the calling periods of this AGD and any reopenings resulting from a suspension, approve or reject the suspension of this AGD for a new resolution on a later date, to be defined by the President and Secretary of the AGD, in conjunction with the Legal Advisor.

The tool is subject to the same rules as the traditional distance voting bulletin, as established in Article 71 of CVM (Comissão de Valores Mobiliários) Resolution 81, for example, investors can send their opinions before and during the assembly.

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Crisis of the Starbucks owner in Brazil reignites concerns about retail sector

Nov 3, 2023 – Denyse Godoy

Earlier this year, news of an apparent fraud in the balance sheet of Lojas Americanas raised concerns about the situation of retail companies in the country.

The concerns were further reinforced over the months by the crisis of the Tok&Stok furniture store chain, the bankruptcy of bookstores Cultura and Saraiva, and the devaluation of giants like Magazine Luiza and Renner in the Stock Exchange.

When the Selic interest rate began to fall in August, the financial market was relieved – the reduction in interest rates benefits both the companies themselves, which suffer less from the weight of their debts, and consumers who can buy more on credit.

However, the news this week that the operator of premium brands Starbucks Coffee, Subway, Eataly, and TGI Friday’s, SouthRock Capital, had filed for bankruptcy, made investors in the financial market once again uneasy about the prospects for commerce.

Three days after the filing, details of SouthRock’s financial situation are fueling considerations that the problem may be more related to the management of these businesses themselves rather than the sector as a whole.

The management company explained that its debts amount to approximately R$1.8 billion. The Covid-19 pandemic, inflation, and high-interest rates also affected operations in Brazil, according to SouthRock’s statement.

Therefore, they will restructure the businesses, reviewing the number of stores, the schedule for new openings, the size of the workforce, and renegotiating with suppliers.

Such measures are overdue, according to finance expert and strategist Julio Damião. “The problem was prioritizing revenue and scale over cash generation and profit. Why didn’t they reduce the number of stores, make adjustments to the structure, and prioritize products with higher margins (while there was still time)?” questions the executive.

In this scenario, Starbucks Coffee International Inc. requested the termination of the partnership with SouthRock, which had held the license to operate the brand’s stores in Brazil since 2018, leading to a potential legal battle.

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Understanding the super week in the markets in Brazil and around the world

Nov 3, 2023

The U.S. jobs report, which showed the creation of 150,000 jobs (below the forecast of 180,000), released this Friday, concluded a week of positive news in the market’s view.

As a result, almost all the major market indicators ended Friday on the rise.

The Ibovespa closed the week with a gain of 4.29%. This number corresponds to more than half of the index’s appreciation from the beginning of the year until now: 7.68%.

The real also strengthened against the dollar, which ended the day with a 1.54% drop to R$4.89.

In the United States, the stock markets also closed higher. The S&P had its best week since November last year, with a 5.9% increase.

And the yields on two-year U.S. government bonds fell by 15 basis points. Overall, it was the best day in terms of reducing yields on U.S. government bonds since 2020.

In the opinion of Filipe Villegas, a stock strategist at Genial Investimentos, the main explanation for the market’s optimism is the change in the perception of monetary policy.

“The decisions on monetary policy ended up, in a way, surprising the market, conveying a message of more dovish monetary policies, that is, more inclined to not raise interest rates.”

According to Villegas, the movement began on Tuesday when Japan did not confirm the adoption of an interest rate control policy.

“The Japanese investor today is the one who holds the most foreign debt securities,” he explains. By not adopting a monetary policy, Japan “brought relief to global interest rates.”

The positive trend continued on Wednesday morning when the U.S. Treasury announced its new debt issuance policy.

On the same day, the Federal Reserve kept the basic interest rates in the United States unchanged, in the range between 5.25% and 5.75% per year.

However, what excited investors the most was the perception that the recent rise in U.S. government bond yields may be sufficient to prevent further increases in the basic rates.

In the United States, the stock markets closed sharply higher, and the yields on long-term U.S. government bonds had their best results since 2020.

In Brazil, despite market players’ apprehension about President Lula’s statements regarding the primary deficit for 2024, the Ibovespa, which had started the week in the red, also ended with significant gains.

Much of this result is due to the positive data that came from the United States.

But the market also saw it as positive that the Copom’s statement indicated that the Central Bank is likely to continue reducing the Selic rate in the coming meetings.

“The market had priced in the possibility of a 0.25% cut at the January meeting,” says Villegas. “As the Central Bank left the door open for more cuts, this ends up reflecting positively on our interest rate curve, which is positive for the performance of domestic stocks.”

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Central Bank and Fed meet in the shadow of ‘fiscal risk’ in Brazil and treasuries in the USA

Oct 31, 2023

The Monetary Policy Committee of the Central Bank and the Federal Open Market Committee of the Federal Reserve are meeting this Tuesday and Wednesday to decide the basic interest rates in Brazil and the USA. However, this time, the market’s focus won’t be on the rates themselves.

In Brazil, doubts about fiscal policy and public finances have gained more prominence. In the USA, attention is directed towards the behavior of government bonds.

There is little doubt in the market regarding the decision in both Brazil and the United States. The almost unanimous consensus is that the Central Bank will reduce the Selic rate from the current 12.75% to 12.25% per year. In the USA, the majority opinion is that the Fed will not change interest rates, which are currently in the range of 5.25% to 5.5% per year.

If the forecasts are confirmed, part of the attention will be focused on the post-meeting statements and speeches, looking for signals about the next steps in monetary policy in Brazil and the United States.

“The market will mainly want to understand how they (the Central Bank directors) view the country’s inflation and whether there are signs of economic weakening or not,” says Jonas, from Hike Capital, an investment consultancy based in São Paulo.

Since the last meeting, market inflation forecasts for 2023 have been decreasing week by week, although the same trend is not observed for 2024.

However, since last Friday, another factor has gained even more importance on the radar of fund managers and investors: where is the discussion about the 2024 primary deficit anchored, following President Lula’s admission of a primary deficit in 2024.

“The Copom meeting tomorrow (Wednesday) is undoubtedly important. But, looking ahead, we need to understand where the discussion of the 2024 deficit is anchored,” said Bruno Lima, equity analyst at BTG in the Morning Call podcast.

In the last minutes, the Central Bank had already drawn attention to its evaluation of “the importance of the firm pursuit of these (fiscal) targets,” considering their importance for “anchoring inflation expectations and, consequently, conducting monetary policy.”

The fiscal risk is also mentioned in the “Copom Preview” analysis released by XP: “Recent data on inflation and activity continue to suggest room for monetary easing, but we believe that an acceleration in the pace of rate cuts is increasingly less likely, in line with the rise in U.S. interest rates and persistent fiscal risks on the domestic front.”

As a result, the institution expects a 0.50 percentage point reduction in the Selic rate this week and a signal that the Central Bank will maintain the pace in the upcoming meetings. XP projects a reduction in Selic until June 2024, with the basic rate reaching 10%.

In the United States, analysts believe that the Fed’s meeting, which is expected to keep interest rates unchanged, will be overshadowed by the announcement on Wednesday morning of the profile of the issuance of government bonds.

On Monday, the Fed already announced that it would issue $776 billion in government debt securities. The proportion of the profile of each bond should be known on Wednesday morning and is important because it will determine the price and yields of the assets.

Since the last Fed meeting, yields on U.S. Treasury bonds have risen, with ten-year bonds exceeding 5% last week.

This behavior had an impact on markets worldwide and led Fed officials to state that it would help maintain the economy’s basic interest rates by effectively causing an economic slowdown.

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Capital market reaches over 85,000 participants subject to regulation

Oct 31, 2023

The number of participants in the capital market subject to regulation reached 85,035 at the end of September, according to the CVM Bulletin.

This represents a growth of 5.6% compared to the number recorded at the end of last year.

The growth was driven by the securities consultants sector, which had the highest growth of the year among categories with over 100 participants: 21.4%, from 1,329 to 1,613.

In the first three months of the year, the number of primary issuances of securities reached R$ 421.5 billion, a slight decrease compared to the R$ 427.1 billion from the same period last year.

However, the number of issuances had a significant increase, up by 40%, from 1,651 to 2,314 operations.

Highlights were the issuances of FIP, FII, FIDC, and CRI, with the highest relative growth of 216%, occurring in FIPs (Participation Investment Funds).

The daily average financial volume in the secondary stock market is lower than last year. Conversely, the markets for FIIs and debentures are on the rise.

According to the CVM, in the third quarter of 2023, a slight increase in the liquidity risk indicator was also observed.

This movement is correlated with the slowdown in net inflows of foreign investors into the secondary stock markets.

This information is from the latest edition of the Economic Bulletin of the Brazilian Securities and Exchange Commission (CVM).

Starting from this edition, the CVM is making the Economic Bulletin available in an interactive format through the Power BI tool.

“The Power BI format allows the public to access the historical market information from the Economic Bulletin on a single screen,” says Bruno Luna, Head of the Economic Analysis, Risk Management, and Integrity Advisory (ASA) at CVM.

“With this new feature, users can apply filters and analyze long periods of the regulated markets, directly accessing charts and facilitating the understanding of market developments.”

Information such as the secondary stock market has data dating back to 1995. The CVM bulletin also provides data on real estate investment funds (since 2004), the secondary market for debentures (since 2009), public offerings (since 2010), and more.

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For Inter Asset, fixed income is still more attractive than the stock market

Oct 30, 2023 – Denyse Godoy

November begins with expectations of a new interest rate cut in Brazil and the maintenance of the basic interest rate in the United States. However, according to Inter Asset, the asset class of fixed income is still more attractive than the stock market.

One of the main reasons for this is the recent increase in geopolitical risk, with the escalation of the conflict between Israel and the Palestinian group Hamas. Since Saturday, Israel has been increasing pressure by advancing into Palestinian territory in the Gaza Strip, bombing targets in Syria, and launching an incursion into the West Bank.

“These moments of conflict tend to be more inflationary. We are witnessing Israel vs. Hamas and Ukraine vs. Russia, and there is also Azerbaijan vs. Armenia, and the 2024 elections in Taiwan,” said Marcelo Mattos, CIO (Chief Investment Officer) of Inter Asset in an exclusive interview with Capital Aberto.

In such complex scenarios, the primary goal of the asset manager should not be to “play to hit, to seek the big opportunity of the moment,” but to avoid significant losses. “I protect myself, limit potential losses, and can achieve substantial gains,” explained Mattos.

Since August, the Copom (Monetary Policy Committee of the Central Bank of Brazil) has reduced the Selic, the Brazilian basic interest rate, by 1 percentage point to 12.75% per year. The majority of the financial market is betting that this pace will be maintained, with another 0.5 percentage point reduction in the central bank’s meeting taking place on Tuesday (31) and Wednesday (1). In the United States, the prevailing opinion is that the Federal Reserve, the American central bank, will not make changes to interest rates, which are currently in the range of 5.25%-5.5% per year, in the meeting that also ends on Wednesday (1).

In 2023, so far, Inter Asset has positioned itself in disagreement with the rest of the market. “What we have seen this year are very strong narratives, and the market’s positioning has been very intense in these narratives, and I think that has opened up an opportunity to go against the grain,” Mattos explained. “We have discussed a lot, in our committees, the difference between narrative and price.”

One example was the significant pessimism regarding the prospects of the Brazilian economy observed at the end of the first quarter of the year. “Managers were very pessimistic about the prospects, especially regarding the fiscal side when the federal government presented the general guidelines for anchoring. At that time, we took more positions, primarily in real interest rates in Brazil, and a little in stocks,” the director of Inter Asset explained. “In the middle of the year, I think the narrative changed because everyone was very optimistic, pricing terminal interest rates in the range of 8.75% per year, and at that time, we decided to reduce all positions.”

In the last 30 days, according to Inter Asset, both local and foreign investors have adopted a more optimistic stance regarding Brazil, while the perception of the external scenario is deteriorating.

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Inflation forecast falls and remains within the target for the 3rd consecutive week

Oct 30, 2023

The analysts’ forecast for inflation this year in the financial market has dropped again this week, from 4.65% to 4.63%, according to the Central Bank’s Focus Bulletin.

This marks the third consecutive week in which the estimate falls within the target range for inflation, which is 3.25% for the year, with a tolerance of 1.5 percentage points up or down.

The projected inflation for 2024, on the other hand, increased from 3.87% in the previous week’s bulletin to 3.9% in the bulletin released this Monday.

As for 2025 and 2026, the predictions remain at 3.5% for both years. Starting from next year, the inflation target becomes 3%, also with a tolerance range of 1.5 percentage points.

The financial institutions’ projection for the growth of the Brazilian economy this year stands at 2.89%, with a slight decrease compared to 2.90% from the previous week.

The Focus Bulletin is a survey conducted among financial market institutions with the main economic indicators, released weekly by the Central Bank (BC).

For 2024, the expectation for Gross Domestic Product (GDP), the sum of all goods and services produced in the country, is a growth of 1.5%.

According to the Focus Bulletin, for 2025 and 2026, the financial market projects GDP growth of 1.9% and 2%, respectively.

The financial market analysts’ forecast is for the Selic rate to end 2023 at 11.75% per year.

By the end of 2024, the estimate is for the basic interest rate to fall to 9.25% per year. For the end of 2025 and 2026, the forecast is for the Selic rate to be at 8.75% per year and 8.5% per year, respectively.

According to the Focus Bulletin, the forecast for the exchange rate is set at R$5 for the end of this year. For the end of 2024, the prediction is that the U.S. dollar will be at R$5.05.

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Week comes to an end under the impact of big tech companies, inflation, and Lula’s speech

Oct 27, 2023

Positive inflation in Brazil, but not so much in the United States, mixed reactions from investors to big tech companies’ earnings reports, and Lula admitting a primary deficit in 2024 were the highlights of the week in the market.

On Friday, the Bureau of Economic Analysis released the Personal Consumption Expenditure (PCE), the main measure of inflation in the United States.

