COMMENTARY · FIDC & SUBORDINATED CLASS
The risk difference between senior and subordinated quota of a FIDC is a direct function of the waterfall structure. Applying the same discount rate to both is a recurring technical error.
A FIDC (Credit Rights Investment Fund) typically issues three classes of quotas: senior, mezzanine and subordinated. The credit rights portfolio is the same, but the right over cash flows it generates is divided into layers.
Subordination is the engineering that allows the senior quota to receive defined target return, even with portfolio of risky credit rights: subordinated quota absorbs the first losses, protecting upper classes.
The waterfall is the prioritization rule of cash flows generated by the portfolio. In each payment date, cash received from portfolio is distributed by hierarchy:
1. Senior expenses (administration, custody, audit).
2. Senior quota return (defined remuneration).
3. Mezzanine quota return (when there is mezzanine).
4. Senior quota amortization (when applicable).
5. Surplus to subordinated quota (residual).
The waterfall is reverse: subordinated absorbs first losses, but receives the surplus when there is one. It is the negative leverage versus positive leverage of the structure.
It is common to see report that values subordinated quota of FIDC applying the same discount rate as senior quota plus generic spread (300, 500, 800 bps). This is recurring methodological error.
The risk of subordinated quota is not linearly proportional to risk of senior. It is function of:
Subordination level (% of subordinated quota over total fund equity)
Concentration of portfolio (more granular portfolios, lower volatility, smaller subordinated risk premium)
Loss curve of credit rights (more sloped curve, more risk for subordinated)
Senior amortization mechanism (when amortization is conditioned to subordinated coverage triggers)
"Valuing subordinated FIDC quota with senior plus spread methodology is comfortable and wrong. The defensible methodology requires explicit projection of waterfall under different portfolio loss scenarios."
Defensible methodology: project portfolio cash flows under multiple loss scenarios (base, stressed, broken), apply waterfall to each scenario, extract net cash flows for each quota class, discount each class at consistent rate with its risk profile (which can be derived from the scenario itself, by yield seeking).
It is more work than applying single multiplier. It is, also, the difference between valuation that withstands market reset and valuation that did not foresee the reset coming.