The slowdown in the growth of the Brazilian economy after the recent big expansion in corporate issuance into the international and domestic capital markets has put the focus on the efficacy of Brazil’s relatively recent (2005) insolvency law.
Recent high-profile cases have led to concerns that creditors and investors are not receiving the full protection intended by the new law, which is modelled on the US’s Chapter 11 and provides legal protection for corporate restructuring. One of these cases includes meat-producer JBS, which in May 2012 leased a poultry factory from French-owned company Doux Frangosul. Doux Frangosul had defaulted on its debt in the second half of 2011 and now the French company’s creditors claim that they are not getting the revenues from the lease agreement, which they also argue was agreed at below market rates.
In a separate case HSBC, Credit Suisse and ING are taking legal action against brewery Cervejaria Petropolis’s operation of an asset of an insolvent company.
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| Fábio Rosas, partner and insolvency specialist at TozziniFreire Advogados |
Fábio Rosas, partner and insolvency specialist at TozziniFreire Advogados in São Paulo, says the insolvency law is well written, but he points out that the courts are still getting used to applying it to what can be complex cases. An additional practical difficulty is that, outside the states of São Paulo and Rio de Janeiro, where there are specialized insolvency courts, the law is being applied by unspecialized local court systems; this can lead to lengthy and costly delays, as well as some erratic judgements.
The current negative economic outlook is also leading to greater use of covenants and guarantees in DCM transactions. "In the past couple of years – since a wave of defaults in 2008 and 2009 – we have seen additional discussions from investors in terms of securities and guarantees," says Rosas. "Everybody is still learning from experience [of recent insolvency case law] and there is more emphasis on having clear covenants."
Data from Brazilian bank association Anbima indicate that the issuance of local debentures by non-financial corporates reached R$86 billion ($38 billion) in 2012, compared with R$7.3 billion in 2007. Over the past seven years, Moody’s coverage of non-financial corporates – excluding utilities and concessions – has increased to 54 from 25 issuers. The agency says that 67% of those 54 entities are rated as speculative grade.
According to a recent Moody’s report: "The Latin American speculative-grade default rate was 2.6% in the year ending July 2012, slightly lower than the 2.8% experienced globally. Default rates tend to be lumpier in Latin America, with higher peaks during stressed periods as in the 2008/2009 global financial crisis. This can be partly attributable to the larger impact of the sharp currency depreciation as well as the smaller sample size in our study. In total, there were four Moody’s-rated defaults in the region over the past year affecting nearly $990 million of debt. That is around one-third of the default volume seen in 2009, when the Latin American default rates last peaked."
Rosas says that as well as a greater use of covenants in debentures documentation there has been a much greater focus on getting clear and up-to-date information from companies that issue bonds.
