WorldVest is initially aiming to raise roughly R$173 million ($100 million) in a Brazilian receivable investment fund (FIDC) that the merchant bank announced yesterday, according to CEO Garrett K. Krause.
“As we start signing up more business we’ll just grow the fund as needed,” he added.
The fund collateralizes private-label credit cards and consumer loans paid in installments, originated by eight middle-market Brazilian retailers with annual revenue of R$6 billion.
WorldVest expects to have a 20% subordination in the form of shares that the arranger itself will purchase. The projected coupon is 125% of the benchmark CDI rate, and the final maturity will be five years.
Krause said foreign investors were welcome to buy into the senior piece but that some potential buyers WorldVest had spoken to were reluctant to take on the currency risk naked and a reais/dollar hedge is not economical. But he pointed out that the liquidity of the domestic market has been strong enough to easily absorb FIDC issuance. “There’s so much money available from Brazilian-based funds, and they understand the market,” he added.
WorldVest has tapped S&P to rate the deal and is aiming for a double A or higher on the national scale.
Middle-market companies are underserved in Brazil, and this is where WorldVest is looking to focus its efforts, Krause said. He sees a good deal of untapped potential in retail, a sector hungry for funding to keep up with rising consumer demand. “They need more capital and liquidity to grow,” Krause added. And their needs are not being met by the large banks that dominate Brazil, which focus on large corporates.
Very low default rates among Brazilian consumers are another draw for financiers. But as more Brazilians take on credit, the incidence of defaults might trace the upward trajectory of other countries that have undergone rapid consumer debt expansion. However Krause said that size of consumer interest rates in the country — among the highest in the world — provides breathing room should defaults go up.