Experts predict wave of restructuring due to high interest rates

01/11/2023

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The number of court-supervised restructuring requests nationwide in 2022 is the lowest in the last eight years — a total of 833 companies, according to credit bureau Serasa Experian. But this calm scenario is not likely to remain in place in 2023.

Lawyers say that many companies leveraged themselves with the supply of credit during the pandemic when interest rates were low and now — with the Selic, Brazil’s key interest rate, at 13.75% per year — are unable to honor the payments.

This situation can be seen in Serasa Experian’s delinquency indicator. It shows that in November the country had more than 6.3 million companies in the red, the highest level since records began, in 2016.

There are 45 million delinquent debts — or R$108 billion. Also, according to Serasa’s survey, most defaulted companies operate in the service sector (53.5%). In second place are those in commerce (37.5%) and in third are industrial companies (7.7%).

Some of these companies have already reached firms specializing in insolvency. Lawyers say demand grew after November and December.

“There was a boom, a scary one,” said André Moraes, of Moraes & Savaget Advogados. “One hundred percent of the clients who came to us at the end of the year complained about the same thing. They took out loans with interest rates at 3% that more than tripled, they can no longer pay.”

Three of Mr. Moraes’ clients filed for court-supervised restructuring in December. And two others have their documentation prepared to file for court-supervised restructuring requests in the first months of 2023.

“During the pandemic, we worked more for sectors affected by social distancing measures. Hotels, tourism agencies, and transportation companies. Now all sectors need help,” added the lawyer.

Juliana Bumachar — Foto: Leo Pinheiro/Valor

Juliana Bumachar, from Bumachar Advogados Associados, confirms the high demand at the end of the year and projects an increase in requests for 2023. “Companies had been renegotiating, but it got to a point where they can no longer afford,” she said, adding that had filed for court-supervised restructuring for one of her clients, in São Paulo, on the last day of the judicial recess.

Also in December, according to her, there were two other new cases at the office, one of them with liabilities of R$1.2 billion.

In the first half of the year, the scenario is not expected to change as there is no estimate of an interest rate reduction. The banks project that the Selic will remain stable at 13.75% per year until May. In June, when the monetary easing cycle would start, it would drop 0.5%.

“In the current economic scenario, with interest rates at this level, a wave of restructuring is likely. But what will dictate whether or not these processes will be done by judicial means will be the posture adopted by creditors, especially banks,” said Renato Franco, founding partner of Integra Associados, a consulting firm specializing in company restructuring.

To Mr. Franco, there was a change in the behavior of creditors, especially banks, during the pandemic. They began to show much more willingness to negotiate, even granting terms and discounts that were previously only possible through court-supervised restructuring.

With this attitude, and the offer of credit, companies were able to solve their financial problems with out-of-court agreements and the number of requests fell. In 2020, 1,179 were registered, and 891 in 2021, according to Serasa data.

In the pre-pandemic period, the rates were higher. The worst years in the historical series are 2016 and 2017. In 2016, when President Dilma Rousseff was impeached, 1,863 court-supervised restructuring requests were filed. This is more than double today’s numbers.

In the lawyers’ view, 2022 was an “aftermath” of what was seen in 2020 and 2021. The problem now, they say, is that companies may not have the means to renegotiate. “There are no more guarantees to offer to the banks,” said Mr. Moraes.

According to Vicente de Chiara, legal director of the Brazilian Federation of Banks (Febraban), the current situation is far from the scenario that existed in 2016 and 2017, and he stresses that financial institutions will continue to prioritize out-of-court negotiations. To him, all the major banks have restructured their credit and collection departments and now have teams focused on collaborating with the companies to solve the problem.

“In this pandemic and post-pandemic period, we realized that everyone should anticipate the move. Instead of letting the company file for protection from creditors and then sit down to negotiate, it brings forward the negotiation. That is better for everyone,” said Mr. de Chiara.

Some lawyers say that besides the pandemic factor, out-of-court solutions were also boosted by the new recovery and bankruptcy law, which came into effect in January 2021.

Now, companies can, for example, use the so-called stay period outside the court-supervised restructuring, that is, while they are trying to negotiate with creditors. This mechanism suspends collection actions against the debtor.

The deadlines, however, are different. In judicial recoveries, collection actions are suspended for 180 days. For negotiations, the new law provides for up to 60 days.

The new law also strengthened out-of-court restructuring. In both judicial and out-of-court restructuring, the debtor gathers its creditors to negotiate. A payment plan is drawn up, usually with a grace period, discounts, and installment plans. If the majority of the creditors approve these conditions, all the others are bound and will receive what is due to them in the same way.

The number of creditors involved, however, changes from one method to the other. In the court-supervised restructuring, all debts incurred up to the date of the beginning of the process are submitted (there is an exception for tax debts and amounts with fiduciary guarantees).

In the out-of-court restructuring, the debtor chooses the creditors with whom it wishes to negotiate — which allows it, for example, to spare suppliers, avoiding getting into trouble with those who are essential to the business. This negotiation occurs without interference from the Judiciary. Only after approval by the group of creditors is the payment plan submitted to a judge for ratification.

Before the new law, the agreement of 50% of the creditors with whom the debtor chose to negotiate was required. Now, if the debtor has one-third approval of the payment plan, the debtor notifies the judge and gets 90 days to try to convince the others — and reach the 50%.

During this period, collection actions are suspended. If even after this period the debtor cannot obtain approval, he can still file for court-supervised restructuring.

*By Joice Bacelo — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/