The distressed assets market in Brazil exceeds US$100 billion, drawing the attention of Brazilian and foreign investors.
Distressed assets include non-performing loans (NPLs), credits from civil, tax and labor lawsuits, precatorios, movable and immovable assets subject to litigation, and any other problematic assets that can be acquired at a discount by investors aiming returns that compensate the high risk.
Foreign hedge funds and family offices and Brazilian Receivables Investment Funds (FIDCs) figure as the main investors in this segment which, in 2023 and 2024, should experience exponential growth due to the economic.
Below are 5 key legal insights for foreign investors in the Brazilian distressed assets market:
1. Identifing and Pricing Correctly Distressed Assets: Distressed assets in Brazil can be non-performing loans (NPLs), credits from civil, tax and labor lawsuits, precatorios, personal and real estate subject to litigation, and any other problematic assets.
Because they have a non-performance component, the challenge of (i) identifying assets (such as receivables) of any nature, which are often unnoticed by other investors and (ii) pricing these assets correctly, to the point of applying the correct discount vs. the potential financial return over time, are a differential in this increasingly competitive market, but still nascent and with opportunities.
2. Performing Legal Due Diligence on Distressed Assets and Seller: Critical point for investors, it is essential to carry out legal due diligence both on distressed assets and on the seller.
In the case of judicialized non-performing loans (NPLs) portfolios, it is important to (i) carry out a pre-evaluation of each judicial process, the credit documentation and guarantees of the NPLs, the stage of the process, if the deadlines were met (risk of succumbence fees), if there are judicial deposits, if there are guarantees, among other elements that increase or decrease the chances of return in the shortest period and (ii) analyze information about the seller to avoid, in addition to the standard risks of this type business, others not obvious, such as reputational risks.
3. Carefully Drafting the Contracts for the Purchase of Distressed Assets: As they are problematic and pose relevant legal challenges, the acquisition of distressed assets must always be carried out through a purchase and sale agreement, with protective provisions for investors involving the purchase, transfer of rights, protection against false representations (past, current and future), fraud, issues involving money laundering, corruption, among other direct and indirect legal aspects (including obligations to do and not to do) that can impact on credit recovery and also the investor himself.
4. Paying Attention to the Procedures for Collection and Execution of the Distressed Asset: After acquiring the distressed asset, success in planning, gathering critical information and effective collection and execution of the credit is what differentiates investors from each other.
In the case of non-performing loans (NPLs) whether judicialized or not, the more proactive the collection and execution of credit, whether judicial or extrajudicial, the greater the chances of success. Actions such as contact with debtors and guarantors, proposal for renegotiation (if attractive), identification of assets that can guarantee collection using strategic data and tracking technology, among others, help in this proactive process in search of results.
5. Identifying Tax Risks and Opportunities: Another important point in investments in distressed assets is to properly assess the tax impacts of the acquisition of the asset and its liabilities, of any revenue that it may generate throughout the process and in the event of disinvestment.
With a billionaire and growing market, distressed assets in Brazil will generate countless opportunities for Brazilian and foreign investors in the coming years, being essential to pay attention to the points above to understand and implement measures to reduce risks inherent to the segment.
