With no prospect of interest rate reductions and spreads still close to historic lows, the private credit market is going through one of the riskiest periods in recent times. Ulisses Nehmi , CEO of Sparta Investimentos , one of the leading private credit managers in the country, says he has never seen such a poor risk-return ratio as the current one.

“When we look at this distortion between return and risk, I think it’s at the worst point we’ve ever seen. The most dangerous point. We have to be cautious now. It’s not a free-for-all,” he says in an interview with NeoFeed .

In addition to the higher risk of default associated with the greater difficulty companies face in honoring the high interest rates on their debts, Nehmi points out that there is a potentially even higher risk for healthy companies, associated with price levels.

According to data from Credit Guide, the median spread for tax-exempt debentures ended July negative at 0.02%, even with some widening of spreads in previous months . Nehmi points out, however, that these levels are justified only by the effect of the tax exemption, proportional to the levels of interest rates, which he considers "absurd." "If it weren't for the tax exemption, there wouldn't be a negative spread."

According to Sparta's CEO, the credit market is currently in a "fragile equilibrium" due to a lack of investment, new offerings, and inflows of funds or redemptions. "If it were fragile at a level that is extremely cheap, okay. But it's a fragile equilibrium at an expensive level, and we are very concerned about that. We are being very cautious."

In tax-exempt funds, where managers are required to maintain significant exposure to infrastructure debentures, the manager believes that a negative marginal cash flow could have a direct impact on rates in that market.

A similar effect occurred in previous months, when tax-exempt funds experienced a wave of redemptions. From May to July, the category suffered net withdrawals of nearly R$ 25 billion, according to Credit Guide, with R$ 4 billion in July alone.

Nehmi believes that the expected volatility in this market over the next few months should disappoint investors in these funds, especially those with tax-exempt funds hedged against the CDI (Brazilian interbank deposit rate). "At this moment, I don't believe there will be much attraction for incentivized debenture funds."

The scenario, he says, is somewhat different in non-exempt funds. With greater allocation freedom and without seeing much room for closing spreads, Nehmi and other managers in the industry have been maintaining higher cash levels — which would support a potential wave of redemptions without a major effect on prices and, consequently, on fund returns.

According to him, the biggest risk here is a potential improvement in the macroeconomic scenario, with falling interest rates and a shift in investments towards higher-risk assets — which he considers unlikely given the current conditions.

In this cautious environment, Sparta has been giving preference to bonds from companies with more predictable revenues, such as those in the infrastructure sector. On the other hand, Nehmi states that there are significant opportunities in the agricultural sector, which had been heavily penalized by the sector.

Despite the credit problems associated with many companies in the sector, Nehmi believes that this movement also generated considerable discounts even for the most established agribusiness companies.

"That's where we've seen some opportunities and real distortions. Because everyone is scared. But there are some more solid names that end up selling at discounts that don't make any sense at all."

Read below the main excerpts from the interview.

Is it not a good time to invest in credit?
 The idea behind it is more or less this: fixed income is very attractive, but credit is not. The scenario remains quite uncertain—and I'm not just talking about the last month, this has been going on for some time. High interest rates have been driving investors towards fixed income and, in general, this also ends up pulling some allocation towards credit—at least towards higher-quality credit. On the other hand, higher interest rates, sustained at that level, do indeed increase the risk for companies.

What has been happening?
 If credit risk is higher, we should see wider spreads. But what we've seen in the last two years is the opposite: risk has increased and spreads have narrowed. There's a technical divergence, driven by flows. And what we see today is that investors are over-allocated in credit.

"If credit risk is higher, we should see wider spreads. But what we've seen in the last two years is the opposite: risk has increased and spreads have narrowed."

Is there a risk of a default crisis?
 No. Actually, the challenge of higher quality credit isn't default. The problem is the price level. If it enters at a high price, the return may not be as good, and our perception is that credit prices are very high. There will be an outflow of credit, but it's unknown when. Paradoxically, if we have lower interest rates, credit risk decreases, but other classes become more attractive, investors take on more risk, and money flows out of credit to other classes, widening spreads.

