Honeymoon is over: TRX and Catuaí call off deal, raising red flags over other pending transactions

Although the practice is common, acquiring assets and paying for part of them through the subscription of fund units has unsettled the market because of the scale involved in TRX’s transactions.

The proposed deal with Catuaí did not specify how much of the purchase price would be paid in units, but other acquisitions announced by the fund have provided further details.

At least R$75 million of the R$210 million purchase price for Log Recife II would be paid to Log in TRXF11 units. The R$2.14 billion Cy.Capital portfolio, meanwhile, could be paid for either in cash or through the subscription of fund units, although no detailed payment breakdown was disclosed. In the acquisition of the Iguatemi portfolio, R$350.5 million of the total R$876.15 million consideration would also be paid in units.

Transactions of this magnitude support a fund’s expansion, but excessive reliance on units as a form of payment raises liquidity concerns. One issue under scrutiny is the discrepancy between the price established for TRXF11’s 13th unit issuance and the fund’s current trading price.

In early August, TRX announced the largest issuance in its history, initially targeting R$5 billion, with the possibility of increasing the offering to R$10 billion. The subscription price was set at R$94.39 per unit, while TRXF11 was trading at approximately R$89.15 on the stock exchange.

On August 26, when Catuaí announced that the transaction had been terminated, TRXF11 was trading at R$70.11—slightly more than 25% below the issuance price.

Moves of this kind, particularly when carried out on a large scale, create risks because of market volatility. Excessive selling pressure may trigger a cascading decline, further reducing the fund’s trading price.

Contractual mechanisms can protect asset sellers from assuming the risk of a decline in the fund’s unit price. One example is a unit-price protection clause, which guarantees payment of the difference between the market price and the price originally agreed upon by the parties.

It has not been confirmed that the “market conditions” cited in the announcement referred to the difficulty of maintaining the agreed value of the units while TRXF11’s market price continued to fall. However, this is one of the hypotheses circulating in the market.

With several other transactions relying on these units as part of their payment structures, attention is now turning to the closing schedules for TRX’s upcoming acquisitions. The market will be watching to see whether, unlike the Catuaí deal, those transactions are ultimately completed.

TRXF11 is a hybrid real estate investment fund with a net asset value of approximately R$6.05 billion. It has attracted market attention because of its bold transactions. In the past two months alone, the fund has announced approximately R$4.2 billion in projects, assets and pending deals.

One issue that raised concerns during the fund’s latest issuance was the use of an outdated net asset value without a fresh appraisal of its properties. The fund is also already leveraged. This created uncertainty in the market and contributed to selling pressure, further reducing the price of TRXF11 units while the offering remained open.

Market specialists believe that more effective communication could have mitigated the disruption. TRX itself has acknowledged that the process could have been handled differently, while remaining optimistic that it will be able to demonstrate the fund’s strong performance to unitholders. Read more here.