The issue started causing concern in the credit market about three weeks ago when a securitizer allegedly used funds from a reserve pool meant for emergencies in a risky transaction, going against the purpose of the fund as a safety net for default situations.
Securitizer is the firm that transforms outstanding debts into tradable financial assets, specifically real estate receivables in the case of CRIs.
InvestNews discovered that the securitizer involved is Virgo, the country’s second-largest, managing R$ 90 billion in fiduciary assets. Virgo utilized reserve fund resources to invest in a vehicle intended to offer a “strong guarantee” for another CRI operation it structured. However, the operation failed to generate the anticipated demand, resulting in the concentration of reserve resources in a low liquidity asset.
A high-ranking executive of Virgo, who was involved in a governance breakdown, was promptly dismissed by the company upon discovery, as per sources familiar with the matter.
Comprehend how it works.
Part of the funds raised in a CRI operation are allocated to a reserve expenditure fund to cover interest payments, amortizations, and other expenses, ensuring investor protection and operational stability. It is crucial for this fund to be kept separate from the securitizer’s resources.
Virgo used its own reserve funds to support a new operation involving Oncoclinics, ensuring a strong guarantee for the project.
Due to investors showing little interest in Oncoclinical papers, the CRI placement was unsuccessful, leading to the necessity of activating the firm guarantee. Consequently, the Allocation fund had to step in by allocating a portion of its assets to a high-risk, low-liquidity asset.
After this incident, the executive in charge of operations, who was unaware of Virgo’s founders, was fired, and the company’s management was reevaluated to prevent any negative impact on shareholders.
Shareholder protection
The actions of the dismissed executive have gathered the top industry practices. The law does not detail the assets required for the reserve funds, but as they belong to the CRIs’ shareholders, these funds should be utilized in their best interest.
It is essential and common in the market to invest these funds in secure, easily convertible, and stable assets to protect capital and ensure fast access to funds in case of any unforeseen events.
The Allocation fund can freely invest in various products and market assets, even those with high credit risk that may lead to significant losses in net worth. Therefore, for investor safety, it should not be used as a substitute for the reserve fund.
The operation suggests a possible conflict of interests as Virgo’s executive used reserve funds for a product related to a company operation they were also involved in.
Some customers at the backstage chose to halt dealings with Virgo due to potential risk to funds in the reserve account. The operation also raised concerns among investors of the initial CRIs.
Insiders emphasize that, although the Allocation Fund is utilized in a maneuver, the reserve fund also invests in highly liquid products without jeopardizing shareholder assets. Despite some exposure to risk, shareholders were not adversely affected, according to individuals familiar with the situation.
Virgo stated to InvestNews that it does not address individual transactions or market rumors but confirms that its operations adhere to prevailing laws, regulations, and industry standards in the capital market.
The company has organized over 900 operations since its establishment, with no instances of irregular behavior by the securitizer. There have been no customer or investor losses from any of these operations.
The issuer also confirms that all commitments have been met in full, maintaining the regular payment flow for ransoms and other contractual duties.
