The pandemic raised the liquidity risk of Brazilian borrowers of all sizes and sectors, putting pressure on credit committees of domestic and foreign lenders as to whether or not to approve a new facility.
Despite the adverse moment, there are countless sound borrowers, with established governance (or in the process of being implemented), which have the potential to become good clients and generate healthy and profitable operations for banks, fintechs, securitization firms and funds. But how to differentiate the degree of risk from one company to another?
Below are 2 items that, added to others, can contribute to credit committees to approve or not a credit line:
1. Run Risk Assessment: This step is fundamental and is often overlooked by lenders, especially foreigners. Run a detailed risk assessment. Assess risk factors related to the company, its operations, governance and audit structure, solvency indicators (such as volume of protests and passive collection lawsuits), status of controlling shareholders, history of default with other creditors, collateral available and tax situation.
Experience shows that the risk of default and filing for judicial reorganization by borrowers could already have been clearly identified in the risk assessment stage, through the analysis of some of the items above.
2. Evaluate the Collateral Structure: Given that the current moment is of high liquidity risk, structuring an adequate collateral package that effectively works and that takes into consideration the borrower’s business cycle is key. Collateral instruments such as Fiduciary Lien over Real Estate, Fungible and Infungible Assets, CDA/WA, Fiduciary Assignment over Receivables, CPR with Fiduciary Lien over Fungible Goods, among others, are examples of liens that provide greater security for lenders, already evidenced in court decisions in the country’s main jurisdictions.
The above points can help Brazilian and foreign lenders better assess liquidity risk in order to identify good borrowers in the current pandemic.