Credit Recovery | 3 Key-Strategies for Creditors to Use in Brazilian Judicial Reorganizations

In 2024, Brazil recorded an increase of approximately 61.8% in requests for judicial reorganization.

This scenario, triggered by a challenging economic environment with high interest rates, increased default, and restrictions on credit granting, requires a proactive stance from creditors to minimize risks and optimize the chances of recovering credits subject to judicial reorganization.

Below, we highlight three key tools that can be used in this context:

1. DIP Financing: DIP Financing emerges as a strategic tool, allowing creditors to provide capital to companies undergoing judicial reorganization, enabling the continuity of their operations. In exchange for this contribution, creditors can negotiate better payment terms and priority in receiving the credit, enjoying a privileged position in relation to other creditors.

However, granting DIP Financing requires a careful analysis of the situation of the company in judicial reorganization, in particular the risks of non-receipt of credit. This thorough analysis is essential to determine whether DIP Financing represents, in fact, an advantageous strategy, capable of maximizing the chances of credit recovery. Despite the risks involved, DIP Financing can be a powerful tool for creditors.

2. Expropriation of Assets and Assignment of Credit: Although the law establishes the protection of assets essential to the business activity of the company in reorganization, it is possible to structure negotiations with the company in judicial reorganization aiming at (i) expropriation of certain assets that are not essential to the production process, such as the isolated sale of production units or equity interests, and (ii) assignment of future credit rights of the company in reorganization. It is important to emphasize that these measures should be carefully analyzed and negotiated between the company in judicial reorganization and its creditors, under the supervision of the Judiciary.

3. Structured Operations: Structured operations, such as the securitization of receivables, offer creditors an innovative alternative to deal with difficult-to-recover credits. Instead of dealing with the complex and time-consuming process of judicial reorganization, the creditor can transform these credits into financial assets tradable in the market.

This strategy offers several advantages for the creditor. In addition to immediate liquidity, securitization allows the transfer of the risk of default to investors, reducing the need to provision losses with difficult-to-recover credits. Additionally, the operation improves the creditor’s cash flow, freeing up resources for new credit operations and optimizing its financial balance sheet.

In view of the growing scenario of requests for judicial reorganization in Brazil, the adoption of effective credit recovery strategies becomes crucial for creditors. By implementing approaches strategically and adapted to each case, creditors can increase their chances of success in credit recovery in a challenging economic environment.

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