Debt defaulting plan, already denied, reduces investment in the area – 10/10/2020

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Anyone who invests in the precatory market already enters this business knowing that it is an application with a high return, but with a risk to receive. Precatories are debts that the government has to pay because the court has already decided. But the degree of uncertainty increased last week after government officials considered freezing the transfer to those entitled to this payment, diverting billions of reais to finance social programs.

The government test balloon did not last 48 hours, but it was enough to leave behind companies and investors that operate in the precatory market. Business decreased and changed profiles, according to companies in the sector. They do not reveal what the reduction was.

“It is obvious that between the first statements and until we have a final and definitive definition on the subject, we take our foot off the accelerator. There is an additional uncertainty,” said Arthur Farache, president of Hurst Capital, an online investment platform, specialized in real assets, such as precatory.

Greater selectivity

According to him, the company continues to look for investment opportunities to offer precatorios to investors who access the platform. But this process is being more selective.

Today we are active and buying, but we are using more conservative models to choose precatories.
Arthur Farache, Hurst Capital

According to him, more conservative claims are those of lesser value and of a food nature – which originate from lawsuits that discuss salaries, salaries, earnings, pensions, social security benefits and indemnities for death and disability.

Precatories of lesser value and classified as of a food nature have priority in the payment queue and, therefore, usually take less time to be paid off.

How precatory investment works

Precatories are bonds that represent a payment of debt that the government has to make. When a person or company files a lawsuit in court to receive a payment from the federal, state or municipal government and wins this process after all resources are exhausted, the court orders the government to pay what it owes. This obligation is the precatory.

Estimates point to a stock of more than R $ 150 billion in indemnities due only by the Federal Government in court today.

Delays create space for speculation

The problem is that governments take years to pay even with a court decision. And this makes room for the precatory to become an investment.

Whoever wins a lawsuit against the government and does not want or cannot spend years waiting for the money, can receive the capital immediately, selling this precatory to law firms and online investment platforms, such as Hurst Capital and Precatórios Já.

These companies are able to buy precatories at a discount because they are advancing money and assuming the cost of time to receive. And, in this way, these platforms can offer the precatory to investors, who keep a part of the gain when the precatory is paid in full.

Since 2018, the approximately 3,000 investors who have used the Hurst platform have had an average annual return of 15% per year by investing in assets as preconditions of the federal government.

Government gave a scare

Firms that operate in the precatory market prefer federal government bonds because the degree of uncertainty is less than that of state governments.

In the federal government, a precatory issued by the Court until July of one year is paid until December of the following year, or the Union is considered in default. As this “default” undermines the investment grade given by international risk rating agencies, the federal government does not usually delay the payment of the precatory.

This is one of the reasons that caused greater surprise among market agents when the government suggested the possibility of postponing the payment of precatories already sent to 2021.

The federal budget for precatories in 2020, for example, is R $ 53.45 billion. But if the government’s idea of ​​limiting the payment of precatories – to only up to 2% of the Union’s current net receipts – was already valid, this would reduce the disbursement with precatories to less than one-third.

Despite the greater conservatism, professionals in the sector say that the market for precatories will continue to function as an investment alternative for those looking to diversify the portfolio with real assets.

“We have professionals here who have worked with precatórios for 30 years and have gone through many periods of ups and downs over that time,” says Farache, from Hurst.

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