The global scenario of high funding costs has led foreign and Brazilian financial institutions, fintechs and funds to have to restructure loans in Brazilian reais and US dollars with Brazilian borrowers.
From local transactions, such as issuing banking notes, loans, capital markets certificates (CRIs and CRAs), to international loans, such as PPEs, direct loans, among others, several of them are currently being restructured to reschedule repayments, add collateral and/or change certain covenants.
See below 5 points of attention to be considered by lenders when renegotiating loan facilities in Brazil with local borrowers:
1. Which Type of Restructuring Instrument to Enter Into in Restructuring of Debt in Brazil: 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 (i) be straightforward and contain provisions that provide certainty and apcceleration rights to the confessed debt and (ii) be qualified as an enforceable debt instrument to be enforced in Brazilian court through fast track procedure (execucão judicial).
2. Confessed 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 liquid, certain and due.
3. Default Charges to be Applied to the Restructured Debt: 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. Inclusion of Clause to Allow 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 Package to Back the Debt Restructuring: 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.
The above points take into account a background of recent restructurings and applicable Brazilian caselaw.