The full result came in at 0.4% for September, similar to the variation in August and above expectations, which were 0.3 percent. The core index increased by 0.3 percent, in line with expectations but showing an acceleration compared to August’s 0.1%.

Over 12 months, the indicator shows accumulated inflation of 3.7 percent, which is below the 3.9 percent recorded in August but still well above the target of 2 percent.

The market’s assessment was that the data reinforces the perception that the Fed is likely to keep interest rates unchanged at the upcoming meeting next week but leaves open the possibility of rate hikes in subsequent meetings.

This view gained weight after the release of the U.S. GDP data earlier in the week, which gives an idea of the country’s economic growth.

The U.S. GDP growth in the third quarter was 4.9%, above the expected 4.3%, and significantly higher than the 2.1% growth in the second quarter.

As a result of these indicators, yields on U.S. government bonds rose again on Friday, although they remained below the 5% mark from earlier in the week. Around noon, the bond yields were at 4.858%.

In Brazil, there was also inflation data, but the perception is more positive.

The National Consumer Price Index 15 (IPCA-15) from IBGE, considered a preview of the official inflation rate in the country, increased by 0.21% in October. This represents a slowdown compared to the previous month when it recorded a decrease of 0.35%.

The week had already started with a reduction in the inflation forecast for this year, from 4.75% to 4.5%, according to the Focus Bulletin.

On Friday, XP, which had a more conservative stance, announced that it had lowered its projection from 4.8% to 4.5%. XP explained the change as a result of “short-term benign surprises and the reduction in gasoline prices by Petrobras.”

In addition to macroeconomic data, the week was also marked by important third-quarter earnings reports.

In the United States, four of the five Big Tech companies reported results, all of which were better than expected by market analysts.

However, the positive numbers were not enough to convince investors. Alphabet (Google and YouTube) and Meta ended the week in decline.

On Thursday, the Nasdaq recorded its worst two-day performance of the year, with a 1.8% drop on that Thursday alone.

The index partially recovered on Friday, driven by the rise in Amazon and Intel shares. Microsoft was another giant in the sector whose positive earnings results were reflected in the stock performance.

“Many of these technology giants were priced for perfection,” said John Lynch, Chief Investment Officer at Comerica Wealth Management, to the Wall Street Journal. “We are seeing imperfect performance.”

In Brazil, Vale released its third-quarter earnings report, which met market expectations.

The company reported an operating result (EBITDA) of 20.9 billion reais, a 14.1% increase over the same period last year. The net profit for the period was 13.9 billion reais, a -36.3% decrease compared to the third quarter of 2022.

The market reaction was positive. At the end of trading on Friday, Vale’s shares were outperforming the decline in the Ibovespa, rising more than 3%.

The Ibovespa, which opened with a slight increase, dropped more than 1% in the afternoon following comments by Lula to journalists, where the president admitted that the country is unlikely to achieve a zero primary deficit next year.

“We are unlikely to reach the zero target, because I don’t want to cut investments and projects. We don’t need that [zero fiscal target],” Lula said during a meeting with journalists at the Palácio do Planalto.

“I won’t establish a fiscal target that forces me to start the year with billions in cuts to projects. If Brazil has a 0.5% deficit, what is it? 0.25%? Nothing. We will make the right decision, and we will do what is best for Brazil.”

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Despite the drop in interest rates, retail stocks have accumulated losses of over 10% this year

Oct 26, 2023

The two cuts in the Selic rate (Central Bank interest rate) and the prospects of further cuts in the upcoming meetings of the Central Bank have not been enough to boost the stocks of retail companies.

According to a study by Quantum Finance, as of October 20th, the ICON index of B3, which comprises the main companies in the sector, was down 12.42% for the year.

Since then, the performance has changed little. Compared to the closing on Wednesday, the year-to-date decline is 12.47%.

During the same period, the Ibovespa had a positive performance of 2.8% until the Wednesday close, always compared to the opening on January 2.

In general, market analysts attribute the poor results to the Brazilian interest rate curve, which saw a sharp escalation from March 2021, as well as the population’s high debt levels and increased competition among retail companies.

According to independent analyst Hulisses Dias, there are also individual company issues that have affected the sector in recent months.

“An example of this is the former Via Varejo, which has now become Casas Bahia, a company without a clear growth strategy and whose debt has eaten into many of the results the company could have had,” argues Dias.

Grupo Casas Bahia leads the declines in the ICON, with a decline of 78.33% as of October 18.

On the other hand, Construction company Tenda (TEND3) and C&A Modas (CEAB3) had extraordinary results, and their stocks rose by 150.47% and 114.8%, respectively, during the same period.

In Dias’ opinion, the trend was for the sector to benefit from the expected interest rate cuts, but this scenario became more uncertain due to the conflict in the Middle East and the recent rise in U.S. bond yields.

The ICON is the Consumption Index of B3, composed of the 71 main stocks of companies in the cyclical and non-cyclical consumption and health sectors.

Classified as a total return index, the ICON takes into account both stock price variations in the market and the distribution of profits to shareholders.

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CVM establishes international standard ESG reporting

Oct 25, 2023

The Brazilian Securities and Exchange Commission (CVM) has issued a regulation establishing a sustainability-related financial information report (ESG report) based on the international standard issued by the International Sustainability Standards Board (ISSB).

For publicly traded companies, investment funds, and securitization companies, the preparation and disclosure of the report are voluntary and available from the beginning of 2024.

For publicly traded companies, the mandatory reporting will commence on January 1, 2026. The regulation was instituted by Resolution CVM 193.

“We are the first regulator and country in the world to adopt sustainability reporting rules, following the IFRS S1 and S2 standards,” says João Pedro Nascimento, president of CVM.

“We are starting with the voluntary disclosure of sustainable aspects by issuers, with greater transparency, standardization, and comparability.”

Through the international standardization of the information disclosed, the tool aims to allow for comparisons between companies and facilitate the assessment by global regulators and investors.

According to Nathalie Vidual, Superintendent of Investor Protection and Guidance at CVM, it is essential for Brazilian practices to be aligned with international practices of sustainability information disclosure.

ESG Report

The sustainability-related financial information report, based on the ISSB standard, must be objectively identified and presented separately from other entity information and financial statements.

According to Paulo Roberto Ferreira, Superintendent of Accounting and Audit Standards at CVM, the adoption of sustainability information disclosure standards issued by ISSB is a recommendation from the International Organization of Securities Commissions (IOSCO).

“The standards help capital markets assess the impacts of sustainability risks and opportunities on entity cash flows, contributing to the development of a sustainable and regenerative economy,” says Ferreira.

This new regulation is part of CVM’s Sustainable Finance Action Plan for 2023-2024, which includes goals, objectives, and compliance deadlines based on the guidelines outlined in the Sustainable Finance Policy.

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Investment funds resume recovery after a pause in September

Oct 24, 2023

Investment funds have returned to showing a positive net inflow in the first half of this month, following the decline in September.

According to data from Anbima, there was a positive balance of R$21.7 billion (around $4.34 billion) in the first two weeks of the month.

This positive result was primarily due to inflows of R$25.4 billion ($5.08 billion) made in the second week of the month.

If this positive performance continues until the end of the month, the funds will have their recovery resumed after the decline in September.

Last month, the balance was negative at R$13.6 billion ($2.72 billion) after two consecutive positive results in July and August, a situation that hadn’t occurred since March and April of last year.

In the second week of the month, fixed income alone had R$28.2 billion in net inflows.

The fixed income class was followed by FIDCs (Credit Rights Investment Funds) with R$2.3 billion ($460 million) – R$2.4 billion in a single fund.

The following had net outflows: multimarket funds (R$4.1 billion), ETFs (Exchange Traded Funds) with R$606.9 million, pension funds (R$411.1 million), foreign exchange funds (R$57.1 million), and equity funds (R$27.7 million).

“I think we went through a period of investor outflows that may have been one of the most challenging for all asset classes at the same time at the beginning of this year,” says Bruno Mérola, an analyst at Empiricus.

“This change obviously, in my view, has a strong connection with the interest rate decline,” he adds.

This assessment is shared by Mayara Ranni Sekertzis, head of funds and pensions at Manchester Investimentos.

“The fund industry as a whole, regardless of categories, suffered a lot in the first half of this year.”

“Now we are already seeing a bit of a reversal of this process. Fixed income, from April to May, started to offer very attractive returns due to all the movements, the spreads that opened up in the market.”

The pause in the recovery in September is explained by Kaique Fonseca, an economist and partner at A7 Capital, as a result, among other factors, of the increase in U.S. bond yields.

And going forward, in his opinion, this movement is likely to continue impacting the market.

“As the interest rate there (in the United States) has risen in the long term, all interest rates in the world rise. And this certainly alters the outlook for the performance of risk assets in the world, not only in Brazil but globally,” says Fonseca.

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The market revises down its inflation forecast amid weaker economic activity data.

Oct 23, 2023

The financial market analysts’ forecast for inflation in 2023 has dropped again, from 4.75% to 4.65%, according to the Boletim Focus released on Monday by the Central Bank.

For the second consecutive week, the median of expectations for the IPCA (Consumer Price Index) remained within the inflation target range for the year, which is 3.25% with a 1.5 percentage point variation upward or downward.

For 2024, the inflation projection is 3.87%, a slight decrease from the previous week’s forecast of 3.88%. For 2025 and 2026, the predictions are 3.5% for both years. The target starting from 2024 becomes 3% per year.

The downward revision of inflation forecasts partly reflects the deterioration of economic activity indicators recently released.

Last Tuesday, IBGE (Brazilian Institute of Geography and Statistics) reported that in August, the volume of services in Brazil decreased by 0.9% compared to July, in seasonally adjusted series, after accumulating a 2.1% gain from May to July.

On Friday (October 20), the Central Bank’s Economic Activity Index (IBC-BR), considered a preview of the country’s Gross Domestic Product (GDP), indicated a 0.77% decline in August.

The financial institutions’ projection for the growth of the Brazilian economy this year is 2.9%, with a slight decrease from 2.92% from the previous week.

For 2024, the expectation for Gross Domestic Product (GDP) growth is 1.5%. For 2025 and 2026, the financial market projects GDP expansion of 1.9% and 2%, respectively.

“It seems that the restrictive monetary policy has finally started to impact the real economy, while the effects of the strong agricultural performance at the beginning of the year are dissipating,” says Agora Investimentos’ report released on Monday.

Agora, however, draws attention to the IGP-10, released on Tuesday by the Getúlio Vargas Foundation, which stands at 0.52%, the highest since July 2022.

“The IGP-10 came in stronger than expected, suggesting that wholesale inflation is back, although, for now, it is not a cause for concern in our opinion. For now, we should not expect changes in the upcoming Copom meetings,” adds Agora’s report.

According to Boletim Focus, the market expects the Selic rate to end 2023 at 11.75% per year. By the end of 2024, the estimate is that the basic interest rate will drop to 9% per year.

For the end of 2025 and 2026, the forecast is a Selic rate of 8.5% per year for both years.

Finally, the forecast for the exchange rate is R$ 5 for the end of this year. For the end of 2024, the prediction is that the US dollar will be at R$ 5.05.

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Five asset management companies talk about opportunities and risks until the end of the year

Oct 19, 2023 – Denyse Godoy

After a turbulent first half for the domestic market, the conflict in the Middle East has become the primary focus of attention for Brazilian investors in this last quarter of the year, while the domestic scenario seems to have calmed down.

See where five asset management companies are currently placing their bets – and what are the main risks on their radar:

EMPÍRICA INVESTIMENTOS

“In general, we are more optimistic about fixed income and credit in this last quarter. I believe that the main risks we face today are from the international arena – mainly due to new prospects of conflict in other regions, as we do not know the extent it may take. The worst phase in the local market has stabilized to some extent. The greater pressure ends up falling on interest rates, the speed at which we will be able to implement a reduction in the face of a more adverse external scenario, with upward pressure still in the American market.”

Leonardo Calixto, CEO of Empírica Investimentos

MULTIPLICA CRÉDITO & INVESTIMENTO

“In general, given the conditions in the external environment, with high interest rates and inflation, combined with events in Russia, Ukraine, and now conflicts in Israel, the manager’s tendency will be to adopt a more conservative strategy in pursuit of safety. In the U.S., the much-anticipated soft landing may take longer than expected, but that doesn’t worry us too much. What we have on our radar is the structural aspect of the U.S., with a growing deficit, a possible drop in economic activity, and trade relations deteriorating, which would lead to a deterioration of the U.S. financial situation. However, the fact of the war in Israel ended up benefiting Treasuries, which saw a significant increase in demand due to the increase in risk aversion. In Brazil, fixed income securities remain in the spotlight, although interest rates have fallen but remain at a high level. Regarding the Brazilian stock market, although few assets show good prospects, top-tier banks stand out with attractive multiples. The domestic economy is doing well, but elevated international interest rates for a longer period may impact the continuity of the Selic rate decline. For now, there is not enough data to make us believe in this hypothesis, but it does exist. Finally, we cannot forget that in Brazil, we are always exposed to political risks, and these should always be on our radar.”

Maria Levorin, Director of Distribution and Suitability at Multiplica Crédito e Investimento

SPARTA FUNDOS DE INVESTIMENTO

“The main event in the first semestre concerning the world of private credit was Americanas and Light, which stirred the secondary market and led to a significant repricing of all private credit papers. A good part of this distortion has already reversed, and what remains, we believe should return by the end of the year. Besides that, when we talk about prospects, the main event currently underway, affecting private credit, is the drop in the Selic rate. For higher-quality companies, the drop in Selic is almost automatically transferred to improvements in credit metrics. When we talk about credit, we are usually discussing this microeconomic world. Macroeconomic or geopolitical concerns affect this market much less.”

