LatinFinance - March/April 2015 - 41

BRAZIL
RESTRUCTURING

Amid a new wave of debt restructurings, Brazil's still-evolving
bankruptcy framework will give some creditors comfort. Others have
many reasons to be afraid. By Dominic O'Neill

New rules, old problems

I

nvestment bankers, lawyers,
and investors are all expecting a surge in
corporate defaults and bankruptcies in
Brazil over the next two years. The new
wave comes on top of an already large
increase in debt restructurings since 2012.
A combination of macro-economic
adjustment (see page 32) the fallout from
the corruption investigation at Petrobras
(see page 38), and ever tighter credit
conditions - as well as overinvestment and
lower global prices in commodities - is
likely to make life more difficult for local
businesses in 2015 and beyond.
"We are facing two years of a very
severe local environment," says Salvatore
Milanese, partner at São Paulo-based
restructuring advisory firm Pantalica
Partners.
For each of the past three years, courts in
Brazil have granted bankruptcy protection
to more than 600 companies, including
around 100 large corporations, according to
the local office of US credit scoring agency
Experian. That compares to an average of
around 400 between 2009 and 2011, and
less than 200 a year between 2006 and
2009. Overdue loans in the banking system,
meanwhile, have steadily risen to 144 billion
reais ($52 billion) - more than double the
volume in 2008.
This year, companies involved in oil and
gas and agribusiness supply chains will be
particularly hard hit, predicts Milanese.
Consumer goods companies and autoparts manufacturers - sectors that grew
in part thanks to generous government

with how the local bankruptcy framework
copes with this wave of restructurings.
The good news, both for companies and
their creditors - if not for controlling
shareholders - is that Brazil is increasingly
moving towards a bankruptcy framework
that is more similar to that of the US, more
creditor friendly, and more orientated
towards helping companies get back on their
feet more quickly.
policies in areas such as tax and banking
- will also struggle under more austere
fiscal conditions, he says. Hydroelectricity
production has further suffered, due to a
drought in the state of São Paulo, as well
as reluctance to increase regulated prices
under President Dilma Rousseff's previous
administration.
"We see a huge pick-up in [restructuring]
activity," says Samuel Aguirre, São Paulobased corporate finance senior managing
director at FTI Consulting. "Hundreds of
companies are in trouble. The banks have
been trying to roll over [overdue debt] for
a couple of years - the lend-and-pretend
model. Now more companies are coming
out of the closet."
Over the longer term, Brazilian
companies could find it easier to raise
capital globally if creditors are happy

SAMUEL AGUIRRE, FTI CONSULTING

"THE BANKS HAVE
BEEN TRYING TO ROLL
OVER [PAST-DUE DEBT]
FOR A COUPLE OF
YEARS - THE LENDAND-PRETEND MODEL.
NOW MORE COMPANIES ARE COMING OUT
OF THE CLOSET"

Pre-packs emerge
Brazil's restructuring landscape has changed
a lot since a new law was enacted in 2005,
the first major shake-up to the framework
since the 1940s. A $1.8 billion restructuring
of the Brazilian unit of Italian foods firm
Parmalat was one of the first to gain court
approval under the new law in late 2005.
Last year, oil services firm Lupatech
did the first Brazilian pre-packaged
restructuring. The $300 million deal
brought Lupatech out of a situation where
its leverage was higher than the minimum
permitted to contract for Petrobras, says
João Feiteiro, Lupatech's general counsel.
The pre-packaged deal - more rubberstamped than negotiated in court - was a
"breakthrough," says Feiteiro, as it showed
how equity conversions could be done
under local law, even if the main pre-petition
shareholder, a unit of development bank
BNDES, remained the same due to its
debenture holdings.
"The creditor was 100% preserved either
in new debt or in equity," says Feiteiro.
A few months later, oil exploration and
production company OGX converted $5.7
billion of old debt into equity in another
pre-packaged court-approved structure.
The deal was Latin America's biggest ever
corporate debt restructuring. Perhaps even
more importantly, the agreement included
$215 million of new financing through three
tranches of convertible debentures.
As Brazil's first DIP (debtor-in-possession)
financing involving international creditors,
March/April 2015 - L ATINFINA NCE.COM 41
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