The spread of Coronavirus and the actions taken by government to restrict most industries and stores to operate in Brazil for the next weeks will certainly have a major adverse impact on the economy and the ability of Brazilian borrowers and guarantors to meet their obligations in equity or debt financing.
Sectors in the agri/food and pharmaceutic chains are likely to suffer a bit less, as they are being safeguarded by government in order not to affect the supply of goods and medicine to people and pacients.
But there is a high chance of a new waive of Judicial Recovery filings in the coming months by Brazilian companies seeking court protection as a result of the Coronavirus impacts on their businesses.
Based on the above scenario and our prior experience in 2008/2009 and the economic downturn started in 2015, foreign lenders, investors, and insurers should now:
1. Risk Assessment: Assess their loan, equity, and insurance documentation, including collateral package, to understand their rights and obligations towards Brazilian borrowers and guarantors in the current scenario;
2. Collateral: Consider if the current collateral package is enough to provide legal comfort and cover for the oustanding amount or the obligations it supports, and whether it may be a strategic moment to approach borrowers and guarantors to negotiate any sort of collateral enhancement (if the case), or if there isn´t such open door, conduct asset search in preparation for any potential litigation;
3. Legal Brainstorming All Potential Scenarios: In light of current adverse situation and the risks that may arise in the coming months, brainstorm with your in-house and local legal counsels the potential scenarios and the most appropriate legal actions that may have to be taken in order to protect your rights and collateral. Experience in Brazil shows that the ones who are proactive and lead the pack are the first to enjoy better terms, collateral or full repayment;
4. Restructurings: If there is the need of restructuring of any loan or equity facility, think about what proper terms and conditions should be agreed on with borrowers and guarantors, and what type of foreign and Brazilian law governed documentation should be required in order to protect lenders and investors of any adverse future situation, including judicial and out-of-court restructuring.
Taking the steps above should help foreign lenders, investors, and insurers navegate their investments in Brazil during the current and coming adverse conditions, so that their exposure is fully secured or the risks of loss are mitigated.
