A key component for foreign lenders, investors, and insures to navegate in such uncertain times in Brazil is taking care of existing collateral.
Experience from the 2008/09 debt crisis and the 2015/19 economic downturn provided relevant guidance on how to proceed now in respect of secured assets, including:
(i) Immediately assess existing collateral to check status of safeguard and if monitoring service (if any) is being properly rendered. Request updated reports and certificates, and if possible, ask the monitoring firm to issue an interim report in case the periodicity is monthly or longer;
(ii) Check current market value of secured goods and demand local expert to provide a distressed value. If coverage ratio drops substantially due to the pandemic, approach borrower/insured/invested company to negotiate collateral enhancement;
(iii) Review Brazilian and foreign law loan and collateral instruments to list borrowers and guarantors’ material obligations, including reporting, coverage ratio, affirmative covenants, and events of default. Review carefully the notification/communication requirements to protect creditors’ prerrogatives and remedies;
(iv) Check if collateral is perfected, including all formal legal requirements that security instruments governed by Brazilian law should have and if their (and any amendment thereto) proper registration in Public Registries were performed; and
(v) Run best, probable, and worst case scenarios that may result from the assessments, checking and reviews above. Design an action plan and start implementing it forthwith.
The brief guidance above may contribute with lenders, investors, and insurers to deal with their current facilities in Brazil and be able to mitigate at some level potential risks that may arise in connection with the novel coronavirus.
