Out of Lehman's Ashes, a Niche Brazil Fund Returns 115% a Year

  • Jive started out buying 816 million-real portfolio from Lehman
  • Distressed-asset market may be worth over 400 billion reais

Back in 2014, Jive Investments Holding Ltd. was knocking at the doors of U.S. hedge funds trying to create a partnership to invest in Brazilian distressed assets.

"They just weren’t interested in coming here," said Guilherme Ferreira, Jive’s 37-year-old co-founder. The market was simply too small.

These days, Jive is the biggest independent buyer of distressed assets in Brazil, and those same funds that passed over the chance to team up are hunting for opportunities, he said. While Ferreira declined to name the firms, he said the motivation behind their change of heart is obvious: Delinquencies are surging amid Brazil’s worst-in-a-century recession, prompting banks to unload non-performing loans for pennies on the dollar.

“Brazil as a whole is distressed,” Ferreira said. “Things that didn’t look like they were in trouble suddenly are. Investments that were once considered investment grade have turned into high yield.”

Jive, which got its start snapping up bad corporate loans and distressed bonds after Lehman Brothers went bust in 2008, has posted an internal rate of return that tops 115 percent in each of the past five years, Ferreira said. Bloomberg couldn’t independently confirm that figure. In August, Jive struck the kind of deal it was hunting for all those years ago, raising 500 million reais ($138 million) from Credit Suisse Group AG’s private-banking clients, according to statements from both firms.

Distressed asset funds such as Jive acquire credit portfolios at aggressive discounts, usually from large banks, and then earn a profit by collecting on the loans, renegotiating with the borrowers or repackaging the debt and issuing securities.

Jive bought Lehman’s Brazil portfolio -- whose face value was 816 million reais -- for just 27 million reais in a 2010 court-approved sale, Ferreira said. The firm has already collected 16 percent of the principle and is aiming for 30 percent -- or about 244 million reais -- in the next five years, he said.

With most economists agreeing that Brazil isn’t any closer to turning a corner on its recession, Jive estimates that banks and others could be sitting on at least 400 billion reais in bad loans. In 2014, buyers of that debt closed deals with a face value of 15 billion reais, Ferreira said. Jive plans to boost its headcount to 85 employees by year-end from 67 now to tackle more distressed debt and expand into private equity. It’s also negotiating states’ liabilities and looking into the real estate sector.

Brazil’s economy is poised to shrink 3.5 percent in 2016, according to a central bank survey, adding to a 3.8 percent contraction last year. Meanwhile, annual inflation is running above 10 percent and unemployment in Brazil’s six biggest metropolitan areas has surged to 7.6 percent from 4.3 percent at the start of last year, data compiled by Bloomberg show. Brazil’s real tumbled 2.9 percent to 3.7659 per dollar as of 4:11 p.m. in Sao Paulo.

All of that is making it harder for consumers and businesses to pay their bills. Personal delinquency rates soared to 6.2 percent in January from 5.3 percent a year earlier, the central bank said. And the number of companies filing for bankruptcy protection in the first two months of the year doubled, according to Serasa Experian, a Sao Paulo-based credit-rating company.

In February, Jive bought a portfolio valued at 2.2 billion reais from Itau Unibanco Holding SA, Latin America’s biggest bank by market value, according to three people familiar with the transaction who asked not to be named because they’re not authorized to speak publicly on the matter.

“From one day to the next, Brazil became a huge opportunity for buyers of distressed assets," said Ferreira, who declined to confirm the Itau portfolio acquisition. "Banks that never thought about selling loan portfolios are now selling."

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