But what about Raízen, Braskem…
 In large companies that require more careful management, the risk is already priced in today. This doesn't mean there will be problems, but it does mean there is more risk—and then it's necessary to understand what will happen in the market. It might become a problem, or it might just result in a larger spread and then return to normal, depending on what happens from now on. On the other hand, other companies that are undoubtedly good will eventually have very squeezed spreads, with very high prices. Perhaps it won't be the best risk-adjusted return, but even so, the investor accepts the lower rate because no surprises are expected.

So, are the higher-quality bonds actually underpriced because they're heavily damaged, while the more stressed bonds are overpriced?
 I prefer to think that higher quality companies are expensive, yes.

And these other companies with higher leverage ratios, do you think they are fairly priced?
 It's difficult to know what will happen, but let's say there's a much higher return, which is compatible with a higher risk as well. But I think it's important to point out that if there are these higher spreads, it's because there's risk.

But overall, is the market riskier due to higher interest rates for a longer period?
 I think, yes, there would be no problem, technically speaking, in stating that the overall level of credit risk is higher because of high interest rates. And today we have to be careful – and not only with default rates, because the investor's return will probably be worse during this period, perhaps even below the CDI (Brazilian interbank deposit rate).

"Credit spread is not a thermometer of return, it's a thermometer of risk. If there's a spread, it's because there's risk."

Which hypotheses cannot be ruled out?
It's impossible to rule out the possibility of the company having problems. Fraud, for example, is completely unpredictable. But, at the same time, companies that already have a level of leverage, some operational issue, some shareholder dispute, or some kind of specific problem, I think that's already reflected in prices. The credit spread isn't a thermometer of return, it's a thermometer of risk. If there's a spread, it's because there's risk.

And what about bonds with spreads below the NTN-B rate, is there no risk involved?
 That's where we get to the discussion about the tax exemption, because debentures with negative spreads, if they were for an institutional investor, who can also buy non-incentivized debentures, it wouldn't make sense. But, since there's a specific incentive for individuals and given the absurd interest rate levels we have today, the incentive is relevant. If it weren't for the exemption, there wouldn't be a negative spread.

Generally speaking, given the price level, is it better to be in a government bond than in the credit market?
 I think that if you're in the credit market, you have to be more cautious about whether you're buying at a high price or not. But I think the return-to-risk ratio in credit has been more favorable at other times.

Is this one of the lowest levels in this risk-return ratio?
 We can say that this is the biggest distortion we've ever seen. In 2019, we saw very weak credit, but credit risk was much lower because interest rates were lower. Now you're seeing very tight spreads, but with very high interest rates. So, fundamentally, the risk is higher. In terms of flow, the return on risk is low. So, when we look at this distortion between return on risk, I think it's at the worst point we've ever seen. The most dangerous moment. We have to be cautious now. This isn't a free-for-all.

"You're seeing very tight spreads, but with very high interest rates. So, fundamentally, the risk is higher."

At the beginning of the year, the spread widened, especially in the incentivized sectors. Many market managers attribute this to a worsening perception of credit for specific companies, GPA and Raízen. Is that correct?
 Over the past 12 months, we've experienced significant volatility in the spreads of incentivized bonds. We can specifically mention three events that contributed significantly to this volatility. The first was Provisional Measure 1303, which would have changed the taxation [of tax-exempt assets] and generated a rush, causing spreads to tighten excessively. Then, the Provisional Measure expired, and prices corrected. And we also had excess liquidity that appeared in the market.

For example?
There were the significant FGC payments at the beginning of the year and the dividend payments due to the rule change at the very end of 2025. So, there was a very strong demand for incentivized bonds again. Then, we had a third movement, which was a significant widening of incentivized credit spreads, which I think was triggered by Raízen and GPA. Because they are very well-known names, they are very much in the media, and individual investors held many shares in these companies, especially Raízen . This generated a movement of redemption, of frustration among platform investors, even of aversion to credit.

Has this wave of rescues improved?
 It decreased significantly, but we haven't seen any further significant issuance of incentivized debentures. So, it's funny, because there was even some tightening of spreads after that. I think investors, in general, have seen a lot of bad news about credit, so they are more apprehensive. Regarding incentivized debentures, I suspect that the volatility that will exist and is already present won't give investors the feeling that the return level is sufficient; they'll think the volatility isn't worth it, especially in funds hedged to the CDI (Brazilian interbank deposit rate). At this moment, I don't believe there will be much attraction for incentivized debenture funds.

