By Marcos de Vasconcellos
In 2012, 757 Brazilian companies asked to go into bankruptcy. The previous year had been 515. Bankruptcies enacted had a lower high, but also increased: from 641 in 2011 to 688 in 2012. Growth should continue this year. With this, the need for lawyers are closely watching its customers to indicate the best time to ask the recovery is even greater, evaluates Samuel Aguirre, Sam Aguirre or, as he prefers, director of corporate finance at FTI Consulting, expert advice corporate restructuring.
The Mexican who studied in Canada and worked in debt restructurings, turnarounds and bankruptcy proceedings of companies worldwide is optimistic about the Brazilian scenario dosetor. "The demand for credit is increasing delinquencies and also,"
pointing. The slowing economy booking a lot of work to those working in the Business Law.
The Recovery Act and Judicial Faências (Law 11.101/2005), is still young in the eyes of Aguirre, but it is a clear step forward by bringing the clear intention of rehabilitating companies, "especially when compared to the old law," the Bankruptcy Act. The priorities of payment funds and labor debts with Brazilian Finance have quirks that are the director of FTI points as possible difficulties in leveraging a company in recovery.
With the difficulty - or impossibility - of trading funds that are not of unsecured creditors, get a loan specific to recovery is nearly impossible in Brazil. For example, are not accepted by Justice negotiations to pay other creditors before the bank that lent the company with few guarantees. Legal uncertainty, he says, is something that deviates investments in the country.
Aguirre studied four years to graduate trustee of the bankrupt estate in Canada. In Brazil, says be amazed at the lack of specific training for administrators. The concentration of companies in recovery in the hand of few administrators also care professional, who arrived in the country in the second half of 2012, the FTI, to serve that market.
Read the interview:
Conjure - How do you analyze the market for judicial recoveries?
Sam Aguirre - You can look at historical data and well Serasa complete. 757 were required judicial recoveries in 2012, an increase of 47% compared to 2011. The number of 189 is awarded, representing an increase of 25%.
Conjure - Grew in 2009, then dropped in 2010 and follows an upward trend in 2012.
Sam Aguirre - The increase in 2009 originated in the 2008 crisis. The numbers dropped a bit and now maintain a rising trend. What you're seeing in the market is a slowdown in the last two years. You see that GDP is falling almost at the same pace, being inversely proportional to something else.
Conjure - And how do they relate?
Sam Aguirre - Falling GDP will automatically transfer to the recoveries and bankruptcies. You only see two other things: an increase in defaults and consumer demand for credit. We have an increase in bankruptcies, usually in the industry, which has very high cost structure and failed to profit needed to pay their debts. This is the most basic. The structure is uncompetitive in Brazil, and has imposed very high raw material comes from outside. Moreover, there is a very sharp economic slowdown.
Conjure - We left the market optimism that by 2010 and 2011 was acting as if there was a possible fall in the future.
Sam Aguirre - This is a cycle. After that lever consumption, for example, not more. And the consumer is leveraged super, he has too much debt and income is very committed.
Conjure - He has become accustomed to a status consumption?
Sam Aguirre - The income has risen steadily over the last six or seven years. You see a decrease in unemployment amazing. It has a fabulous credit growth. This growth is at a very fast pace, but who is lending today are not national banks. Domestic banks are slowing down, worried about consumer defaults. He started the first quarter of 2012, where the delinquency car was 8% or 9%, many banks have cut their lending. Only public banks are lending - Caixa Economica Federal and Banco do Brazil - and they have borrowed as GDP grew every day. The government is using public banks to inject money into the consumer market. Who is accelerating the demand for credit are those who have up to $ 500 of monthly income, because minimum wage went up. They are quiet now, but for me this is a situation that will be very complicated. You already have a series of problems in Brazil, you have a cost structure for very large companies, and you have a consumer who is exhausted the level of consumption.
Conjure - The movement that we have will probably be an increase in bankruptcy filings.
Sam Aguirre - I think so. What is also interesting is that at the end of the year you do not necessarily see bankruptcy filings, for administrative reasons. I believe there is an increase in the first half of the year.
Conjure - It's a good market for the lawyer who deals with it.
Sam Aguirre - The market for lawyers that will be very good start to the year. It's time for lawyers to connect to the new cases that are coming out these days, these months, for sure.
Conjure - At what stage is the recovery proceedings in Brazil?
Sam Aguirre - Young is a law in 2005, has a few years, but we tried to mold with U.S. law, the Chapter 11, a company focused on rehabilitation. There is a clear intention to rehabilitate the companies, especially when compared to the old law, which created a very lengthy process, where the trustee, the trustee, was focused on liquidating assets. It has other methods such as negotiating extrajudicial, you can sit and talk with your creditors that you can not afford it, but to show their missions. Before, it was an admission of failure in many countries still is. Now, you can do that to negotiate a plan of company goals to creditors. The bankruptcy is a process that provides an opportunity for the debtor to reorganize and submit a recovery plan to the lender. He has a definite plan, it is one of the major changes of the old law and has to meet a number of priorities.
