In the last few months, we have seen relevant falls of High Yield credit FIIs (riskier credits). Between them, HCTR11, DEVA11, TORD11 e VSLH11.
Since April 2002, we have brought our pessimistic view on the class in the face of high interest rates.
Our view is: if large companies could have relevant impacts on their profitability and cash flow generation with the increase in financial expenses, what is left for companies that have lower credit quality?
The graphics below show the maximum drop faced by an investor in these assets¹:
What do we know?
After the Americanas event, we began to perceive a tendency of stress in the credits of some companies (CVC, Light, Marisa, among others).
These events of debt renegotiations of big players are the main symptoms of a national trend of economic-financial problems in view of the increase in the cost of debt with the increase in the CDI rate.
That said, if large companies, with solid balance sheets, high banking capacity and access to the capital market, are suffering, what to expect from smaller companies or projects and admittedly more risky?
The answer is simple: greater refinancing difficulties and lower ability to pay creditors.
In this sense, at the beginning of the month, one of the CRIs gifts in wallet HCTR11 presented delay in your paymentsbeing discharged days later.
This fact, in our view, was yet another symptom of any credit problems.
In addition, last week, one of the CRIs that make up the fund’s portfolios won an injunction exempting it from paying interest and amortization for 60 days.
To add fuel to the fire, all the FIIs above are part of the same financial holding company, despite having different strategies and being owned by separate managers.
In addition, some of them are positioned both in the debt of certain projects and in share capital.
This puts the manager in a difficult situation, as if he executes guarantees or collects debts, he could “harm” the shareholders who are in the share capital.
If it is softer in debt collection, it would be harming shareholders who are positioned in the company’s debt.
What are the implications for investments?
The event confirms a long-term vision of the Allocation area at Warren, of focus on very high quality debt (High Grade) or in credits that have a structure of very robust guarantees and that give extreme comfort in the payment of the principal and interest, in case any problem occurs with the company or project.
In addition, it reinforces the importance of deeply understanding the governance behind the investment products in which we allocate, seeking to guarantee the maximum transparency to shareholders regarding the risks involved.
What is the positioning of Warren’s Allocation area?
The area believes, despite the cooling of inflation at the end of last year, in a Selic rate at high levels for a long period.
That said, we continue with the view that higher risk credits deserve care and in-depth analysis.
With the current drops, we will not deprive ourselves of analyzing potential opportunities that the market may offer, but always guaranteeing the governance alignment and deep understanding of guarantees and structures behind these debts.
What lessons can investors draw from this moment?
The main lesson for FII investors is that we should not just be guided by a high charge (IPCA+11% or CDI+7%, for example), a high dividend yield or short-term profitability to guide our investment decisions.
We suggest that investors take the time to understand the thesis, or that hand over management to competent professionals, who dedicate their day-to-day to analyzing and managing portfolios in the desired segment.
But how do I find these managers?
Warren offers a managed portfolio of FIIswhich includes in-depth analysis of the entire investment team and is 100% aligned with the clients’ objectives.
See below the profitability² of the portfolio:
Notes on the graphics:
1 The charts have different start dates to correctly reflect the calculation of the maximum drawdown that an investor would have in the asset, each FII starts on the date of its IPO.
2 Profitability calculated from the theoretical return on the recommended portfolio of FIIs deducted from the cost of administering the managed portfolio.
If you are interested in investing in FIIs with specialists, register and we will contact you.