Ulisses Nehmi, CEO of Sparta Fundos de Investimento

TAG INVESTIMENTOS

“In terms of strategy going forward, essentially what we did and continue to focus on is an increase in high-grade assets. After the American events and the stresses from March/April onwards, we significantly increased this allocation. The review we made for this quarter was an increase in risk, especially in fixed income and NTN-B, after these interest rate hikes. In the stock market, we are quite neutral; we had a larger cash position, and now we are gradually allocating some of that cash. Considering the aggregate stock market, we had 15% in cash and are moving to 10%. Risks on our radar: I think the main one is that we are returning to an environment of great uncertainty with another war, in addition to those we had already been monitoring, and they were not few. In Brazil, there is the issue of the Legislature, some issues related to taxation and fiscal matters. Abroad, the issue of interest rates in the U.S. and Europe, where inflation will end up.”

DAEMON INVESTMENTS

“Regarding our investment strategy for the last quarter and the risks on our radar, as a quantitative analysis firm, we do not work with macro scenario forecasting because our mathematical models are designed to react to current market conditions, without assuming predictive capability. A recent example is the terrorist attack in Israel and its repercussions on global markets. Before the conflict, the fund had some positions identified as the most relevant. However, with the start of the war, some positions had their directions altered.”

Sergio Rhein Schirato, Co-Founder of Daemon Investments”

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Optimism about Brazil, Cheap Stock Market, Fear of War: How Asset Management Firms View the Last Quarter

Oct 18, 2023 – Denyse Godoy

After a significant shock in the private credit market due to crises in major companies like Lojas Americanas and Light, the decline in interest rates in Brazil, and signs of the end of rate hikes in the United States and Europe, there were expectations that risk assets, such as stocks traded on the stock exchange, could have a very positive end to 2023.

However, the attack by the Palestinian group Hamas against Israel and the fear of a broad Middle East war are dampening expectations. Nevertheless, asset management companies are still finding good profit opportunities when carefully analyzing the assets.

See how five firms see the opportunities and challenges in the capital market:

Kínitro Capital
“The multi-market fund of the firm has been acting in a more tactical manner regarding its exposure to equities, maintaining a more negative bias towards international markets and a more constructive stance towards Brazil. In the international fixed income segment, the team maintains a scenario of rising US interest rates. Geopolitical risks, as well as a resurgence in global inflation, are currently the main focus of attention.”

Carlos Carvalho, CIO of Kínitro Capital

Urca Partners

“The manager’s strategy for this last quarter will be to focus on resolving all the issues in the fund’s portfolio, particularly completing the ongoing operations and accelerating sales. On the risk side, we see rising construction costs and credit quality. The portfolios have been quite resilient, but the variability of receipts has increased, indicating that families have been facing difficulties in making their payments.”

Caio Braz, partner at Urca Capital Partners

Mantaro Capital

“Our funds are positioned for an improvement in Brazil over the next 12 months, with controlled inflation, allowing the central bank to continue reducing interest rates. There are high-quality companies in the stock market at very attractive prices. The strategy is to keep trying to capture those who benefit from the normalization of the Brazilian macroeconomic scenario. It doesn’t need to be explosive; the country won’t grow significantly, but interest rates will fall to more civilized levels.”

Leonardo Rufino, partner and equity manager at Mantaro Capital

Jive Investimentos

“We remain vigilant about macroeconomic developments and how they impact liquidity and windows of opportunity within the capital markets for new issuances. Our focus is to keep finding companies with good businesses, valuable assets, and a need for capital, either to repair their balance sheets due to excessive debt that became unsustainable after the interest rate hike or for new projects.”

Guilherme Ferreira, partner at Jive Investments

Manatí Capital

“In this last quarter, we have continued to focus almost 100% on fixed income. It is still possible to achieve excellent returns with well-balanced risks, especially due to the collateral composition and the reduction of bank credit. We have noticed that the real estate development sector is in great need of resources. The main risks ahead, in our assessment, are the increase in global interest rates, war, and domestic fiscal issues.”

Eduardo Mekbekian, co-founder of Manatí Capital

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Central Bank survey predicts that inflation will be within the target again

Oct 16, 2023

The median inflation forecast for this year has returned to within the target range for the first time since June of last year.

According to the Focus Report, the financial institutions surveyed by the Central Bank estimate an IPCA of 4.75% by the end of the year.

The value is at the upper limit of the target range set by the National Monetary Council, which is 3.25%, with a 1.5 percentage point margin.

Among the institutions classified by the Central Bank as the Top 5 in terms of projection accuracy, the index is even lower: 4.69%.

Last week, the market projected an annual inflation rate of 4.86% for 2023.

According to Jonas Carvalho, founder of Hike Capital, “these revisions probably reflect the current inflation being lower than expected and the high probability of a reduction in gasoline prices.”

September’s IPCA announced last week was 0.26%, lower than the market’s forecast of 0.33%.

“All prices are falling, except for administered prices, which are controlled by the government. It’s a price that is easier to act upon,” he added.

For the coming years, when the inflation target becomes 3%, the forecasts also indicate rates above the center of the target but within the variation range: 3.88% for 2024 and 3.5% for 2025 and 2026.

According to a note from the American bank Goldman Sachs, the projection of inflation above the target center for the coming years “probably reflects the market’s expectation that the government will have difficulties in achieving the announced fiscal goals and will be inclined to tolerate inflation above the target.”

The bank also believes that the projection is influenced by the market’s belief that “the upcoming changes in the composition of the Copom may make it more favorable to more flexible monetary policies.”

The Focus projections for other important indicators remain unchanged compared to last week.

The median market projections for the growth of the Brazilian economy in 2023 remained at 2.92%, according to the Focus.

For 2024, the median expectations for Gross Domestic Product (GDP) growth remained at 1.50%. For 2025, it stayed at 1.90%.

For the basic interest rate (Selic), the median estimates remained at 11.75% at the end of 2023, 9.00% in 2024, and 8.50% in 2025.

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Interest rate cap causes a 27% decrease in consigned loans for retirees

Oct 13, 2023 – Denyse Godoy

The CNPS (National Social Security Council) approved on Wednesday (11) another reduction in the cap on interest rates that can be charged by financial institutions for consigned loans to beneficiaries of the national public pension system.

The cap will be reduced from the current 1.91% per month to 1.84% per month for payroll-deductible loans. For consigned credit card, the maximum rate, currently at 2.83% per year, will be reduced to 2.73% per month. 

The cap has been reduced since the beginning of the year and has been criticized by financial institutions as “artificial and arbitrary.” Cuts in the maximum rate made by the Ministry of Social Security “do not take into account any technical criteria and the cost structure, both in funding acquisition and in granting loans to retirees,” according to a press release from ABBC (Brazilian Banking Association) and Febraban (Brazilian Federation of Banks).

The sector records various metrics indicating a reduction in the volume of consigned loans granted to retirees in recent months as the cap was compressed:

The average monthly grant fell from R$ 7.3 billion between May and August 2022 to R$ 5.3 billion in the same period this year, a decrease of 27%, according to data from the Central Bank.

The volume of average monthly grants between May and August 2023 is the lowest since 2018 when it stood at R$ 5.5 billion.

Dataprev reports a reduction in the average monthly grant from May to September by 12%, decreasing from R$ 4.5 billion in 2022 to R$ 4 billion in 2023.

The number of operations with retirees over 70 years of age, which pose higher risks, decreased by 35% in the same period.

“The setting of the cap at an economically impracticable level has hindered the service of those presenting higher risk, with advanced age, as well as operations for lower-income retirees,” says the statement from ABBC and Febraban.

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Brazil capital market has its best result of the year in September

Oct 13, 2023

Brazilian companies raised R$ 57.1 billion ($11.3 million) in the capital market in September, according to information compiled by Anbima (Brazilian Association of Financial and Capital Markets Entities).

It was the best result of the year, and the volume represents a growth of 23.1% compared to September 2022.

In the cumulative total from January to September, the total issuance reached R$ 290.5 billion ($57.4 billion).

This corresponds to a reduction of 28% compared to the same period last year, but the entire decrease is a reflection of the market’s contraction in the early months of the year.

“The data reinforce the trajectory of a gradual recovery in the capital market, with this rebound also influenced by the economic environment with lower interest rates,” says José Eduardo Laloni, vice-president of ANBIMA.

“It’s interesting to note that the monthly average capital raised in the last four months, from June to September, reached R$ 45.8 billion ($9.06 billion), a level similar to the monthly average for the entire year of 2022.

Debentures lead the capital raising. In September, the offers amounted to R$ 31.8 billion ($6.3 million), with a 46% increase compared to the same month in 2022.

In the year-to-date, the volume of these operations reached R$ 142 billion ($28.1 million), a decrease of 30.2% compared to the same period in 2022.

The energy sector leads in issuances, with R$ 44.6 billion ($8.8 million) in issuances for the year. Following that are transportation and logistics (R$ 15.95 billion, $3.16 million) and sanitation (R$ 15.7 billion, $3.11 million).

“It’s worth noting the extension of the average maturity of debentures, which went from 6.1 years in the first nine months of 2022 to 8.3 years in the same period of 2023, reflecting greater confidence in the capital market,” says Cristiano Cury, coordinator of the Fixed Income Committee of ANBIMA.

CRIs (Real Estate Receivables Certificates) account for the second-largest volume of offerings in 2023 (R$ 31.7 billion, $6.29 million), with a 3.5% growth compared to the same period in 2022.

Real estate funds (R$ 16.4 billion, $3.23 million) and Fiagros (R$ 7.2 billion, $1.42 million) also showed positive variations in this comparison, with an increase of 23.3% and 46.9%, respectively.

In the stock market, there were follow-on operations (subsequent offerings of shares) for the seventh consecutive month, and the result in September (R$ 6 billion, $1.19 million) represents a high of 133.8% compared to the same month in 2022.

However, in the year-to-date (R$ 29.3 billion, $5.79 million), there is still a decrease of 46.5% compared to the same period in 2022.

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Net assets of FIDCs surpass R$ 400 billion

Oct 11, 2023

The net assets of Funds of Investment in Receivables (FIDCs) have reached R$416.7 billion (around $82 billion), according to a Quantum Finance survey.

In total, there are 2,600 available funds with 4,600 active series, as reported by the data company specializing in the capital market.

The ranking of managers with the largest net assets is led by Oliveira Trust, which holds a portfolio of R$61.5 billion.

Oliveira Trust’s size is nearly double that of the second-place firm on the list, BB Asset Management, with net assets of R$34 billion.

However, Tercon Asset Management leads in the number of registered FIDCs, with 163 in its portfolio, more than three times the number of the second-place REAG Investimentos among managers with the ten largest net assets.

According to Quantum’s findings, the net assets of FIDCs exceed the volume reported by Anbima, which considers only its associated managers.

According to the latest Anbima statistics as of October 4, the total net assets were R$393.6 billion, higher than the R$386.7 billion reported at the end of September.

Funds of Investment in Receivables (FIDCs), which were previously only authorized for professional and qualified investors, have been made available to the general public, provided they meet certain criteria.

This change is one of the provisions of CVM Resolution 175, the new regulatory framework for funds, which came into effect on October 2.

Funds of Investment in Receivables consist of company receivables such as rent, checks, invoices, and payments in installments through bills and credit cards.

Under the previous rule, only professional investors with specific market certifications recognized by CVM and qualified investors with at least R$1 million in investments could access this type of asset.

For retail investors, the only way to access FIDCs was through investment funds that purchase FIDCs, provided that their portfolios contained no more than 20% exposure to this category of investment.

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ANBIMA starts to publish remuneration of financial bills.

Oct 11, 2023

ANBIMA has begun to publish the interest rates for four classes of financial bills.

According to the association, this is the first time the market has a reference for these values.

The indicative rates will assist both companies by providing a market benchmark and investors by offering price transparency.

The first day of interest rate calculation for financial bills, released on Tuesday night, reported rates between 0.5% and 1.1% for papers with a one-year maturity.

“This is an important step toward the maturation of the fixed income market,” says Luiz Masagão, president of ANBIMA’s Trading Forum.

“In recent years, we have been working to promote this segment through the disclosure of information, keeping the investor at the center of the discussions.”

The daily rates are published on the institution’s website after 8 PM.

So far, 14 institutions have been selected to provide data daily, following various fundamental criteria to ensure fair and market-relevant pricing. One of these criteria is the submission of average buying and selling rates of letters traded on the secondary market.

There are four priced classes: LF (senior financial bills), LFSC (complementary financial bills), LFSN 5- (with a maturity of up to five years), and LFSN 5+ (with a maturity of over five years).

The first day of calculation recorded rates between 0.5% and 1.1% for the senior letters with a one-year maturity. The buying rate for these assets had a range of 0.5% to 1.2%, while the selling rate showed figures between 0.4% and 1%.

For the subordinated letters, LFSN 5+ had rates of 1.3% and 1.8% for assets that are three years away from maturity. Meanwhile, LFSN 5 reported a single rate of 1.9% for the same period.

In the case of complementary letters, those with a repurchase date in four years recorded a minimum rate of 1.9% and a maximum rate of 2.9%.

In addition to these data, ANBIMA also prices a range of assets: government bonds, debentures, CRIs (Real Estate Receivables Certificates), CRAs (Agricultural Receivables Certificates), FIDCs (Credit Rights Investment Funds), and indexes.

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Investors in fixed income are now able to vote in assemblies using WhatsApp

Oct 11, 2023 – Denyse Godoy

Investors in fixed income securities, such as debentures, can now use WhatsApp to vote in assemblies called to address their assets. This service is being launched by the fintech company Vórtx, which already offers this tool for assemblies of investors in variable income.

The debut of WhatsApp voting in fixed income will occur in the four debenture holder meetings that electricity company Light will hold this month. Vórtx is the trustee for the debentures and is responsible for organizing the meetings.

