Legal disputes become a profitable asset for companies, attracting specializing firms

08/15/2024

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João Mendes — Foto: Rogerio Vieira/Valor

Brazilian companies are now exploring their legal contingent assets in search of alternatives to raise funds at a time of restricted access to capital, high interest rates, and more selective investors. By carefully examining their numbers in search of “assets hidden in their balance sheet”—without financial visibility—, companies are eying not only IOUs issued by the judiciary branch, which are court-ordered payments of federal debts, but also other legal disputes.

As a result, the market for legal claims in Brazil is increasingly gaining ground, with a growing number of asset managers operating in this niche. Although this type of asset was not seen as “monetizable,” now companies’ legal departments have started to actively work to help the financial areas.

As this segment matures, a new spree of deals that were already usual in developed markets such as the U.S. is now arriving in Brazil.

Large-sized companies have started to transfer a portfolio of lawsuits to a fund of investment in receivables (known in the Brazilian market by its acronym FDIC), structured by a specialized asset manager. New transactions should be announced soon.

From the get-go, a company receives capital through this portfolio, which can help reduce its leverage, for example. In the end, it gets to keep a large part of the gains from the causes. Firms specializing in alternative assets, including Prisma, have been operating in this new niche in Brazil. Banks are also starting to seek opportunities in this market.

Companies that have recently resorted to the sale of legal claims include retailer Marisa—which sold tax credits to raise cash—and food processing company BRF. When contacted, Marisa and BRF declined to comment.

This market has also been boosted by cases from philanthropic hospitals (Santas Casas) selling lawsuits against the federal government and asking for payment for a bed in the public healthcare system (SUS). The so-called “thesis of the century,” which excludes the Tax on Circulation of Goods and Services (ICMS) from the social taxes PIS and Cofins base, has also been driving this market in recent years.

Companies also sold these litigation assets to raise cash amid court-supervised reorganization processes.

Vessel company Oceanpact, which does not face an emergency cash problem, announced a partial assignment of collection suits against Petrobras for charging daily contract fees. In a notice of material fact, the company informed the market that it received R$100 million and would take part, in the majority, of future amounts to be received in the lawsuit. Oceanpact also declined to comment on the matter.

Some companies have seen the possibility of selling legal claims as a way of “unlocking value,” as the disputes could generate billions of reais on their balance sheets. This market’s demand also receives a boost from companies interested in using certain types of tax credits to reduce taxation.

“The legal claim market emerged with the sale of single-name claims [with just one claim holder]. The sale of a portfolio came later. Now, as the market matures, there is a group of companies that do not necessarily need to raise capital, but they sell this package in search of efficiency of funds,” said Guilherme Setoguti, a lawyer ahead of the Brazilian Association of Special Situations and Litigation Finance. The association was created last year to meet the demands of this industry. The increase in the number of asset managers specializing in “special sits” has fueled this market in recent years.

Gustavo Junqueiro, a partner at Dias Carneiro Advogados, points out that the understanding that these assets are “totally unrelated” to companies’ businesses was a key driver for this market growth. It represents a good choice for companies seeking liquidity.

“Companies are exploring their numbers to find possible illiquid funds,” said Francisco Clemente, a partner at KPMG. According to him, the new legislation on court-supervised reorganization is among the reasons for this market growth. Research on alternative assets recently launched by KPMG revealed that having cash on hand is the main driver for selling these assets. Many companies also sell defaulted loans for this purpose, in a fast-growing market in Brazil.

At Latache Capital, an asset manager specializing in special situation assets, the approach by companies considering entering the segment of legal claims has grown, as companies realize these assets’ value. “Companies have been going through a process of internal transformation and realize that legal assets have value and they can take advantage of these opportunities for extraordinary monetization,” he points out.

According to him, extensive due diligence is required before the acquisition of these assets to understand the counterparty’s payment capacity, with a direct impact on risk and pricing. A common clause in the acquisition of legal claims, he says, is the earn-out. If payment is made within a shorter time than estimated at the time of purchase, the company receives an additional pre-agreed amount. At Latache, to be eligible for purchase, a lawsuit must have passed the final ruling, when there is an unappealable decision on the matter.

Felipe Ciciarelli, the head of the legal claims area at Makalu Partners, argues that this market is not new in Brazil, as IOUs have always attracted investors. However, more recently, this went through a dearth when a proposal to amend the Constitution [“Precatórios PEC”] affected the payment of IOUs by the federal government, reducing investor appetite. As this topic is now more structured, Mr. Ciciarelli expects a new boost, as it is also expected that more assets will be sold by companies.

According to the executive, Makalu is currently dealing with around R$1.1 billion in these assets, considering face value. They involve different cases, not only the public sector but also large-sized companies. There, according to Mr. Ciciarelli, the focus has also turned to private disputes, which can include the sale of hereditary or commercial claims or even collection suits for charging fees.

Prisma Capital has been in talks with large companies to back their litigation. “The company prioritizes the allocation of its capital in core business, not in litigation,” said João Mendes, a partner at the asset manager. In this type of business, there is a partial assignment of the legal claim, which means that the asset manager backs the case—from lawyers to other costs involved—and the company can have a leaner legal department, participating in the gains obtained from the success of the action. “The company also has a committed partner, who would invest capital to generate results. Someone to share the risk,” he adds.

Companies have recently started to use these lawsuits as a way of obtaining cheaper capital, aiming to reduce leverage, for example. “These assets [legal claims] are very financially useful. The general counsel of a company ends up sharing a role that previously was only of the CFO. The legal department becomes more efficient, serving as a source of funds for the company,” said Mr. Mendes, from Prisma. By packaging these lawsuits into a FIDC, a company receives the agreed-upon money. Later on, as the processes are successful, it would keep a large part of the gains.

“The beauty of this type of FIDC is that it is made up of diverse cases, with various legal risks. Diversification reduces risk and allows for more attractive rates,” the Prisma partner points out.

Mateus Tessler, a partner at Jive, points out that companies are showing an increasing interest in using these claims as collateral for loans. As they are carried out through a fiduciary assignment, in addition to obtaining competitive rates, a company could keep the amount of the debt off its balance sheet, Mr. Tessler explains. “We prefer to do that. The disbursement is lower and we avoid the risk of delay [in payment],” he said. “Usually, large companies do that. The legal advisor, not the CFO, is the one who suggests it.”

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/