Debenture issuers seek creditors to review contracts
The number of companies that have had to sit down with creditors has grown amid a worsening economic scenario and rising interest rates and inflation. This was made clear by the increase in the number of meetings of bondholders held in recent months. In most cases, the meetings between issuers and creditors were used to renegotiate the payment schedule and guarantees. Yet, there are also examples of non-compliance with the so-called covenants, or the restrictive clauses in contracts.
Considering only public companies, the number of calls for bondholders’ meetings has more than tripled. From January to July, 71 were called, while in the same period last year there were 22, according to a survey carried out by Valor based on documents sent to the Securities and Exchange Commission of Brazil (CVM). The scenario is the same in the field of private companies, trustees told Valor. These entities, whose activity is regulated by CVM, act as intermediaries in the relationship between bondholders and issuers.
“In 2020, we had that shock in the economy with the pandemic. Now we see the consequences very clearly, with companies in need of restructuring their debts, asking creditors to adjust to the new reality,” said Karolina Vangelotti, a partner and director at Pentágono. From January to July, Pentágono attended 656 such meetings. The number corresponds to almost 80% of those held in 2020. Last year, there were 1,097 in total.
Vórtx, another trustee, saw the number of meetings related to corporate debt increase 40% in the first half of the year, to nearly 100.
Eugenia Souza — Foto: Silvia Zamboni/Valor
One of the most common requests made by borrowers was the approval for changes in payment flow or rates, said Eugenia Souza, a partner and head of corporate trust at Vórtx. “We saw indexers skyrocket, which made debts more expensive. When looking at the cash flow, companies decided to negotiate, for example, to make semi-annual payments instead of monthly disbursements,” she said.
CVC and Metalfrio Solutions are examples of companies that managed to change the amortization and remuneration payment dates for bondholders in the first half of the year.
Requests for substitution of guarantees have become more frequent in the meetings. It is common, for example, that in the case of subsidiary issues, the debt is guaranteed by a suretyship from the parent company. With an eventual decrease in the holding company’s capacity to cover the debts of all its subsidiaries due to a decrease in dividends received, it has become necessary to exchange the guarantee for other security interests.
The fear of a decrease in the capacity to generate profit has also led companies to move before an eventual non-compliance with financial indicators. “They understand that they won’t have an EBITDA as previously projected and prefer to ask for a covenant exchange,” Ms. Ms. Souza said. “When the issuer has good faith, he prefers to negotiate rather than wait and see an acceleration of maturity.”
Of the meetings related to corporate debt with Vórtx’s participation in the first half of the year, almost 20% were for declaration of acceleration of maturity – of companies that failed to comply with the agreed terms and therefore had to pay what they owed earlier than planned.
Since companies don’t usually make a single issue and know that they will eventually tap the debt market again, having an acceleration of maturity can affect their reputation as good payers. “The company wants to come back to the market looking good, so there are people who get ahead of the curve and do the restructuring before they can’t deliver,” said Antonio Amaro, head of fiduciary services at Oliveira Trust.
ISA Cteep, for example, asked bondholders in March for a remission, considering the possibility that it would not be able to meet the agreed debt-to-equity ratio at the time of debt issuance. As justification, the energy company said it was studying potential asset acquisitions and that revenues had been affected by the Covid-19 pandemic. These factors could impact the financial statements and make it unfeasible or impossible to meet the target, the company said in documents.
From the investor’s standpoint, the economic uncertainty scenario imposed a more careful look on the compliance with what was agreed with the company at the time of issuance. “When everything is calm, investors are calm. When the payment is in the account every month, they usually forgive if the company delays a report, for example. In a crisis scenario, all monitoring becomes more rigorous. They want deadlines punctually met and begins to call more meetings,” Ms. Souza said.
According to the Brazilian Corporation Law, the meetings can be called either on the initiative of the issuers, the trustees, the CVM, or investors, if they represent at least 10% of the outstanding debt. The trustee has the obligation to attend the meeting and provide bondholders with the information they are requested to provide, according to the law.
*By Rita Azevedo — São Paulo
Source: Valor International