The volume of “short” positions in IRB3 shares (IRBR3) hit a record this Tuesday (30) very close to the limit allowed by B3.
On the eve of the implementation of the equity bid to raise funds that are vital to its continued operations, the IRB saw the number of open positions – leased shares that were not covered or repurchased – up to 717 million, equivalent to 27.2% of your free float (stocks outstanding in the market), according to stock exchange data compiled by XP.
Investors usually take a short position in a stock when they think its price will go down. In practice, they do this by renting shares from other investors, and selling them in the market with the intention of buying them back at a lower price in the future. Your gain is in this difference.
Last week, due to an increase in demand for operations, B3 raised the IRB share lease limit from 25% to 30% from free floatwhile cutting the limit of options in company shares from 35% to 30%.
• IRB (IRBR3): Between a stock offering that offers a strong discount and a jump in “sell”, what can be expected of the company?
Part of the betting on the fall of IRB shares is carried out by investment funds. Since December last year, more Brazilian stocks and hedge funds have been sold than reinsurers’ shares have been bought, according to data compiled by Economica. The latest numbers are from April of this year, when managers have up to 90 days to notify the Securities and Exchange Commission (CVM) of the composition of their portfolios.
Many of these funds adopt “long and short” or “long and short” strategies, setting up operations with pairs of assets that, in the managers’ view, will perform differently over time.
Nearly a hundred portfolios had some “short” positions in the IRB in April, holding the reinsurer’s stock on lease, while 220 had “long” positions. Although they are occupied by fewer managers, the funds’ short positions far outnumbered the long positions. The balance amounted to -169 million riyals in April.
Some managers with short positions in the IRB in April have sold off in recent weeks. “We got to zero a few weeks ago, when the reinsurance company’s stock rent started going up and making the process more expensive,” says one of the managers who heard it Infomoney. Yesterday, in the face of increased demand, the average cost of leasing IRB shares was 69.5% annually. The fee is collected by the person who owns the papers and is willing to “lend” them temporarily to investors interested in a “short” action.
Other managers intend to participate in the IRB stock offering specifically to reduce or even close the short position now.
Clarified: When announcing a capital increase, last Wednesday (24), the reinsurance company informed that it intends to raise up to R$1.2 billion with the operation to reformulate regulatory indicators and avoid interference by the Supervisory Authority of Private Insurance (SOSEP). ). Initially, it intended to issue 597 million shares – these were priced, at the date of the announcement, at R$ 2.01.
However, the company left open the possibility of increasing the number of issued shares by up to 200% to raise the same 1.2 billion Brazilian reais, which means that the securities offered in the offer will appear at a price significantly lower than market prices. . According to the calculations of companies such as Safra and BTG, if the Immigration and Refugee Board issues the maximum number of shares, the discount will raise prices to the level of R$0.66 or R$0.67. Looking at this perspective, stocks are renewing historical lows in recent days, and closed yesterday’s trading at 1.72 Brazilian Real. At 11:10 AM (Brazilian time) today, the price has dropped to R$ 1.69.
For those in open rental positions, participating in the offer of shares and buying them at a price well below the market price at which they were sold is a good business.
“For us, this is a binary situation: if the bid comes in the range of R$0.70, we will close the position. If it goes to BRL 1 or BRL 1.10, we will not go to zero,” says the manager who has a suitable short position at the IRB, hearing him Infomoney. In his opinion, current prices are much higher than what the securities are actually worth and will be adjusted by the market. “Even if the company stops losing, and will stop at some point, its profit will be marginal,” he explains.
Complex mode and endings
Listed in B3 in 2017, the IRB has been going through a hell of a lot since February 2020, when the director of Squadra published a letter to the market citing a series of “inconsistencies” in the IRB’s balance sheet. Until then, the company had made a profit that impressed investors: its return on equity (ROE) was 34% in 2018, while the average in a group of about 30 global reinsurers did not reach 5% in the same year. The return on equity for the Immigration and Refugees Bureau (IRB) is estimated to reach 45% in 2020.
The disclosure of evidence of fraud led to a series of events from which the company struggled to recover – some of it serendipitous and unrelated to the uncertainties that surrounded its balance sheets up to 2020. This year, and especially in the second quarter, the results have been harsh, impacted by the activation of the company’s rural insurance due to the drought that hit the southern region. The loss of agribusiness, which did not exceed 108%, amounted to 124% and was the main reason for the loss of 373 million Brazilian reals in this period.
“The company was in the process of reorganizing, doing an honest job, but luck was bad. The topic of rural insurance was unusually scary, and now the Immigration and Refugee Board has to make the offer, there is no alternative,” says one of the managers. Since it has provided insufficient capital to meet regulatory requirements, if it does not solve the problem soon, it runs the risk of interference by Susep. “If that happens, the situation for the company will only get worse.”
Given the imminence of the problem, a major uncertainty surrounding the market is whether the IRB stake offering will be able to raise as many resources as intended, and whether they will in fact be sufficient to address the financial gaps and boost the company’s return to growth.
It was dropped but still very expensive
What appears to be a common talk among managers is that the IRB, at screen price, is “too expensive.” Stocks listed in the BRL 2 range are still trading much higher the book A tangible asset, which we view as equity modified through tax credits or hard-to-realize intangible assets,” says one director, who is left to decide only today — the last day — whether or not to participate in the IRB offering. Pricing will take place on Thursday. (1) The shares will be traded on Monday (5).
It’s not about distrust of the current administration, which has done a good job. The reality is that the reinsurance business is competitive all over the world, and it is difficult for companies to get a return much higher than their cost of capital,” he says.
Another manager agrees that in the BRL 2 range, IRB shares are trading at an “unrealistic” price. The company has tried in many ways to attract private investors, and no one cares about this level of prices. Potential investors are making predictions for the coming years and they can’t reach the market value.”
In this manager’s view, one explanation for what he sees as price distortion is the strong presence of individual investors in the IRB’s shareholder base. Currently, more than 267,000 individuals are shareholders of the reinsurer, ten times more than the 27,000 who owned stock in the company at the end of 2019, before Squadra revealed the problems on the balance sheet.
Stocks have become furious among small investors because of entrenched bias — an expectation that they will be priced at the prices they have been in the past, one manager assesses. “Part of the people might really believe in the deal, but not just because the stock was worth R$30 in the past that R$2 was cheap. There was bad pricing and fraud,” he says.
One common argument among these investors is that IRB shares will naturally rise because the company’s value is now less than the amount held in cash. “But every insurer has a large cash position, which they are required by law to have, in order to ensure the risks they are taking.”
Among the individuals who are really betting on the business is one of the largest individual investors in the Brazilian Stock Exchange, Luiz Barsi Felho. He became a shareholder of the IRB in June 2021 and has since been working to increase and express his position in the company. It owned about 27 million shares in March of this year, according to documents available with CVM. His daughter, Louise Barcy, was elected to the IRB’s audit committee in July, “in the context of improving corporate governance,” the reinsurer said at the time.
Yesterday, Louise reported on her social networks that the Parsi Group intends to subscribe to 10 million shares in the IRB offer, at a price of 1 Brazilian real per share. “If we are not met, which we understand is a risk, we will evaluate our replacement ratio further, depending on the price and also the operating performance of the company,” he said. “As a member of the Audit Committee, I would like to deposit my vote of confidence that the company will do everything in its power to maximize the funds raised.”
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