Investors interested in participating must access the link on Vórtx’s website for a WhatsApp conversation with a chatbot. The chatbot authenticates the investor’s identity through questions about personal data, then presents the privacy terms that the user must agree to and presents the questions up for voting. The investor then selects from the provided options by typing the number of the desired choice.

The data is sent directly to a Vórtx platform, which tallies the votes alongside those received live. The tool is subject to the same rules as traditional distance voting, as established in Article 71 of CVM (Securities and Exchange Commission) Resolution 81. For example, investors can submit their opinions before and during the assembly.

“It’s a much simpler process than the banker seeking out the investor, presenting the legal documents of the assembly, requesting a power of attorney, asking the investor for a digital signature, and sending the power of attorney,” says Marcio Teixeira, responsible for the trustee agent offerings at Vórtx.

“This is a tool that streamlines the process and promotes the democratization of voting. More people will be voting and participating in decisions regarding their assets.”

Before the Covid-19 pandemic, assemblies for fixed income investors were rare. However, in recent months, with the increase in inflation and interest rates worldwide, more companies have faced difficulties in meeting their commitments and have called upon the buyers of their debt securities to renegotiate payment terms.

This is the case with Light, which seeks the approval of approximately 25,000 investors in meetings on the 20th, 24th, and 25th of October, to confirm the declaration of early debt maturity and legal advisors’ actions, such as the objection to the recovery plan, among other issues.

Initially, WhatsApp voting is being offered to individual investors because aggregating their votes is the biggest challenge in organizing fixed income assemblies – these investors are widely dispersed. The next step, Teixeira explains, is to offer the same solution for legal entities, such as investment funds.

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China: Giant in the Real Estate Market Fails to Pay Debt

Oct 10, 2023

Country Garden, one of China’s largest property developers, announced on Tuesday that it failed to make a payment on an international debt worth $60 million, deepening China’s real estate crisis.

The company also stated that it doesn’t expect to meet its upcoming international obligations on time, indicating that a default may be imminent.

According to the company, which was once the largest in its sector in China, its sales are facing “remarkable pressure.”

Since June, the company’s property sales have seen monthly drops exceeding 50% compared to the same period last year.

In August, sales fell by 71%, and last month, they plummeted by 81%.

Real Estate Crisis in China

In its Global Economic Outlook report released on Tuesday, the IMF mentioned Country Garden, stating that the liquidity crisis the company is facing is “a sign that real estate distress is spreading to stronger developers, despite policy easing measures.”

According to the IMF, “property developers face severe funding constraints, preventing them from completing presold homes, undermining home buyer confidence.”

The IMF also issues a warning about the risks of China’s real estate crisis to the global economy.

“The crisis in China’s real estate sector could deepen, with global spillovers, especially for commodity exporters.”

This assessment is supported by Fabrício Gonçalvez, CEO of Box Asset Management, who stated, “An economic slowdown in China could reduce demand for Brazilian commodities such as soy, iron ore, and other agricultural products.”

Evergrande

Country Garden’s difficulties add to the crisis of another giant in the Chinese real estate sector, Evergrande, which has been ongoing for nearly two years.

Fifteen days ago, Evergrande announced that it had been unable to meet the rules imposed by Chinese authorities for the issuance of foreign bonds.

The purpose of the fundraising was to raise capital to pay off part of the company’s $20 billion debt in the international market.

On the same day, the Beijing-based news website Caixin Global reported that Xia Haijun, the former CEO, and Pan Darong, the former CFO of the company, had been detained by Chinese authorities.

Hengda Real Estate, a subsidiary of Evergrande, is under investigation by the China Securities Regulatory Commission for alleged violations of disclosure rules.

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IMF Sees a Global Scenario Consistent with a Soft Landing

Oct 10, 2023

The projections in the IMF report are increasingly “consistent with a scenario of a soft landing, with declining inflation but without a significant contraction in activity.”

This statement is from the Global Economic Outlook report, released today at the annual meeting of the IMF and the World Bank in Marrakech.

The report also revised upward the growth projection for Brazil for this year, from 2.1% in the July forecast to 3.1%.

For 2024, the fund estimates that Brazil will grow by 1.5%, 0.3 percentage points higher than the previous forecast.

Here are some of the key points from the report:

IMF Report – General Overview

According to the IMF, the global economy continues to recover slowly from the effects of the pandemic, the Russia-Ukraine war, and the inflation that followed both events.

While the global economy has avoided stagnation, growth remains slow and uneven.

A full recovery to pre-pandemic growth levels still seems distant.

This assessment particularly applies to so-called emerging economies and developed countries, especially in Europe.

An exception among developed countries is the United States, where the resilience of consumption and investment is surprising.

Global Growth

In the IMF’s projections, the global economy is expected to grow by 3% this year. This is the same level as in the previous report from July.

This represents a drop of 0.5 percentage points compared to the 3.5% of the previous year.

For 2024, the IMF reduced the growth forecast by 0.1 percentage point, from 3% to 2.9%.

This would signify a slight deceleration compared to this year.

Inflation

In the fund’s view, global inflation is expected to continue its downward trajectory from the 9.2% in 2022.

The forecast for 2023, year-on-year, is a rate of 5.9%.

For 2024, the IMF expects further slowing of price increases, but at a slower pace, to 4.8%.

Core inflation, which excludes food and fuel, is also expected to continue on a downward trajectory, albeit more slowly.

The IMF’s projection for global core inflation in 2024 is 4.5%.

Services

The IMF points to three global factors that help explain the current state of the world economy.

The first is the behavior of the services sector, whose recovery is almost complete, according to the fund.

Strong demand in the sector has helped countries like France and Spain, which have a strong tourism sector, compared to nations with economies more dependent on industry, such as Germany and China.

However, this demand is starting to weaken, suggesting a reduction in inflation and labor market pressure in the sector.

High Interest Rates

The report attributes part of the economic slowdown to the restrictive monetary policy adopted by central banks to curb inflation.

The fund states that the tightening of monetary policy is beginning to weigh, but “the transmission is uneven among countries.”

According to the report, the tightening is more strongly felt in countries with adjustable mortgage rates or lower levels of household savings.

Moreover, countries are also at different stages of the interest rate adjustment cycle.

The fund mentions Brazil, along with Chile, as countries where monetary policy has already begun to be eased, compared to advanced economies where interest rates are close to their peak.

Price Shock

The third factor shaping the global economy in the IMF’s view is the price shock caused by the Russia-Ukraine war.

Economies more dependent on the import of oil and gas from Russia experienced a more acute rise in energy prices and a sharper economic contraction.

According to studies conducted by the IMF, the transmission of the rise in energy prices was the main cause of the increase in core inflation in the eurozone.

In the United States, however, the increase in core inflation is likely to be a reflection of a more pressured labor market.

IMF Report – Brazil

The IMF revised its growth forecasts for this year and 2024 upward compared to the July report.

Now, the IMF believes that Brazil will grow by 3.1% in 2023, one percentage point higher than the forecast from three months ago.

According to the fund, the revision was driven by the strong performance of agriculture in the first quarter and the resilience of the services sector.

For 2024, the estimated growth is 1.5%, 0.3 percentage points higher than the previous forecast.

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Brazilian Central Bank Survey Predicts Dollar at R$ 5 by Year-End Amid U.S. Interest Rates

Oct 09, 2023

After two weeks of stability, the forecast for the year-end value of the dollar jumped from R$ 4.95 to R$ 5.00, according to the Focus Bulletin released by the Central Bank on Monday.

In the spot market, the currency has already accumulated a 6.4% increase since September 16, when the most recent upward trend began.

During this period, the value of the U.S. currency went from R$ 4.86 to R$ 5.17, the rate recorded on Monday morning.

The increase mainly reflects the rise in yields on U.S. government bonds, which reached 4.8% for the ten-year maturity last week, the highest level in nearly 20 years.

As the survey was closed last week, it does not take into account the likely impacts of the Hamas attack on Israel, which began early Saturday.

Other financial market forecasts for key economic indicators in 2023 remained stable.

The expectation for GDP growth remained at 2.92% for 2023 and 1.5% for 2024.

For 2025 and 2026, the financial market projects GDP growth of 1.9% and 2%, respectively.

The forecast for inflation measured by the National Broad Consumer Price Index (IPCA) also remained the same as last week: 4.86% in this edition of the Focus Bulletin.

The index is 0.11 percentage point above the upper limit of the target set by the National Monetary Council, which is 3.25% with a tolerance of 1.5 percentage points.

For 2024, the inflation estimate increased by 0.01 percentage point, rising from 3.87% to 3.88%. For 2025 and 2026, the forecasts are 3.5% for both years.

According to the financial market, the Selic rate is expected to end 2023 at 11.75% per year, the same level as forecasted last week.

For the end of 2024, the estimate is that the basic rate will drop to 9% per year. For the end of 2025 and 2026, the forecast is for the Selic at 8.5% per year for both years.

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The Middle East War Takes Priority Over Data Releases

Oct 09 , 2023 – Denyse Godoy

This week includes the release of the minutes from the recent interest rate-setting meetings of the Federal Reserve (the U.S. central bank) and the European Central Bank (ECB). However, all the agenda of economic indicators and events has taken a back seat due to the outbreak of a new war in the Middle East. The Palestinian group Hamas launched a surprise attack on Israel on Saturday (7), sparking an armed conflict in the Gaza Strip that has already claimed the lives of at least 1,200 people on both sides.

Subsequently, Israel imposed a total blockade on Gaza, preventing Palestinians from accessing water, food, and fuel. Around 150 Israeli citizens of all ages were taken hostage by Hamas.

The human tragedy is immeasurable. From an economic perspective, the global financial market’s concern revolves around oil prices in case other countries in the region become involved in the war. Shortly after 10:30 AM (Brasília time), a barrel of WTI crude oil was trading up 3.8% on the New York Stock Exchange at $85.81 per barrel.

“The risk of an escalation in the conflict, involving other countries, is the main point to be monitored in the coming days. Although neither of the two countries is a major oil producer, the conflict is happening near major oil producers in the Middle East,” said Fernando Siqueira, an analyst at the brokerage firm Guide. “In Brazil, the reaction is expected to be negative in general, in line with what we are seeing around the world. Oil producers and export-oriented companies are likely to perform relatively better. More cyclical companies focused on the domestic market are likely to have weaker performance.”

Week’s Schedule

Wednesday (11)

09:00 AM: Brazil – IPCA, from IBGE

03:00 PM: USA – Minutes from the September Fed meeting

Thursday (12)

Holiday in Brazil (Our Lady of Aparecida Day)

08:00 AM – Europe: Minutes from the September ECB meeting

09:30 AM: USA – Consumer Price Inflation (September)

10:30 PM: China – Consumer Price Inflation (September)

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After a Rush to Register Investment Funds, Managers Adapt to Resolution 175

Oct 6, 2023 – Denyse Godoy

Resolution 175 of CVM (Securities and Exchange Commission) was highly anticipated.

After two years of discussions, it effectively came into effect on Monday (2nd), establishing a new regulatory framework for investment funds by consolidating 38 regulations into a single rule.

The days leading up to this change were hectic for asset management companies and administrators.

As the funds registered before the 2nd of the month have until December 2024 at most to fully comply with the new rules, those who already had products in progress accelerated their preparations.

Registration requests to CVM reached a record of 656 in September, which is 43% higher than in August and the highest for the month in the regulator’s historical series. Of these requests, only 80 were in normal operation, accounting for 12% of the total; in August, this portion was 44%.

Now, the sector’s expectation is a slowdown in registrations to allow internal teams at asset management companies to organize and adapt.

The priority is to adjust the funds that have already been registered to the new rules according to the different validity dates of each regulation.

The first major deadline is in April of next year, affecting changes related to improving communication with the manager, class names, and FIDCs (Fundos de Investimento em Direitos Creditórios – Investment Funds in Credit Rights). These are priorities for asset managers. Then, the other points need to be complied with by the end of 2024.

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Drex: Understanding the Evolution of the Brazilian Digital Currency

Oct 6, 2023 – Jéssica Araripe e Nei Zelmanovits

In the context of the global economy’s digitization, the Central Bank of Brazil (BACEN) has its own initiative in the cryptoeconomy: the creation of a Brazilian sovereign digital currency renamed Drex. With a shift in focus towards wholesale interbank operations, the project is currently in the testing phase and will preserve financial intermediation.

The primary goal of Drex is to enable financial transactions with digital assets and smart contracts that have legal validity, with the possibility of programming transactions and the potential to reduce their cost. BACEN has also indicated that Drex could contribute to the enhancement of Open Finance. When purchasing a product with Drex, financing options may be offered based on data analysis shared by institutions, potentially reducing credit costs.

These points differentiate Drex from PIX, which focuses on instant transactions. DREX operations will be settled through an authorized financial intermediary, such as a bank, within the Drex Platform, which utilizes distributed ledger technology (DLT).

Initial Actions

BACEN has been preparing the ground for the creation of a Brazilian sovereign digital currency for several years. The effort began with the establishment, through BACEN’s Ordinance 108,092, of an interdepartmental working group composed of representatives from all its areas.

With the aim of studying the potential issuance of a Brazilian digital currency, their work resulted in three initial actions: 1) the publication of the Real Digital guidelines, in line with the BC# Agenda, which took place in May 2021; 2) discussions with society regarding potential applications of Real Digital, in a series of webinars held in the second half of 2021; and 3) the Lift Challenge Real Digital, to evaluate use cases for the sovereign digital currency and its technological feasibility, at the end of 2021.

Since the beginning of 2023, BACEN has taken concrete steps to bring the project to life. It launched the Real Digital pilot project (Piloto RD), as approved in Resolution 31/2023–BCB on February 14, 2023, and updated the guidelines for the sovereign digital currency. BACEN also shifted the project’s focus to wholesale interbank operations, excluding the initial plan for retail payments.

