Since 2005, when the Bankruptcy Law was approved, the Brazilian market has been experiencing a continuous evolution of the operational aspects resulting from the restructuring or recovery processes of companies.
The crisis that has affected the Brazilian economy in recent years has considerably increased the number of companies that have had to restructure their debt, either by extending maturities, adding new collateral and sharing them or by means of a recovery plan.
In relation to the last mentioned option, there is a common error happening. Different to what companies may think, having a recovery plan approved by the creditors, the judge and the “judicial administrator” (when it comes to judicial recovery) is not enough. Completing some debt restructuring transaction documents requires hiring an "agent" to act as either as a collateral agent, escrow agent, administrative agent or paying agent - but the truth is too little of its role is formalized in the documents. Also, we have noted that the issue is treated differently by borrower and lender.
The view of the borrower - who is the vulnerable party aiming to rebuild its financial capacity - and their legal advisers, is usually that having less room for discussions means more advantage, since the more detail in the plan, the more obligation there is for the company. At the same time, lenders believe the lack of details on the operational activities may, over time, give them the chance to increase their demands on the borrower. Lenders think that, if the document stablishes the obligation but is silent regarding the procedures to follow, they have the right to demand it takes place in the way the syndicate finds better. None of these approaches are correct.
The best option
Overall, it is recommendable to develop a document that contains all the operational details necessary to support both parts and ensure the commitments are effectively fulfilled under control. It is not uncommon to find in the transaction documents certain non-viable obligations to be implemented in practice.
In most types of transactions - whether it’s a debt restructuring or new debt - it is common the agent’s involvement will occur very close to the signing of contracts, which is understandable since there is no responsibility for credit or structuring. This participation is key, as their contribution can help reduce the time it takes to complete operations, as well as creating minimum standardization in the Brazilian market.
The participation of an experienced and independent agent in the early stages of the recovery plan process can be a catalyst for the transaction, making it more efficient and effective for all parties, which is why it would be a great step forward if lenders and borrowers were prepared to enter into discussions early in the process.