Conjure - What would be?
Sam Aguirre - Are the labor amounts - everything is paid to employees takes precedence; extrajudicial lenders - they do not enter the judicial process, not subject to any plan, they will be paid. After the creditors have Extra-. Once you have loans with collateral. Finally come the unsecured debts, which are suppliers, banks without collateral, ie those who do not have any guarantees. There are peculiarities in the Brazilian legislation and jurisprudence, which give different treatment to creditors of the same class. Suppliers, for example, typically receive before banks, although both are unsecured creditors.
Conjure - This is something common? Pay first who supposedly is poorer?
Sam Aguirre - It's a quirk of Brazilian law. It happened in a recent case that followed, where, by the plan, providers would be paid in five years with the banks and the debt should be paid off in 30 years. The debt to banks was not even bigger than with vendors. The idea is that the supplier has to survive because they can go bankrupt because of debt from a single client. With a bank that is more difficult to happen.
Conjure - Favoring suppliers, what kind of problem you may have with banks, for example?
Sam Aguirre - The bank can argue that the plan should be equal for everyone. He has to respect the rules and play the game.
Conjure - Here also there is the peculiarity of the majority shareholder to participate in the negotiation, right?
Sam Aguirre - This is common in Latin America, but there is in the U.S.. The controller of a company entering bankruptcy, in general, has lost all economically. That's because the debts now worth more than the assets. The company, economically, belong to creditors. And lenders will share the company to them. Only Brazilian law, Mexican law and Colombian law allows the shareholder to be an important role in this recovery. He may have something that is more beneficial to him than to the discharge of debts, necessarily. That, in the U.S., does not exist. If you go into Chapter 11 is because you're broke.
Conjure - This issue of giving more power to the debtor, is because the law here is made to retrieve business? It is hoped that he has the power to grow again?
Sam Aguirre - Wanting to rehabilitate the debtor would be a focus, but it depends on the plan and the company is viable. If the company is viable and need money, someone has to bring that money. That will be the owner, who will be able to settle with creditors and bring new money, restructuring debt, for example. If he does not have the funds, you have to get someone else to take a share of all assets, buying assets. There are several ways to rehabilitate a company, or a part of it, taking some contingencies or partners that were too big to face that moment. You must create a sustainable debt. It's the idea of the cake: the two sides have to understand the size of the cake, and discuss the size of the slice that can be distributed to each.
Conjure - There is much talk of the intransigence of Justice, mainly from the Labour Court and the Ministry of Labor. Companies criticize agencies for not accepting negotiations. When there is negotiation, negotiated often not valid for the judiciary. How does this affect the recoveries?
Sam Aguirre - I think in most cases the basic premise is that you can not negotiate debt labor. The recovery plan often will demonstrate the way most practical and feasible to divide the cake you have. Workers are a class within the bankruptcy. You will need their vote and there can be no expectation of other creditors that you'll negotiate with employees. It may be a point that everyone would like to discuss, but it will not be so. It has opening for discussion.
Conjure - This is not a problem?
Sam Aguirre - It is a fact that here in Brazil is complicated buy a company. The labor issue and the tax issue is so complicated that scare the stranger. It is difficult to quantify this contingency that he does not understand. There is the fact, for example, he can be reached personally by a labor action against his company.
Conjure - Talking with lawyers, they say that Brazilian companies have many problems with bankruptcy by the call too late. It is a reality or just an impression?
Sam Aguirre - The thing is, nobody wants to ask for recovery, but in the U.S., much is said of companies that took advantage of the process to end liabilities, creating a recovery plan for a perfectly viable company.
Conjure - So the company can enter recovery without needing to take advantage of it?
Sam Aguirre - In Brazil, to do this type of planning is too complicated, just the labor issue, which has a super-priority. The tax also part can not be planned because tax is the IRS and she hardly talks. So are the only unsecured. Has a greater dynamic, for instance with bank debt. But can negotiate only take advantage of the unsecured portion seems too risky.
Conjure - And how to know when to ask for the recovery then?
Sam Aguirre - Must have cash, this is important. When I look at a company to see if she can make a bankruptcy is to analyze how much cash you have and how much will need to make purchases without term. This is because if the firm is already in recovery, no one will want to run. Economically, we need to make sure it will survive 180 days to leave the judicial recovery now with a plan that works. It is good to consider whether they would be appropriate, for example, not to pay a portion of which will mature in ten or 15 days, asking for recovery. It's totally legal, but must be cool-headed to analyze. The lawyer has to review the facts and the economic prospects of the business with the financial advisor and talk if it's a good time to do.