A two-layer model will be adopted: the Central Bank will issue Drex, and, in turn, financial institutions and payment institutions will provide support for custody and distribution activities by issuing tokens known as Real Tokenized, representing demand deposits or electronic money, respectively. The goal is for Drex to function similarly to bank reserves or settlement accounts.

Testing Environment

The RD Pilot began in July 2023 with 14 approved projects, predominantly proposed by private institutions, under the coordination of BACEN’s Executive Management Committee (CEG) and following the RD Pilot’s regulations. In this testing environment, which does not involve real transactions, the initial focus is on simulating the buying and selling of federal government bonds, in partnership between BACEN and the National Treasury. The aim is to test the programmability of the currency. In September 2023, one of the participating banks successfully tested this functionality, indicating that progress is well underway.

In addition to federal government bonds, the RD Pilot aims to simulate transactions involving the issuance, trading, transfer, and redemption of other predetermined assets, such as Central Bank currencies, demand deposits, electronic money, with the possibility of expansion in the future, preferably to financial assets and securities. According to the schedule, Drex is expected to be available to the public in 2024.

Legality

The RD Pilot must adhere to the Real Digital guidelines, as updated, with a focus on finding solutions for security and privacy preservation. This is of fundamental importance. BACEN needs to ensure compliance with the legal privacy requirements applicable to the National Financial System, in accordance with the General Data Protection Law and the Banking Secrecy Law, to ensure the legality of Drex.

Regarding the legality issue, according to Article 164 of the Federal Constitution and considering BACEN’s authority to issue paper and metal currency, under the conditions and limits authorized by the National Monetary Council, as provided for in Article 10 of Law 4,595/1964, which was received as a Complementary Law by the Federal Constitution, expanding BACEN’s authority to issue digital currency requires legislative authorization.

In this regard, the Complementary Law Bill 9/2022, presented on February 24, 2022, by Federal Deputy Aureo Ribeiro, which proposes to regulate the issuance of the national currency in digital format, is currently under priority consideration in the National Congress. The bill is being examined by specific committees in the Chamber of Deputies and has already been approved by the Consumer Defense Committee.

Among the proposals of this Complementary Law Bill, it highlights the prohibition for BACEN to directly offer credit, banking products, or financial payment and investment services to consumers. The measure aims to preserve banking intermediation, benefiting the economy, privacy, and the general population as consumers and citizens.

The prohibition also seeks to shield against the risk of nationalizing the banking market that a sovereign digital currency could bring in a one-tiered model. In such a model, the Central Bank would be responsible for issuance, custody, and distribution of the currency to end-users, which could be detrimental to the stability of the system and the efficiency of capital allocation and credit provision.

Global Agenda

It is worth noting that the initiative to create a sovereign digital currency is not an isolated effort by the Brazilian government. On the contrary, it is a governmental response to the growing use of cryptocurrencies and stablecoins for financial transactions, especially involving digital assets. Additionally, it gains prominence in the context of the increasing popularity of electronic payment methods.

According to a study by the Atlantic Council, an American think tank, currently, 130 countries representing 98% of the global GDP are exploring sovereign digital currencies. Of these, 64 countries are in an advanced stage of exploration (development, pilot, or launch), with 11 launches to date, especially in Central America[1].

This plan is part of a global agenda with extensive discussions and knowledge exchange over the past few years among central banks of major economies worldwide, within the framework of the Bank for International Settlements (BIS). This international organization brings together central banks from various countries and has played an important role in advancing the project by organizing forums and working groups to discuss the technical, regulatory, and security challenges involved in implementing sovereign digital currencies, known internationally as Central Bank Digital Currencies (CBDCs). BACEN has actively participated in international discussions, particularly within the BIS, seeking knowledge and experience exchange with central banks from other jurisdictions.

CBDC projects around the world are gaining relevance as regulators from various nations express concerns about the potential systemic risk that widespread use of alternative exchange means to sovereign currencies, such as cryptocurrencies or stablecoins, could pose to the financial system.

However, given the global scale of this phenomenon, there are still significant operational and regulatory challenges ahead. To keep pace with the alternative and decentralized cryptocurrency system, regulators face the challenge of developing a transnational sovereign digital currency system with usability, efficiency, effectiveness, security, privacy, and broad public acceptance.

[1] Cf. Atlantic Council. Central Bank Digital Currency Tracker. Available at: https://www.atlanticcouncil.org/cbdctracker/. Accessed on October 2, 2023.

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Oct 05, 2023

Senate approves project that creates carbon market in Brazil

The Senate Committee on Environment (CMA) unanimously approved on Wednesday (4) Bill 412/2022, which regulates the carbon market in Brazil.

The substitute proposed by Senator Leila Barros (PDT-DF), President of CMA and rapporteur of the matter, exempts agribusiness from obligations set forth in the Brazilian Greenhouse Gas Emissions Trading System (SBCE).

Now, the matter is expected to move to the Chamber of Deputies, and the President of the Chamber, Arthur Lira, has already stated that he wants to vote on it before COP 28, at the end of November.

Understand the key points of the project:

CBEs

According to Bill 412/2022, the governing body of SBCE must develop the National Allocation Plan (PNA), which will determine the amount of emissions each operator is entitled to.

This amount is represented by Brazilian Emission Allowances (CBEs).

Each CBE (equivalent to 1 tCO2e) is considered a tradable asset, which can be received for free by operators or purchased to “offset” emission targets.

CRVE

In addition to CBEs, the project creates the Certificate of Verified Emission Reduction or Removal (CRVE).

Another tradable asset, the CRVE represents the carbon credit generated by the actual reduction or removal of 1 tCO2e of greenhouse gases.

The certificate can also be purchased by companies and used in calculations to demonstrate compliance with their targets.

Furthermore, the CRVE can be used, with authorization, in international transfers under the Paris Agreement.

Obligations

According to Bill 412/2022, companies and individuals emitting more than 10,000 tons of carbon dioxide equivalent (tCO2e) per year are subject to SBCE.

These operators must monitor and report their annual greenhouse gas emissions and removals.

Those with emissions exceeding 25,000 tCO2e must prove that they hold CBEs and CRVEs equivalent to their emissions.

Market

These assets can be traded on the stock exchange according to regulations to be established by the Securities and Exchange Commission (CVM).

Income tax is imposed on the profit resulting from sales, calculated on the net gain when the transaction occurs on the exchange, or on capital gains in other situations.

Transactions are not subject to taxes such as PIS/Pasep or Contribution to Social Security Financing (Cofins).

The use of CBEs and CRVEs to offset emissions allows for the deduction of related expenses in the calculation of taxable income and the calculation base of the Social Contribution on Net Profit (CSLL).

Penalties

Non-compliance with SBCE rules can lead to penalties such as fines of up to R$ 5 million or 5% of the company’s gross revenue. An act of the governing body of SBCE will define punishable offenses. Other sanctions include:

• Embargo on activities;
• Loss of tax benefits and financing lines;
• Prohibition of contracting with the public administration for three years; and
• Cancellation of registration.

Individuals and Traditional Communities

The project stipulates that individuals and legal entities not required to participate in SBCE can voluntarily offer carbon credits.

This rule applies to credits generated from projects or programs for the reduction or removal of greenhouse gases, such as the restoration of permanent preservation areas or legal reserves.

If they comply with the system’s rules, these credits can be converted into CRVEs and sold.

Indigenous peoples and traditional communities, such as quilombolas, can also generate CRVEs from projects carried out in the territories they occupy.

Transition

Bill 412/2022 establishes a transitional period for the implementation of SBCE-related rules.

According to the text, the governing body will have up to two years to regulate the system.

After regulation, operators will have an additional two years before they are required to meet their targets—within this period, they must only submit plans and emissions reports.

According to the rapporteur, Leila Barros, the carbon market generated approximately $100 billion in 2022, with systems in operation in various countries.

With information from Senate Agency

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Oct 05, 2003

Point by Point: The Legal Framework for Credit Guarantee Approved by the Chamber

The Brazilian House held the final vote on the credit guarantee and loan legal framework project this Tuesday. The text now goes to the presidential sanction.

Bill 4188/21 reformulates rules regarding real guarantees given in loans, such as mortgages or fiduciary alienation of real estate, among others.

The law has the potential to bring about significant changes in the sector.

In an interview with the newspaper Valor Econômico, the Secretary for Economic Reforms at the Ministry of Finance, Marcos Pinto, even stated that “the problem of credit with guarantees in Brazil is solved.”

Pinto believes the change should reduce the banking spread and have an impact equivalent to a tax reduction, without the fiscal impact of tax concessions.

Below are some of the main points of the approved text:

Extrajudicial Recovery

One of the Senate’s amendments to the project, which was maintained in the Chamber, creates the possibility of using extrajudicial measures to recover credit through notaries.

The creditor can propose a discount through protest notary offices.

With simple letter communication, email, or instant messaging app, the notary will inform the debtor about the proposal.

The acceptance period is up to 30 days. If the debtor does not accept, the notice will be converted into an indication for protest.

Encouragement for Renegotiation

Another provision allows the creditor to delegate to the notary the proposal of incentive measures for renegotiation.

The notary can even receive the value of the already protested debt and indicate any criteria for updating that amount.

WhatsApp

Another approved change allows the protest notary for any type of unpaid debt to send a notice to the debtor through instant messaging applications (e.g., WhatsApp).

This notice will be considered fulfilled only with the acknowledgment of receipt on the platform.

Proof of Life

Regarding notaries, another accepted amendment changes the law on public records to allow notary offices for civil registration to issue certificates of life, marital status, and physical or electronic domicile of the interested party.

For this, there must be an agreement with the interested institution and immediate electronic communication of the attested proof of life.

Cars

Another possibility of using extrajudicial enforcement will be to recover debts related to motor vehicles alienated fiduciarily.

Procedures will be carried out before the Detrans (State Departments of Transit), through specialized companies in centralized registration, which will perform all the acts of enforcement processing.

Second Alienation

According to the text, a second debt can be secured by real estate being purchased with the fiduciary alienation instrument in the name of the real estate financing creditor.

However, its effectiveness will depend on the cancellation of the one constituted earlier.

If there are previous fiduciary alienations, they will take precedence over newer ones if the guarantee is executed (sale of the property).

From that moment on, the guarantee for subsequent creditors will be applied to the price obtained from the sale, and the registrations of the respective fiduciary alienations will be canceled.

For the fiduciary creditor who pays off the entire debt of the debtor secured by the property, the text provides that they will be subrogated in the credit and in the fiduciary ownership, meaning they will acquire the fiduciary rights of other creditors.

The rule of early maturity of the entire debt if any installment is not paid will apply even to the second fiduciary alienation.

Same Creditor

The proposal also allows the debtor to incur new debts with the same creditor as the original fiduciary alienation.

The project’s rapporteur, João Maia, established an exception to this rule of the same creditor by choosing another institution as long as it is part of the same cooperative credit system as the original creditor institution.

For example, if the value secured by a property in the first loan is up to R$ 100,000, and the original debt is R$ 20,000, the debtor can take out a new loan with the same creditor for an amount of up to R$ 80,000.

However, there cannot be operations secured by the same property with other creditors, and all secured operations can only be transferred by the creditor collectively and to a single new holder.

Guarantee Agent

Bill 4188/21 also creates the figure of the guarantee agent, which will be designated by the creditors and will act in their own name and for the benefit of the creditors.

They may register the encumbrance of the property, manage the assets, and enforce the guarantee, even making use of extrajudicial enforcement when provided for in the special legislation applicable to the type of guarantee. They will also have the power to act in judicial actions regarding the guaranteed credit.

This agent may be replaced at any time by the decision of the sole creditor or the holders representing a simple majority of the guaranteed credits.

After receiving the value from the sale of the guaranteed property, the agent must make payment to the creditors within ten business days.

With information from Câmara Notícias Newswire.

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After the purchase of Órama by BTG, how many independent brokerage firms are left?

Oct 04, 2023 – Denyse Godoy

On last Monday (2), BTG Pactual, the largest investment bank in Latin America, announced the acquisition of Órama Investimentos, a brokerage firm based in Rio de Janeiro, in a deal worth R$ 500 million.

This acquisition was the latest in a series of moves by major financial institutions to acquire independent brokerage firms in Brazil, many of which have decades of history and tradition in the market.

BTG had recently incorporated the retail operations of Nécton, Fator, Elite, Planner, and Magnetis, while Itaú acquired Ideal and Avenue, and XP acquired Rico, Clear, and Banco Modal.

The goal of these giants in the Brazilian market is to rapidly expand their customer base, especially among retail investors, who, prior to the recent interest rate hikes, realized that there are more options to invest their money than the banks where they hold their checking accounts and receive their salaries.

Over the past decade, according to data from the Central Bank, 52 independent brokerage firms ceased operations, reducing the total in Brazil by half. Instead of just facilitating the trading of stocks, the remaining traditional brokerage firms have started offering investment funds, government bonds, private fixed-income securities, and real estate funds.

Now, according to research conducted by Capital Aberto based on Central Bank information, there are 19 national independent brokerage firms operating in the stock market:

1 – Amaril Franklin

2 – Ativa

3 – Codepe

4 – Genial

5 – Geral

6 – EQI

7 – Euroinvest

8 – IB

9 – ID

10 – Levycam

11 – Mundinvest

12 – Nova Futura

13 – Novinvest

14 – Reag

15 – RJI

16 – Singulare

17 – Sita

18 – Trinus

19 – Terra

After two years of high Selic rates, the Copom (Central Bank’s Monetary Policy Committee) started lowering the interest rate in the second half of this year and is expected to continue cutting rates, according to expert projections. This move is likely to attract more investors to equity investments and further consolidate the brokerage sector.

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BTG Pactual buys Órama brokerage for R$ 500 million ($100 million)

Oct 02, 2023 – Denyse Godoy

BTG Pactual, the largest investment bank in Latin America, has reached an agreement to purchase 100% of the share capital of the brokerage firm Órama Investimentos. The acquisition was reported earlier on Monday (2) by Capital Aberto and later confirmed by the bank.

