Debt deals fall short as more companies seek court protection
St. Marche is among the companies that turned to court-supervised restructuring after an earlier out-of-court debt agreement
Divulgação
Out-of-court restructuring has gained traction in Brazil as a faster, less costly way for companies to renegotiate debt. But a growing number of businesses are finding that the relief provided by such deals is not enough to keep them afloat.
Casas Bahia, InterCement, Unigel and St. Marche are among the companies that later turned to court-supervised restructuring in search of a broader overhaul. The companies declined to comment.
Restructuring specialists expect more cases to follow as high interest rates remain in place for an extended period.
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The latest example is Casas Bahia, which filed for court-supervised restructuring on Sunday (16), with R$17.3 billion in debt, just over two years after renegotiating R$4.1 billion through an out-of-court process. That agreement extended maturities and lowered financing costs and, at a later stage, led to the conversion of about R$1.5 billion in claims held by lenders Bradesco and Banco do Brasil into shares.
Even so, continued losses and difficulty generating cash kept pressure on the electronics and furniture retailer, eventually pushing it toward the more comprehensive restructuring confirmed this week.
A growing shift
A survey prepared for Valor by the Brazilian Out-of-Court Restructuring Observatory (Obre) identified 35 cases since 2005 in which companies moved from an out-of-court restructuring to a court-supervised process, with such cases becoming more frequent in recent years. In six instances, the original proceeding itself was converted.
Juliana Biolchi, a director at Obre, said Brazil’s corporate restructuring law imposes waiting periods on successive restructuring filings but does not prevent a company from seeking court protection after an out-of-court proceeding. Because out-of-court agreements typically cover only part of a company’s liabilities, Biolchi believes more businesses could take that route if their cash position shows the first measure was not enough.
A restructuring specialist who asked not to be identified said companies have increasingly limited out-of-court proceedings to financial creditors, leaving suppliers and employees outside the deal. That reduces their ability to carry out deeper operational changes when such measures are needed to put the business back on a sustainable footing.
In cases such as Casas Bahia, where the company needs to rethink the business, close stores and cut jobs, the cost of those measures may ultimately require court-supervised restructuring. “Often, the company’s problem is not just its financial debt,” the source said.
The debate has become more relevant as out-of-court restructuring grows more popular in a corporate environment marked by persistently high interest rates, tight credit and greater difficulty refinancing debt. Financing costs erode cash generation and leave highly leveraged companies with less room to restore their investment capacity.
The figures illustrate the growing use of the tool. From January through July this year, 43 out-of-court restructuring petitions were filed, involving 163 companies and 11,737 creditors, Obre data show. The cases filed in just seven months amount to slightly more than 13% of the 328 proceedings the organization has identified since 2005, when the current Bankruptcy and Corporate Reorganization Law took effect.
In July alone, seven new petitions were filed, involving 63 companies, 1,016 creditors and R$9.6 billion in debt.
Narrower scope
In an out-of-court restructuring, a company negotiates directly with specific groups of creditors and then submits the agreement for court approval. Because the plan can be limited to certain portions of its liabilities, the process tends to cause less disruption to suppliers and customers and less damage to the company’s reputation. It is generally chosen when key creditors are still willing to support a negotiated solution.
A reform of Brazil’s Bankruptcy and Corporate Reorganization Law, approved in late 2020 and in force since January 2021, made the mechanism easier to use. Companies can now file a petition with the initial support of creditors representing at least one-third of the claims covered by the plan and are given 90 days to reach the threshold required for approval.
One expert who asked not to be identified said out-of-court restructuring offers many advantages and that attempting to resolve a crisis through the mechanism is considered worthwhile even if it ultimately proves insufficient.
Luís Caldas, a partner at restructuring consultancy Íntegra, said the initially private negotiations reduce a company’s exposure. By the time its difficulties become public, the business already has a plan approved by a majority of creditors or backed by a significant share of them.
That advantage, Caldas said, comes with a narrower reach. Out-of-court restructuring generally focuses on selected classes of creditors, does not cover tax liabilities and can include labor claims only through collective negotiations with the relevant union.
Broader protection
The move to court-supervised restructuring usually comes when the relief secured under the first agreement is no longer enough to support the financial overhaul, particularly if operating conditions continue to deteriorate, Caldas said. If a company concludes that it will be unable to honor the agreement and begins facing new enforcement actions or cash freezes, a court-supervised process provides broader protection.
The so-called “stay period” generally suspends for 180 days lawsuits and enforcement proceedings involving claims subject to the restructuring. The process also covers a wider range of liabilities, including labor claims, and allows companies to seek specific installment arrangements or settlements for tax debt.
The trade-off is a more expensive and time-consuming proceeding, with a greater impact on the company’s reputation and its commercial and financial relationships. There is also a period of uncertainty between the filing and approval of the restructuring plan.
Unlike an out-of-court proceeding, a company cannot simply choose a limited number of liability classes to restructure.