Could this force a new wave of bailouts?
 Redemptions tend to occur more frequently when there's a setback. Historically, with incentivized debentures, negative fluctuations generate a lot of redemptions. That's why I think the Raízen case was so emblematic, because investors perceived it as a very solid company. After that, redemptions calmed down. It's somewhat stabilized. But perhaps it's a somewhat unstable equilibrium, a fragile one.

"Historically, with incentivized debentures, negative fluctuations generate a lot of redemptions. That's why I think the Raízen case was so emblematic."

Why?
 Nobody is investing willingly. There isn't much supply, there isn't much volume in the secondary market, there isn't much fundraising, and there isn't much redemption. So, everyone is kind of at a standstill. It's a market that I think is in a fragile situation. If it were fragile at a level that's super cheap, okay. But it's a fragile equilibrium at an expensive level, and we're very wary of that. We're being very cautious.

Raízen was huge. But if another well-known company enters Rio de Janeiro, like Casas Bahia – which is a famous name – can we expect a significant impact on the credit market?
 With Raízen, the problem was quite old and wasn't exactly a surprise. But I think it became clearer to everyone when they filed for extrajudicial reorganization. We and several other investors hadn't held Raízen for quite some time because it didn't have an attractive return-to-risk ratio and had been experiencing high stress levels for a while. On the other hand, again, I think there are several more leveraged companies in more delicate situations. Casas Bahia, everyone is following their turnaround efforts. If there are any bonds on the market, they should have higher spreads because they carry risk.

If high-grade bonds are risky due to pricing issues in high-yield bonds, then it's very risky, wouldn't you say?
 I think credit risk is higher for everyone. So, companies with less financial muscle—those in the high-yield world—may not experience as much fluctuation because they lack liquidity in those securities. Therefore, it's not immediately obvious that there's any kind of fluctuation, but there is risk, and that risk is higher.

How is this credit market expected to operate in the coming months?
 In the non-incentivized debenture market, prices are high, but funds are reasonably liquid. All managers have higher cash reserves and shorter maturities. Therefore, it's a situation where small volatilities or minor cash flow changes won't significantly impact prices. If there's a much more positive outcome than what we're seeing, with falling interest rates and a search for more risk, it's possible that this market could change more significantly. So, I would say that a generalized market improvement could worsen the return for non-incentivized credit.

"Prices are high, but the funds are reasonably liquid. All managers have higher cash reserves and shorter maturities."

And what about subsidized credit?
 For those with a higher risk appetite who see inflation-indexed investments as an opportunity, with these rates at record levels, there may be a favorable asymmetry in the long term, if they are willing to take on a little more volatility risk now. However, strategies hedged against the CDI (Brazilian interbank deposit rate) may not be ideal because they carry the risk of repricing and don't offer significant upside potential. Therefore, it is much more favorable for investors with a risk appetite to invest in inflation-indexed or fixed-rate products.

Will emission levels weaken in the second half of the year?
 Last year was a record year, following the previous year which was also a record year. It would be entirely reasonable not to have a record level of emissions this year, for several reasons. Due to the election factor, many companies actually anticipate emissions by a year. It's natural that the pace is slower.

In this scenario, are there any sectors where they are seeking more security?
 It's natural that sectors with more predictability, such as infrastructure, for example, have lower risk. So, I think that's the sector that will always be a favorite when it comes to credit. I think the electricity, sanitation, and highway sectors are the ones with the highest volume because they have regulations that are already more well-known.

And what about the other end?
 You'll see sectors that are more cyclical, like retail, real estate, and healthcare. Sectors that are more dependent on interest rates, more dependent on market conditions, and more competitive. One sector that's currently in a curious situation is agriculture.

Why?
 I think there's a climate issue that could have a significant effect on the sector as a whole, or at least on several segments of that sector, and that's why it's drawing a bit more attention. But we've seen, for example, Fiagros from Minas Gerais with considerable discounts. We believe there are cases where prices don't make any sense, even for very good issuers.

Are they opportunities or distortions?
Generally speaking, we've seen quite significant discounts, which, in our view, can even be some counterintuitive opportunities. But if you look at cases involving higher-risk issuers or producers, then I believe you have to be more careful. That's where we've seen some opportunities and real distortions. Because everyone is afraid. But there are some more solid names that end up selling with discounts that make absolutely no sense.