This is another step in BTG’s plan to expand in the retail market. In a market statement, the bank mentioned that the transaction is part of its “strategy to expand its digital platforms, increase its customer base, and advance the offering of products and services for individuals.”

The deal also allows for economies of scale, resulting in fixed cost dilution, efficiency gains, and productivity improvements, according to the announcement. The completion of the agreement is subject to regulatory approval, including that of the Central Bank of Brazil.

Órama was founded in Rio de Janeiro by Selmo Nissenbaum, Guilherme Horn, Roberto Rocha, and Habib Nascif as the country’s first platform exclusively dedicated to distributing investment funds.

In addition to these partners, Rede D’Or and Globo Ventures are also selling their 25% stakes in Órama. Rede D’Or, which acquired the entirety of its stake in Órama after purchasing the health insurance company SulAmérica in 2022, and Globo Ventures, the investment vehicle of the owners of the Globo Group of communication, which had entered the brokerage in 2017.

Currently, Órama has 370 employees and 300 registered investment advisors with Ancord, managing approximately R$18 billion in assets under custody and serving 360,000 clients, who will gain access to BTG’s banking products such as current accounts and credit cards.

The management team of Órama is not included in the transaction with BTG. Part of the group of founding partners will now focus on an Investment as a Service (IaaS) business, providing solutions for retailers and companies in various sectors that want to offer investment products to their customers, according to the announcement.

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Markets watching PMIs, employment, and central bank presidents’ speeches

Oct 02, 2023

Attempting to predict interest rate trends worldwide, investors eagerly await the release of economic activity indicators like PMI (Purchasing Managers’ Index) in various countries this week, along with labor market data and statements from the presidents of the American and European central banks.

PMI indicators are calculated by different consultancies in each location but use a similar methodology: essentially, surveys answered by professionals responsible for managing supply chain procurement in companies. The surveys include questions about production volume, raw material orders, input and finished goods prices, among other aspects of business. These numbers help determine the economic trend: results above 50 points indicate expansion, while results below indicate contraction.

On Monday (2), the Eurozone’s industrial PMI, measured by Markit, the industrial PMI of Brazil, measured by S&P Global, and two indices from the United States, one from Markit and another from the ISM institute, will be released. On Wednesday (4), the Eurozone’s composite PMI and the services and composite PMIs of Brazil and the United States, all from S&P Global, will be published. All of these data pertain to the month of September.

Regarding August, the employment evolution index from Brazil’s Ministry of Labor and Employment, known as Caged, will be released on Monday (2). In the United States, the JOLTS job survey for August will be released on Tuesday (3), the private ADP employment survey for September on Wednesday (4), weekly jobless claims on Thursday (5), and the September payroll report on Friday (6).

Two weeks ago, during their respective periodic meetings to decide interest rates, the monetary policy committees of the central banks of Europe, the United States, and Brazil made it clear that they are closely monitoring all economic activity indicators to ensure that the worst of the current inflationary wave is behind us. The size of future interest rate hikes in the United States, the end of rate increases in Europe, and the continued decline of Brazil’s basic Selic interest rate depend on this.

As for expectations, the financial market hopes to glean some clues from the speeches that Jerome Powell, the Chairman of the Federal Reserve (the U.S. central bank), and Christine Lagarde, of the European Central Bank (ECB), will give on Monday (2) and Wednesday (4), respectively.

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CVM Resolution 175: Six Key Changes to Investment Funds in Brazil

Sep 29, 2023

CVM Resolution 175, which brings significant changes to the investment fund market in Brazil, comes into effect on Monday, October 2.

The regulation was published in December 2022 and has undergone some changes since then, many of them resulting from suggestions from market representatives.

“CVM Resolution 175 set records for contributions in public hearings held by CVM. It is the result of a collaborative effort,” said João Pedro Nascimento, the president of the regulatory agency.

Capital Aberto has outlined six key points of the main changes brought by the new regulation. Check them out:

Responsibility

Prior to Resolution 175, fund administrators were the only essential service providers, responsible for hiring all others, including fund managers.

With the new regulation, fund managers are also considered essential service providers, alongside administrators. As a result, fund managers share responsibilities with administrators.

This means that administrators will no longer hire the services of fund managers, and both will be responsible for selecting and hiring other service providers.

The hiring of distributors, rating agencies, and investment consultants, for example, shifts from administrators to fund managers.

Classes and Subclasses

Funds can now be divided into classes and subclasses, with each class having its own separate assets, rights, and obligations.

The fund’s classes represent the assets, and the subclasses can accommodate various target audiences, terms, investment conditions, amortization conditions, redemption requirements, and administration and exit fees.

With different subclasses, the same assets can be associated with different liabilities. In other words, within a single class within a fund, it is possible to have groups of investors with different profiles.

With this change, the segment is moving closer to international practice, and there is an expectation that, in addition to efficiency gains for fund managers, the new model will facilitate the understanding of foreign investors.

FIDCs

Resolution CVM 175 also opens up the possibility of investments in FIDCs for retail investors.

Until then, the product was only open to qualified and professional investors, those with at least BRL 1 million in financial investments.

However, retail investors’ access is limited to FIDCs composed of senior shares (with higher credit quality, superior to mezzanine and subordinated shares).

Fundos de Investimento em Direitos Creditórios are composed of receivables from companies such as rents, checks, promissory notes, and installment payments in installments and credit cards.

Investing Abroad

Resolution CVM 175 allows retail investors to invest in funds that allocate up to 100% of their net assets in foreign assets.

The limit under the previous rule was only 20% of net assets.

However, the manager must ensure that a series of additional requirements are met, including that the assets are also intended for the general public or equivalent in the originating jurisdiction.

The assets must also follow a calculation methodology for asset pricing and leverage, as well as concentration rules for assets recognized and monitored by the local supervisor.

Limited Liability

With Resolution CVM 175, fund investors gain more protection.

The regulation provides for a class of shares in which the investors’ liability is limited to the value of their shares.

This applies to classes of shares with the designation “limited liability.”

In these share classes, investors can no longer be called upon to replenish the fund if it becomes negative, as in the past.

Cryptocurrencies, ESG Funds, and Carbon Credits

Resolution 175 also addressed sustainability investments and new technologies such as cryptocurrencies.

The regulation sets rules to be followed by funds that claim to be ESG or sustainable.

There is also permission for investments in funds that make direct investments in assets such as cryptocurrencies and other crypto assets, carbon credits, decarbonization, and methane.

Previously, these investments could only be made through funds investing in futures contracts or similar assets in the regulated market or in ETFs traded in the American and European markets.

Investors will now have access to products that directly replicate an index of these types of assets in Brazil.

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Tokenization: Galapagos, Kinea, and Honey Island invest R$ 13 million in Liq

Sep 29, 2023

Galapagos Capital, Kinea Ventures, and Honey Island have participated in a funding round of R$13 million for Liqi, a company specializing in tokenization and blockchain infrastructure solutions.

Last year, Galapagos had already partnered with Liqi for a token offering of service receivables.

Now, the asset manager is strategically partnering with the fintech to continue developing new solutions for the capital market.

In 2022, Kinea Ventures, the Corporate Venture Capital fund of Itaú Unibanco, Honey Island, and Oliveira Trust also made an investment of R$27.5 million in Liqi.

These investments are aimed at the growth potential of the tokenization sector.

Liqi has already tokenized over R$90 million and expects to end the year with a total of R$250 million in tokenized assets.

The tokenization of assets has been gaining traction in the financial market, as it allows real-world assets to be transformed into digital assets that can be traded on the blockchain.

The technology provides more transparency, security, greater access to investments, and lower costs for both investors and issuers.

“The world is moving towards financial decentralization, and we believe that, with the recent initiatives from CVM and the Central Bank,” says Thomas Averbuck, a partner at Galapagos Capital.

“The timing is ideal to invest in digital assets and decentralized finance to build a more dynamic and efficient capital market,” he adds.

“For Liqi, the entry of Galapagos is very significant, as we are jointly building a strategic agenda,” says Daniel Coquieri, CEO and founder of Liqi.

“Galapagos has a robust capital market operation, a large asset origination and distribution pipeline, which we need to be able to build and develop new instruments for the financial market,” highlights Coquieri.

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Vórtx QR makes the first issuance of tokens for a multimarket fund

Sep 28, 2023

Vórtx QR Tokenizer has just carried out the first issuance of tokens for a multimarket investment fund in Brazil.

Each token represents a share of the fund and can be traded later on the Vórtx QR Tokenizer platform by the investor who purchases it. This issuance thus inaugurates a secondary market in the country for shares of multimarket funds, similar to what already exists for ETFs (exchange traded funds) and real estate funds, which can be traded on the stock exchange (non-tokenized).

The tokenized multimarket fund is the AGBI 3 Carbon Feeder, managed by AGBI Real Assets, an independent Brazilian real asset manager. Initially, 30,000 shares will be sold for R$ 1,000 each, totaling R$ 30 million.

Only professional investors, who have at least R$ 10 million available for investment, can purchase the tokens. Vórtx QR Tokenizer, a joint venture between infratech company Vórtx, which owns Capital Aberto, and QR Asset Management, specialized in crypto assets, operates in the regulatory sandbox of the CVM (Securities and Exchange Commission), an experimental environment for testing innovative financial products and services.

“We want Brazilian managers to know that they can now rely on this alternative fundraising channel,” says Fernando Carvalho, President of Vórtx QR Tokenizer. “The advantage is that when an investor wants to sell their fund shares, the manager doesn’t need to tap into cash or sell assets to provide liquidity. The token simply changes ownership.”

The token issuer has already issued approximately R$ 182 million in digital securities, including R$ 74 million in debentures from Salinas Participações, R$ 60 million in debentures from Pravaler, R$ 40 million in debentures from Indigo, and R$ 8 million in shares of QR Rispar Credit Crypto FIDC from QR Asset.”

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The Central Bank projects a 5% IPCA for the year; IGP-M rises by 0.37% in August

Sep 28, 2023

The Central Bank has maintained its projection that the inflation for 2023, measured by IPCA, will close the year at 5%, more precisely 5.01%.

This data is in the Quarterly Inflation Report released this Thursday and is the same as the previous report from June.

The predictions for monthly inflation, always by IPCA, until then are as follows: 0.38% for September, 0.41% for October, 0.39% for November, and 0.53% for December.

Inflation for 2023

The 5% projected by the Central Bank would still keep the inflation for 2023 0.25 percentage points above the target ceiling, which is 3.25% with a variation of 1.5 percentage points up or down.

However, until August, the 12-month inflation measured by IPCA was 0.19 percentage points lower than what had been forecasted by the Central Bank.

The Central Bank expects an index of 4.81%, but the number reported by IBGE was 4.61%.

The report attributes the difference “mainly to the segment of food at home, especially lower variations than those predicted in semi-processed foods, such as milk, meats, and chicken.”

According to the Central Bank, “the underlying component of service inflation also showed a variation below what was anticipated over the three-month period. The downward surprises, strongly influenced by the evolution of residential rent, were concentrated in the months of July and August and offset the higher variation observed in June.”

IGP-M

The General Price Index – Market (IGP-M) recorded an inflation rate of 0.37% in September of this year. It is the first price increase of the indicator since March of this year.

In August of this year, there was a deflation (price decrease) of 0.14%. In September 2022, deflation was 0.95%.

Even with the inflation in September, the indicator, measured by the Getulio Vargas Foundation (FGV), accumulates deflation rates of 4.93% this year and 5.97% over 12 months.

According to André Braz, coordinator of Price Indices at FGV, the producer and consumer price indices were strongly affected by the increase in fuel prices that occurred on August 16th.

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Will Brazil follow the European Green Deal?

Sep 28, 2003 – By Daniel Oliveira Andreoli and Paula Pinedo, respectively, a partner and lawyer in the competition law department of Demarest Advogados.

Around the world, it is possible to notice that large companies are investing in sustainable production and distribution methods. Apple, for example, has declared its intention to completely eliminate carbon emissions from its global supply chain by 2030. Braskem has public sustainable commitment goals to be achieved between 2025 and 2030, including expanding its portfolio with the marketing of thermoplastic resins and chemicals with recycled content, as well as plastic waste recovery. Measures like these make it clear that we are already experiencing the arrival of a new sustainable era.

Historically, all changes in the production process and, consequently, in the economy itself, bring not only benefits but also various challenges. They also require adaptations by companies, governments—through laws and regulatory processes—and even the population.

Not paying close attention to new market trends can be a risky strategy, not only for large companies but for the national economy as a whole. Large economic blocs, such as the European Union, will begin to require foreign companies to meet various sustainable requirements to export their products. Therefore, the Brazilian market, regardless of accepting bilateral agreements, will need to be prepared to face these changes.

Although large national companies are already moving towards adopting a new sustainable era, the absence of government incentives and regulations can leave the country at a disadvantage compared to major economies. Many of them have well-defined goals and strategies to meet environmental agendas.

Together for sustainability

With an ambitious plan to reduce net greenhouse gas emissions by at least 55% by 2023—and reaching climate neutrality by 2050—the European community is setting an example for the world on how to transform industrial production and the entire traditional economic chain into an integrated system aimed at combating environmental damage and preserving the ecosystem. Thus, recent moves by the European Union make it clear that the community is making every effort to implement its environmental plan.

On June 1st, the European Commission adopted a new guide to exemptions for horizontal agreements, that is, agreements between competitors, in the areas of Research and Development (R&D) and Specialization (R&D and Specialization Agreements – HBERs).

More specifically, the new rules exempt the application of competition penalties when agreements between competitors meet certain requirements, including providing social and environmental benefits.

Therefore, the new guide demonstrates that competition rules will not block agreements or cooperation between competitors aimed at a new sustainable era. Furthermore, the guidelines are quite clear. They provide an objective definition of “sustainability” based on the United Nations Sustainable Development Goals (SDGs), as well as illustrative examples of agreements that will become possible within the competitive sphere of the European Union.