Conjure - But it depends customer consult a lawyer, right?
Sam Aguirre - An entrepreneur has tools, but take the advice of lawyers and financial advisors. The entrepreneur is super competent to build a business, but to save the business does not necessarily. The conflict's lawyer and advisor is talking to your client what he has to do.
Conjure - You mentioned that the Brazilian lawyers are well positioned and understand the market. What are the main difficulties you note to hire or be hired by Brazilian counsel at the time of bankruptcy?
Sam Aguirre - Many times you get the call when the economic situation is deteriorating for the company as you can see in a very complicated negotiation, depending on the profile of creditors. I work for debtors and creditors and the main thing to do is an analysis of settlement. Must See, eg, to the lender, it is best not to accept the plan and that the debtor goes bankrupt. The lawyer needs to be very aware of this, because that account should be made well in advance, to know what are the options trading. The later makes this account, you have less maneuvering.
Conjure - The tax issue is a problem in the recovery?
Sam Aguirre - Has surprises. Overall, companies have credit in Refis, he has a privileged treatment. In general it is very difficult to negotiate with the IRS. She is somewhat flexible, I'd say. There are lenders who are open to tax cut debt by half because you will not get paid.
Conjure - It should not be the country, the Union, one of the main supporters of the recovery? There is a nonsense you put the recipe being one of the creditors less flexible? A collection of a company that recovers will not be greater than the one that failed?
Sam Aguirre - I agree. I think a company that you can rehabilitate is a company that will generate taxes that will pay taxes. In fact, I think they are legal and cultural issues. Not necessarily culture, specifically problems lobbies. Revenue has incredible power. The tax authorities or the IRS should negotiate like any other creditor, but in practice it does not. You have to pay them.
Conjure - It also has the difficulty of getting a loan when you are in recovery. In Brazil, we have the example of Refrigerator Independence, who took a loan but a court has not accepted the agreement between creditor and debtor - in which the bank granting the loan would have preference in the order of payment. There is talk in the market that, after that, it was almost impossible for a company in Brazil recovering borrow as called DIP Loan (Debtor-In-Possession), due to the legal uncertainty. Is it true?
Sam Aguirre - A DIP Loan in the U.S. happens within a process of reorganization, when a company can prove that they need a loan and who borrow will have priority over all creditors in order to survive. This responsibility of the judge to give a guarantee for these lenders creates a stability that does not exist in Brazil. These are short term loans, six months, three months, a year at most. In general they are paid within the recovery, with very high rates because they are too risky. In the case of Independence was even a loan with a longer term to pay after recovery. Here in Brazil are few who will take a chance, because you have a level of legal insecurity. You do not know exactly what the judge will speak at the end. If you have assets that are not pledged as collateral or, I think you have a better chance of getting a loan. In general, it is difficult. You must go through a process where there are many interests: the judge, creditors, the court, the company and the bank itself.
Conjure - At Independence, the plan was accepted by the creditors, but ...
Sam Aguirre - was not accepted by the judge, then a new lender has some uncertainty. To enter a new money must have a very good warranty. The Revenue will not give up her preference, labor credits can not be negotiated, then it becomes difficult to get a priority over them.
Conjure - We constantly reported problems between creditors and the trustee of Banco Santos. This type of problem is common?
Sam Aguirre - I have many years experience in Brazil to generalize, but I think some individuals have had as administrators work more than I think it should be. It has a very strong working concentration among some administrators. If they are good or bad I do not know, what I know is there is not even a training to be a good trustee here in Brazil.
Conjure - Is that a fact?
Sam Aguirre - Absolutely. I can talk, because I am a trustee formed. I graduated liquidator of companies in Canada. Here in Brazil is worth nothing that title, because there is no such training, but they are four years I studied to be trustee with evidence and studies.
Conjure - It's a four-year degree?
Sam Aguirre - It's not easy. It's very complicated, and the final exam is oral, assisted by a lawyer, judge and trustee, who ask questions for three hours. You have to know how the bankruptcy, all cases and exceptions. In Canada, it is a rigorous program, organized by the government. The administrator is an officer of the court, must be accountable to the judge, with many responsibilities and too many powers. I think it has a lot of problems here because there is a profession that ruling.
Conjure - Do not have quality control.
Sam Aguirre - I think this is something that judges and lawyers should do, should set a course to train administrators, this would be the most basic. There must be four years, that is one. But you'll get the guys complicated filter, the filter will be able to have conflicts too. Will have a more consistent filter within the profession, but that's just a suggestion.
Marcos de Vasconcellos is editor of Legal Counsel.