The rising number of judicial reorganization filings, including by large companies, has renewed a significant alert across the entire credit market. Once the crisis sets in, the creditor’s position depends less on the debtor’s size or brand and more on how the credit was originally structured. Not infrequently, in large reorganizations, most of the debt is concentrated in unsecured claims, precisely the class that first absorbs significant haircuts, grace periods and extended maturities.
Because Brazilian law sets no general cap on haircuts or payment terms for unsecured creditors, the difference between recovering capital and bearing a material loss is usually defined before the crisis, in the way collateral and co-obligors were structured. In an environment of high interest rates and a record number of judicial reorganizations, this architecture becomes decisive.
Below we highlight 3 points of attention for creditors facing the debtor’s judicial reorganization:
1. Ranking of the Claim within the Order of Priority: The class of the claim is the main factor determining how much is recovered. Secured claims and, above all, claims not subject to the reorganization (extraconcursais) enjoy privileged treatment, whereas the unsecured claim is the first to absorb the haircuts and extended terms that erode the present value of the debt. To this factor is added the debtor’s governance and corporate structure, whose weight tends to be underestimated. Collateral that appears solid at origination may lose effectiveness in the face of shareholder disputes, assets held in a separate holding company, or doubts over control of the assets. For this reason, assessing the ranking of the claim and the soundness of the assets backing it must take place when the credit is extended, and not only once the crisis sets in.
2. Claims Not Subject to the Reorganization: Certain claims are not affected by the reorganization. Under Article 49, § 3, of Law No. 11,101/2005, claims secured by fiduciary sale or fiduciary assignment, as well as those of the owner under contracts containing an irrevocability clause, remain outside the proceeding; likewise, the claim arising from an advance on a foreign exchange contract (ACC) is non-concursal, pursuant to Article 49, § 4, in conjunction with Article 86, II, of the same law. This is why the security structure chosen when the credit is extended is decisive: a fiduciary sale, rather than a conventional pledge or mortgage, may remove the claim from the reorganization estate and secure, as the case may be, restitution of the asset or enforcement of the security after the stay period.
3. Co-obligors and Personal Guarantees: One of the most effective instruments for protecting the creditor lies outside the debtor’s assets. The judicial reorganization of the principal debtor does not prevent enforcement proceedings from continuing against avalists, sureties and jointly and severally liable debtors, who are reached neither by the stay period nor by the novation resulting from the plan, in accordance with Súmula No. 581 of the Superior Court of Justice (STJ). Hence the importance of requiring, already at origination, solid co-obligors, including individual shareholders, whose assets respond on an autonomous basis.
In light of the new wave of judicial reorganizations, the creditor’s protection is built on two fronts: at origination, through the proper structuring of collateral and co-obligors, and during the proceeding, through diligent action. Mapping the position within the order of priority, opting for structures that place the claim outside the reorganization and securing solid co-obligors are the measures that separate the creditor who recovers its capital from the one who bears the loss.