Margrethe Vestager, Executive Vice President responsible for competition policy, emphasizes: “The revised rules on horizontal agreements provide clear guidance to help companies assess the compatibility of their cooperation agreements with our competition rules and include joint initiatives on sustainability. These updated guidelines are a fundamental tool for advancing ecological and digital transitions.”

Homework

The measures taken by the European Commission, therefore, recognize the importance of competition legislation in achieving climate goals. After all, the large companies affected by these rules are responsible for a significant portion of greenhouse gas emissions.

Thus, to enter the new sustainable era, national regulatory agencies, such as the Administrative Council for Economic Defense (CADE), will increasingly be called upon to establish parameters and limits for cooperation between competitors in pursuit of environmental impact reduction goals. With one of the most recognized competition authorities in the world, Brazil has great potential to lead the new era alongside major world economies and achieve promising sustainable goals.

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AGBI Asset aims for R$ 1 billion under management through innovation in land recovery

Sep 28, 2003 – Denyse Godoy

AGBI, an independent asset management firm specializing in investments in real assets, is betting on innovation in the recovery of degraded farmland to reach R$ 1 billion (around $ 200 million) under management.

AGBI’s strategy since its founding in 2012 has been to acquire farms with degraded land in Brazil, support tenant farmers in soil recovery and mature crop establishment, and then sell them with higher added value.

Now, the asset manager has just entered into an agreement with Infrapar Sustainability, led by Marco Antônio Fujihara, former coordinator of the Brazilian Forum on Climate Change, to develop projects for the AGBI 3 Carbon Fiagro Verde fund.

These projects involve the generation and sale of carbon credits and the use of new land management technologies, such as regenerative agriculture, which can boost the farms’ value.

Launched last year, AGBI 3 Carbon Fiagro Verde has already raised $16 million. The manager’s goal is to reach $60 million with local investors and increase the amount to up to R$ 1 billion ($200 million) with the participation of foreign investors. At least five farms, totaling around 30,000 hectares, will be acquired.

In recent years, the asset manager has developed a methodology to map and assess lands that can be part of its portfolio. With a team of about ten professionals, including in-house staff and partner consultants, they have already registered 960 farms in all regions of Brazil.

The vast majority of these did not pass the initial technical scrutiny, which involves legal, environmental, and soil quality criteria. Although farms from all over the country are being considered, most of the ones actually purchased are in Mato Grosso state, where the agricultural tradition reduces risks.

In the first fund with this investment philosophy, a Mato Grosso farm of about 15,000 hectares was bought for R$8 million in 2013 and sold for $37,2 million in 2021. In the second fund, a similar-sized rural property in the same state was acquired in 2017 for $6 million and sold in 2022 for $29,2 million.

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The end of credit card installment plans could harm innovation in the receivables market.

Sep 26, 2023 – Denyse Godoy

Since June 2021, when a new regulation from the Brazilian Central Bank for the credit card receivables market came into effect, the sector has flourished. The registration system has been improved, companies with different solutions for receivables negotiation have emerged, and FIDCs (Credit Rights Investment Funds) have multiplied. However, proposals to limit interest rates charged on revolving credit and to eliminate interest-free installment plans on credit cards could dampen this excitement.

In early September, the Chamber of Deputies approved the bill that created the debt renegotiation program for families and set a cap on interest rates for revolving credit on credit cards, which cannot exceed a total of 100% – currently, they can reach up to 440% per year. Now, the Senate is considering the bill, with Senator Rodrigo Cunha (Union-AL) as the rapporteur. In the context of discussions about solutions for Brazilian consumer over-indebtedness and high interest rates, the President of the Central Bank, Roberto Campos Neto, expressed discomfort with interest-free credit card installment plans that can last up to 13 months. In an August Senate hearing, Campos Neto stated the need to “discourage these very long interest-free installment plans.” “It’s not about prohibiting interest-free installment plans. It’s simply an attempt to make them a bit more disciplined,” said Campos Neto.

Retail associations immediately voiced opposition to the idea, fearing a negative impact on consumption. Installment plans are a convenience offered by merchants to customers to encourage purchases. Without this tool, consumption could decline in the country, affecting the entire economy. “Retailers rely on installment plans to make sales. If this option is not available on credit cards, they will have to find another way,” says Edson Santos, founder of the consultancy Colink Business Consulting and one of the leading experts in the country’s payment industry. He has worked for various companies in this ecosystem and authored the book “From Barter to Financial Inclusion.”

As possible alternatives to credit card installment plans, experts point to electronic installment payments, pre-dated debit card transactions, and even checks. The first option has not yet become widespread, the second, introduced more than ten years ago, has never been popular with the public, and the third is nearly obsolete. They do not (yet) support the creation of FIDCs.

They also lack a sophisticated registration system that enables them to be transacted. This registration has enabled the creation of services like the one offered since 2021 by fintech Marvin. “Retailers are increasingly selling with credit cards. Credit card networks grow every year, with new issuers, new acquirers, and sub-acquirers providing access and ease of card usage,” says Ricardo Figliolini, Chief Operating Officer and co-founder of Marvin. “We allow retailers to use these receivables balances, with high credit quality, to pay their suppliers, and we do not charge any fees to the retailer. These receivables, which were a problem and a cost for retailers, ‘frozen money in the future,’ have become a strong currency to pay suppliers and access the best credit terms, prices, and deadlines.”

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Market’s Focus for the Week: Key Data Shaping Interest Rate Decisions

Sep 25, 2023

After the European, American, and Brazilian central banks signaled that interest rates could remain at a high level for longer than the market would like, depending on temperature of some indicators, the economic data due this week are the main focus of market participants.

Investors eagerly await the release on Tuesday (26) of the minutes from the last meeting of the Copom (Monetary Policy Committee of the Brazilian Central Bank) in which the members unanimously decided to reduce the basic Selic rate by 0.5 percentage points to 12.75% per year. On the same day, the IBGE (Brazilian Institute of Geography and Statistics) will release the IPCA-15 (Broad Consumer Price Index). The Central Bank publishes its quarterly inflation report (RTI) on Thursday. Taking all this information into account, the market wants to gauge the bets for the next committee meetings — which indicated that more 0.5 percentage point cuts are on the way, but some see the possibility of deeper reductions.

In the United States, the D-day is Thursday (28), when in the morning, the GDP (Gross Domestic Product) and the personal consumption expenditures index (PCE) for the second quarter are released, and in the afternoon, Federal Reserve President Jerome Powell makes a statement during an event with educators.

In Europe, the big expectation revolves around the consumer price index (CPI), to be released on Friday (29).

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Drex and Market Regulation: Between Revolution and Evolution

Sep 25, 2023

There is little or no doubt that Drex, the digital real, is poised to revolutionize financial transactions and the capital market.

To address these changes, market capital regulation will also need to adapt.

The big question is the extent of these changes. In other words, whether investment regulation will undergo a revolution or simply evolve to incorporate the advantages of this new tool.

With the use of digital currency associated with a digital distributed ledger technology (DLT) system, many of the information currently controlled by service providers are recorded directly on the blockchain.

As participants in this network include the Central Bank, regulatory agencies, and major financial institutions, the system is fraud-proof.

This is possible due to certain characteristics of the technology.

Once information is recorded in a blockchain block, it cannot be altered or deleted without the consensus of the majority of the network. This ensures that data remains intact and reliable over time, reducing the risk of tampering or corruption.

Protection against Fraud: Since blockchain uses advanced encryption to ensure the authenticity of transactions, it is extremely difficult to counterfeit or commit fraud.

The decentralized nature of blockchain makes it highly resistant to cyberattacks, as an attacker would have to compromise the majority of the network to succeed in an attack.

Blockchain is a transparent technology. All transactions are recorded in a public ledger, and the information can be audited and verified by anyone.

Identity information can be stored in an encrypted form on the blockchain, accessible only to the legitimate owner.

According to Juliano Cornacchia, CEO and founder of Vórtx, Drex combines the advantages of blockchain with the security of the existing regulatory ecosystem.

“When I bring banks, financial institutions, as the gatekeepers of this business, you maintain the security of the existing regulation.”

In theory, some instances of control, regulation, and oversight that are currently performed by independent service providers could be moved into the blockchain.

Today, these service providers are required by regulators, who need someone to centralize this information. In Cornacchia’s opinion, the role of some of them is threatened.

“Today, I have separate clearinghouses, separate custodians, separate depositories, separate registrars, everything is decentralized,” explains Cornacchia.

One of the businesses at risk, according to Cornacchia, is registration. “There is no longer a need for Vortex or any other registrar. I have a ledger that lists all the holders of those assets. With blockchain, anyone can go there and access it.” In his opinion, the same reasoning applies to custody.

In CVM’s sandbox, an experimental environment where participants have temporary authorization to develop innovations in regulated activities, there are tests with the elimination of both the central depository and custody.

But Bruno Gomes, Superintendent of Securitization, Structured Investments, and Agribusiness at the commission, believes that this does not necessarily mean that providers of these services will disappear.

“It may be that we will still have the figure of the custodian, but working in this network, in a cheaper and more efficient way,” argues Gomes, “with more competition, reducing prices, for example.”

According to Gomes, these tests are currently being conducted in the CVM’s sandbox environment. “There are four projects there, all of them are testing this possibility,” he explains. “To what extent does this network replace, complement, or improve efficiency?”

Regulatory issues aside, João Pedro Nascimento, President of CVM (Securities and Exchange Commission), agrees that Drex will boost tokenization and the capital market.

“DREX has the potential to address issues related to the crypto economy.” And “we understand that the crypto economy and tokenization segment offer opportunities for the growth of the capital market,” he says.

In Nascimento’s view, the relationship between DREX and the programmability of money in the capital market should lead to a reduction in transaction costs.

“The creation and release of shares and other securities given as collateral will be more efficient, facilitating the execution of transactions and creating a more dynamic and inclusive capital market.”

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Sicredi, XP, and Genoa lead the multi-market fund inflow in 2023

Sep 22, 2023 – By Denyse Godoy

The financial cooperative Sicredi, based in the state of Rio Grande do Sul, is the institution that has attracted the most customer funds to the multi-market funds it manages in 2023, according to exclusive data from Quantum Finance for Capital Aberto.

Sicredi’s net inflow of funds this year until August (the most recent available data) was R$ 8.5 billion ($1.61 billion).

The month that recorded the highest net inflow of funds into Sicredi’s multi-market funds was indeed August, with an inflow of R$ 8.9 billion ($1.78 billion), coinciding with the start of the Central Bank’s Monetary Policy Committee (COPOM) cutting the basic interest rate of the Brazilian economy after three years of an upward trend.

In the annual ranking, XP Vida e Previdência comes in second place with R$ 4.77 billion ($954 million). Their best month was April, when they recorded a net inflow of R$ 891  million ($178.2 million).

In third place in the annual ranking is the São Paulo-based asset management company Genoa, with a net inflow of R$ 3.47 billion ($694 million) in the year-to-date of 2023 until August.

Their highest monthly inflow of funds occurred in June, amounting to R$ 1.27 billion ($ 254 million)

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Brazilian SEC opens public consultation on changes to shareholders’ meetings rules

Sep 21, 2023

The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) intends to amend the rules governing shareholders’ meetings, as outlined in Resolution CVM 81. One of the main proposed changes under consideration is the expansion of mechanisms for remote participation and voting in shareholders’ meetings.

Starting from this Thursday, the topic is open for public consultation to gather input from those affected by the regulation and from CVM’s technical departments.

According to the President of CVM, João Pedro Nascimento, “the reform paves the way for modernizing and expanding the ways in which shareholders’ meetings are held, facilitating not only voting but also effective remote participation.”

Nascimento also states that one of the goals is “to promote greater engagement and empowerment of shareholders, especially retail investors.”

According to Antonio Berwanger, Superintendent of Market Development at CVM, with the reform, “the desired benefits of introducing the remote voting mechanism can fully materialize.”

Key proposed changes include:

1. Expanding the scenarios where the disclosure of remote voting bulletins is mandatory for all types of shareholders’ meetings – general or special, ordinary or extraordinary.
2. Innovating the way to participate and vote remotely, allowing companies to provide additional physical locations for shareholders to participate in real-time meetings.
3. Enhancing the remote voting bulletin on various topics, incorporating CVM’s experience in applying Resolution CVM 81 in recent years.
4. Adding cases where the obligation to provide the remote voting bulletin is waived, reducing compliance costs for companies when investors do not benefit from the mechanism.
5. Adjusting the transmission flow of voting instructions to optimize the use of time for collecting, processing, and counting votes by the regulated entities involved in the process.

“This action is aligned with what I have referred to as Open Capital Markets, the democratization of the Capital Market, which aims to facilitate citizens’ journey with more understanding, confidence, and agility in their operations,” says Nascimento.

Suggestions and comments can be submitted until November 24, 2023, to the email [email protected].

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Incentivized debentures gain ground and could get a new boost

Sep 21, 2023

In a year marked by complex credit conditions, incentivized debentures have carved out a prominent space in the financial market.These investment instruments offer bondholders income tax exemptions for individuals and reduced tax rates for corporations. The emitters are mainly infrastructure companies.

Experts estimate that the total funds raised through these operations could reach R$ 45 billion by year-end. This projection signifies a 10% growth compared to the previous year, inching ever closer to the record-setting figures of 2021 when the volume reached an impressive R$ 46.9 billion.

According to Eugenia Souza, who leads the Corporate Trust division and is a partner at Vortx Dtvm, “since the new government took office, the infrastructure and concessions sector has been buzzing with excitement over new investment opportunities and sectoral growth. This enthusiasm is largely fueled by the anticipation surrounding the government’s flagship initiative, the PAC.”

However, Souza notes that the results could have been even more robust if not for the market’s struggle with high interest rates.

