The pandemic generated a high volume of debt restructurings for foreign lenders and companies doing business in Brazil.
See below 6 key points to be considered by lenders and investors when renegotiating commercial, banking, and corporate contracts in Brazil.
1. Contract Type. Debt renegotiations are generally formalized through an amendment to the original contract or a debt confession instrument. The key is that, regardless of the type, the contract must be straightforward, clear and contain provisions that provide certainty and enforceability to the confessed debt.
2. Debt Amount. The clause providing for the amount of the debt must be indicate its exact value (or means of reaching it, if applicable), avoiding subjectivities. It must contain a declaration that the debtor confesses the amount due as net, certain and due.
3. Charges. It is important to determine whether the repayment schedule will be subject to the interest, default interest and penalty provided for under the new debt instrument or those eventually included in the original contract. It is not unusual to see debt renegotiations being challenged in Brazilian courts due to confusion and overlapping contractual provisions.
4. Credit Assignment. Given that the “distressed” credit market is very active in Brazil, creditors should always consider the inclusion of contractual provision that allows the assignment and transfer of credit, rights and obligations to third parties, without the prior debtor’s consent (a later communication should be enough). There are countless cases of sale of credits that are prevented from taking place due to the lack of such type of provision.
5. Collateral. Creditors should always seek to negotiate the inclusion of collateral in renegotiations. Although collateral over fixed, movable or real estate property are always preferred, personal guarantees (aval/fiança) also help as they generally create the commitment of individual guarantors (directors/partners/spouses) to make the debt be effectively paid off.
6. Court Jurisdiction. Often underestimated, the court jurisdiction provisions (where enforcement is to be filed in the event of default) is essential in debt renegotiations and must be assessed according to the case in particular. As a starting point, always consider that the closer to the debtor’s headquarters and assets the creditor is, the better.
The above points take into account a background of a large number of analyzed restructurings and an updated overview of the Brazilian caselaw from the main jurisdictions throughout the country.