The distressed assets and special sits market in Brazil is worth over US$100 billion, attracting the attention of Brazilian and foreign investors.
Distressed assets include non-performing loans (NPLs), credits from civil, tax and labor lawsuits, court orders, real estate and industrial units subject to litigation, and any other problematic assets that can be acquired at a discount by investors who invest money and time to obtain returns that compensate for the high risk.
Investors in such class of assets are likely to be, in Brazil, receivables investment funds (FIDCs), and, abroad, hedge funds and family offices.
See below 5 legal insights for Brazilian and foreign investors in distressed assets and special situations in Brazil:
1. Identify, Find Upsides and Correctly Price Distressed Assets in Brazil: Distressed assets can be non-performing loans (NPLs), credits from civil, tax and labor lawsuits, court orders, movable and immovable property subject to litigation, and any other problematic assets.
Because they have a non-performing component, the challenge of (i) identifying assets (such as credits) of any nature, which are often unnoticed by other investors, (ii) finding upsides not identified or underutilized by the current creditor, such as collateral, unlocated assets, legal strategies, among others, that may accelerate credit recovery; and (iii) pricing these assets correctly, to the point of applying the correct discount versus the potential financial return over time, are a differentiator in this increasingly competitive market, but still nascent and full of opportunities.
2. Perform Legal Due Diligence on Distressed Asset and the Seller: A critical point for investors, it is essential to perform legal due diligence on both distressed asset and the seller.
In the case of portfolios of non-performing loans (NPLs) subject to legal proceedings, it is important to (i) pre-evaluate each legal proceeding, the credit documentation and collateral of the NPLs, the stage of the process, whether the deadlines were met (risk of legal fees), whether there are judicial deposits, whether there are in rem and personal guarantees, among other elements that increase or decrease the probability of a return in the shortest time and (ii) analyze information about the seller to avoid, in addition to the standard risks of this type of business, other non-obvious risks, such as reputational risks.
3. Pay Attention to the Purchase and Sale Agreement for Distressed Asset: Because they are problematic and pose significant legal challenges, the acquisition of distressed assets must always be carried out through a purchase and sale agreement, with protective provisions for the investor involving the purchase, transfer of rights, protection against false statements (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 may impact credit recovery and also the investor himself.
4. Collect the Debtor’s Distressed Asset Extrajudicially and Judicially Using Technology Tools and an Acute Collection Strategy: After acquiring the distressed asset, success in planning, gathering information about the debtor, guarantors and assets, and effective collection and execution of the credit is what sets investors apart from each other. In the case of non-performing loans (NPLs) whether judicial or not, the more proactive the collection and execution of the credit is, whether judicial or extrajudicial, the greater the chances of success.
Measures such as (i) tracking, via technology tools, information about the debtor, guarantors and assets, and (ii) executing strategic and legal measures, both judicial and extrajudicial, against the debtor, guarantors, related third parties and assets of various natures, may reduce the recovery time of the distressed asset acquired.
With a growing billion-dollar market, distressed assets in Brazil will generate countless opportunities for Brazilian and foreign investors in the coming years, and it is essential to pay attention to the points above to understand and implement measures to reduce risks inherent to the segment.