On Tuesday, the Senate approved another bill that allows public service concession companies to issue debentures and deduct a portion of the interest payments.

Under the proposed changes, issuers will have the opportunity to deduct 30% of the amount spent on interest expenses from the calculation base for the Income Tax and Net Profit Contribution base.

According to PL 2.646/2020, these debentures must be issued by December 31, 2030, and their issuance must adhere to regulations outlined in the laws governing investment funds in the sector.

It’s important to note that while the bill has received approval from the Senate, it has undergone amendments and will require further scrutiny by members of the Chamber of Deputies.

Under the provisions of the bill, the funds raised through debenture issuance must be directed toward infrastructure investment projects or activities heavily focused on research, development, and innovation.

Furthermore, infrastructure debentures may even be issued by direct or indirect controlling entities of concessionaire companies.

Eugenia Souza offers insights into potential strategies, stating, “In our view, there may be a movement towards early debt settlement under the framework of Law 12.431, followed by the issuance of new debt to capitalize on the tax benefits. This is also an opportune moment for concessions that have changed their economic group to strengthen their financial positions while enjoying the potential for reduced tax liability in terms of income tax and net profit contribution.”

According to the Ministry of Finance, the volume of debentures in relation to Brazil’s Gross Domestic Product (GDP) currently stands at approximately 9%, significantly lower than the figures seen in the United States (30%) and the United Kingdom (15%).

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Central Banks confirm expectations on interest rates; future depends on economic data

Sep 20, 2003 – Denyse Godoy

As widely expected by the global financial market, tthe Federal Reserve (Fed) kept the basic interest rate of the United States’ economy within the range of 5.25% – 5.5% per year, the highest level since the beginning of 2001.

 In Brazil, the Copom (Monetary Policy Committee of the Central Bank), on the other hand, reduced the Selic rate by 0.5 percentage points to 12.75% per year, marking the second consecutive cut.

Commenting on their decisions, both monetary authorities made it clear that the next steps depend on economic data to be released in the coming weeks, measuring the temperature of economic activity and prices.

In the United States, uncertainty and concerns that the inflation threat may not be over yet are greater than in Brazil.

 “Maintaining a cautious stance is less costly for the monetary authority than a scenario where there is a reduction in the expectation of the basic interest rate, and it appears to be more consistent in a context where there has been an increase in the GDP [Gross Domestic Product] growth projection and a decrease in the unemployment rate,” says Marianna Costa, chief economist at the TC trader community.

The Copom stated that the magnitude of the cuts adopted so far is “appropriate” for further reductions in the upcoming meetings and emphasized that the magnitude of the total monetary easing cycle will depend on a set of variables, primarily inflation dynamics and expectations.

“Even if the Copom continues to assess the balance of risks for inflation as symmetric (which is more likely), upside risk factors have recently become more of a concern for market analysts,” says Sérgio Goldenstaien, chief economist at the Warren Rena asset manager.

“Among them are the recent rise in oil prices, the increase in Treasury yields – the 10-year rate reached its highest level since 2007 – the global strengthening of the dollar, which has contributed to interrupting the real’s appreciation trend since early August; robust data on economic activity and the labor market in the country, which could lead to greater resilience in service inflation; and greater concerns about fiscal policy execution next year.”

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Regulatory Challenges of Using Investment Robots in the Capital Market

Sep 20, 2023

Disruptive technologies have been impacting various economic and social sectors, and, evidently, it is no different with the capital markets. It’s not news that automation has been a part of stock market operations for quite some time. In fact, a significant portion of the market can only imagine what the floor trading was like on the old Bovespa and BM&F stock exchanges. In this environment of coexistence with technology, the capital markets are seeing a new alternative: the so-called “investment robots.”

Although popularly known by this name, investment robots are actually artificial intelligence services offered to investors by financial institutions. These are automated systems based on algorithms programmed to make investment decisions based on a set of information. For example, the investor’s profile, data on a specific asset, news that may influence its valuation, and trading history (machine learning).

The regular use of artificial intelligence for this purpose is subject to obtaining the appropriate registration with CVM (Brazil’s Securities and Exchange Commission), which may vary depending on the automated activity performed. Considering this difference, investment robots are divided into two main categories: robo-advisors and robo-traders.

Robo-Advisors

Robo-advisors are those that base their decisions on the investor’s profile. They can be further subdivided into robo-advisors, which only recommend investments to be made by the investor themselves, and robo-managers, which execute investments automatically.

The use of robo-advisors aims to increase the efficiency of stock trading, optimizing investment exploration through quick analyses that minimize human effects (such as errors and biases, for example), while adhering to rules related to the adequacy of the investor profile analysis, also known as suitability.

Robo-Traders

On the other hand, robo-traders are those that base their decisions on pre-set price patterns by the investor and execute operations without human intervention.

They are often employed to implement the High-Frequency Trading (HFT) technique, which involves trading a high financial volume in order to execute multiple transactions within fractions of seconds and profit from fluctuations in asset prices.

Although HFT practice is not inherently harmful, it can clash with two important pillars of the capital markets: transparency and equity. This is because the speed of transactions combined with the ability to cancel orders can create a perception of artificial supply and demand, unduly interfering with the formation of asset prices and misleading investors. In this scenario, HFT can create conditions for the commission of the offense of price manipulation in the capital markets, especially in the forms of spoofing and layering.

Prohibited by Article 2, II, “b” of CVM Resolution No. 62/2022, spoofing and layering are terms that refer to the submission of orders without the intention to execute them, creating an appearance of liquidity for a specific financial asset. From this perspective, offers are sent both for buying and selling, with only one of them being desired while the other is purely fictitious.

The false offer creates pressure on that side of the order book, inducing other investors to modify their orders to follow the trading. After reaching the desired offer value, the artificial offers are canceled. Despite their common characteristics, spoofing and layering are distinct: the former is characterized by inserting a single fictitious offer in a significant batch; the latter involves inserting successive artificial offers in small batches.

Artificial intelligence has been widely used in the capital markets for some time now, and the trend is for this use to be increasingly explored in a creative manner. Therefore, the use of artificial intelligence in stock trading represents a regulatory challenge that has been around for some time, perhaps as enduring as creativity and the potential for innovation in the capital markets.

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International mergers and acquisitions involving Brazilian companies totalled R$ 145 billion up to August.

Sep 20, 2023

The number of international mergers and acquisitions involving Brazilian companies amounted to R$ 145.5 billion from January to August.

According to a survey by TTR Data and Tozzini Freire lawyer firm, there were 1,282 transactions. This represents a 27% decrease compared to the same period last year.

In August, there were 151 mergers and acquisitions recorded, both announced and completed. These transactions totaled R$ 16.8 billion.

The sector with the highest number of deals was Internet, Software & IT Services, with 254 transactions.

Next came the Business & Professional Support Services segment, with 197 transactions.

The United States and the United Kingdom, with 108 and 35 transactions, respectively, were the countries that invested the most in Brazil.

Conversely, Brazilian companies also chose the United States as their main investment destination, with 19 transactions, followed by the United Kingdom with seven operations.

In the Private Equity sector, there were a total of 57 transactions, amounting to R$ 17.6 billion. This represents a 21% decrease in the number of transactions compared to the same period in 2022. However, the capital mobilized increased by 28%.

There were also 378 Private Equity investment rounds, 41% fewer than last year, with a total movement of R$ 12.2 billion.

According to Thomas Monteiro, a partner at Olimpia Partners, despite the predominance of operations in the IT and professional services sectors, Brazil is uniquely positioned to benefit from M&A transactions in the agribusiness and energy sectors.

This is primarily due to three factors: its abundant natural resources, favorable climate, and substantial market size.

The operation highlighted by TTR Data in August was the completion of the $2.5 billion sale of Aesop by Natura to L’Oréal.

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Overindebtedness Leads Banks to Support the End of Revolving Credit on Credit Cards

Sep, 20 2023 – Denyse Godoy

The House approved on September 5th a bill that assigns the National Monetary Council (CMN) the task of setting limits for credit card interest rates. The Senate still needs to vote on it. The President of the Chamber, Rodrigo Cunha, who will be the rapporteur of the bill, has already stated his intention to address the matter with great “responsibility.”

According to leaders of large and medium-sized banks interviewed by Capital Aberto, the overindebtedness of Brazilians has led financial institutions to support the idea of self-regulation. “Of course, interest rates need to compensate for the credit product, but there is a lot of abuse on the part of financial companies that only deal with credit cards,” said an executive from one of the largest banks, who asked not to be named because they are not authorized to speak publicly on the matter. 

Credit card issuers and other post-paid payment instrument providers used in open arrangements (flagship cards) or closed arrangements (retail network cards) will be required to submit a self-regulation proposal to CMN regarding interest rates and financial charges charged on revolving credit and balance installment payments on credit card bills.

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Brazilian Central Bank expected to reduce interest rates by at least 50 base points

Sep, 19 2023

The Brazilian Central Bank Monetary Policy Committee (Copom) is expected to reduce its the basic interest rate (Selic), which is currently at 13.25% per year, to 12.75% per year in its sixth meeting of the year in Brasília, which starts this Tuesday.

If confirmed, this will be the second rate cut since August when the monetary authority halted the tightening cycle.

In the statement from the last meeting in early August, Copom informed that the Central Bank directors and the president of the organization, Roberto Campos Neto, unanimously anticipated 0.5 percentage point cuts in the upcoming meetings.

According to the most recent edition of the Focus Bulletin, a weekly survey with market analysts, the basic rate is indeed expected to drop by 0.5 percentage points, although some institutions project a cut of up to 0.75 points.

The financial market’s expectation is for Selic to end the year at 11.75% per year. On Wednesday, the 20th, at the end of the day, Copom will announce its decision.

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Challenges Faced by Casas Bahia Extend the Winter of Brazilian Retail

Sep, 19 2023 – Denyse Godoy

The decline in interest rates in Brazil after two years and the prospect of accelerated economic growth in the country have fueled speculation that the crisis in the national retail sector could be nearing its end. However, the growing challenges faced by Casas Bahia, an emblematic name in the industry, are discouraging the most optimistic investors.

The company’s last follow-on to raise funds and reduce debt disappointed. Casas Bahia sold new shares at R$ 0.80 ($0.16) each on Wednesday (13/09), which represented a 28% discount compared to the closing price on that date. Instead of raising R$ 1.1 billion ($220 million), the chain only managed to raise R$ 623 million ($124 million). In the following two trading sessions, it lost about 36% of its market value.,

Concerns about Casas Bahia’s ability to honor its financial commitments continue to rise.

The credit rating agency S&P downgraded it from brAA- to brA-. With this downgrade, investors holding R$ 420 million ($84 million) in CRIs (Real Estate Receivables Certificates) issued by the chain in 2022 could request the early settlement of that debt.

According to credit analysts, the number of stock market investors betting that Casas Bahia may enter recovery, like Lojas Americanas, another retail giant, is small, but growing. 

In the coming days, all eyes are on the unfolding of this situation, which could either increase or further reduce the financial market’s confidence in the entire retail sector.

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Investment Funds: Anbima Publishes New Regulations and Reclassifies Real Estate Funds

Sep, 19 2023

he Anbima (Brazilian Association of Financial and Capital Markets Entities) has published a new Third-Party Asset Management Code with modifications to adapt the text regarding investment funds to CVM (Brazilian SEC) Resolution 175, which comes into effect on October 2.

Among the main updates, the document includes rules for funds with investments abroad, the inclusion of real estate funds and FIPs (Investment Funds in Participation) in sustainability rules, and a new classification for popular real estate funds.

With these changes, real estate funds will have three main classifications:

Brick (Tijolo): for products with more than two-thirds of their net worth, directly or indirectly invested in real estate and real property rights.

Paper (Papel): with more than two-thirds invested in investments in securities and/or values permitted by regulation.

Multi-strategy (Multiestratégia): not adhering to either of the previous two criteria.

For investments abroad, Anbima now requires the fund manager to provide information about the assets in the portfolio.

“The new rules, in addition to being in line with the regulator, aim to bring more transparency to the investor,” said Zeca Doherty, the association’s executive director.

The new version of the code comes into effect on October 2, along with CVM Resolution 175. However, the classification for real estate funds has a different deadline and will come into effect on April 1, 2024.

Existing funds as of this date will have until December 2024 to comply with the new regulations.

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Fitch: Credit Recovery Expected to Stabilize Ratings of Brazilian Companies

Sep, 19 2023

The expectation of a gradual improvement in economic activity and the return of credit should enhance the ratings of Brazilian companies.

This assessment comes from Ricardo Carvalho, Managing Director and Head of Corporates Brazil at Fitch Ratings.

“We expect there to be a slowdown in credit rating downgrades in the second half of 2023,” Carvalho said. 

According to the executive, Fitch downgraded the credit rating of 25 companies in the first half of the year. This volume was higher than the total for the entire years of 2021 and 2022 combined.

The main reasons for these downgrades were disappointment in operational cash generation, high cash burn due to interest rates, increased leverage, and a sharp contraction in credit.

Selective Market

“Domestic issuances have contracted by 42% in the first seven months of 2023 compared to the same period last year. However, there are clear signs of the return of credit supply,” Carvalho said.

In his assessment, despite the return of credit and the improvement in the ratings of Brazilian companies, the market is likely to remain selective.

Therefore, the focus should be more on issuances by companies with higher credit quality, with AA (bra) ratings or above.

In the international market, the outlook is also positive.

According to Natália Brandão, Associate Director of Corporates at Fitch Ratings, the bonds market for Latin American companies is beginning to show a moderate recovery, which could benefit Brazilian issuers.

Bonds issuances by Brazilian companies totaled $8.4 billion in the year-to-date until the first week of September 2023, already surpassing the amount issued in 2022.

“There is an expectation of a gradual resumption of fundraising. However, Fitch believes that at this time, issuances should focus on traditional bond issuers and those with ratings in the BB category or above,” Natália said.