The Operational Dilemma Of The Debt Restructuring Process

Author:Ms Karla Fernandes
Profession:TMF Group

The crisis that has affected the Brazilian economy in recent years has considerably increased the number of companies that have had to restructure their debt, either by extending maturities, adding new collateral and sharing them or by means of a recovery plan.

In relation to the last mentioned option, there is a common error happening. Different to what companies may think, having a recovery plan approved by the creditors, the judge and the "judicial administrator" (when it comes to judicial recovery) is not enough. Completing some debt restructuring transaction documents requires hiring an "agent" to act as either as a collateral agent, escrow agent, administrative agent or paying agent - but the truth is too little of its role is formalized in the documents. Also, we have noted that the issue is treated differently by borrower and lender. 

The view of the borrower - who is the vulnerable party aiming to rebuild its financial capacity - and their legal advisers, is usually that having less room for discussions means more advantage, since the more detail in the plan, the more obligation there is for the company. At the same time, lenders believe the lack of details on the operational activities may, over time, give them the chance to increase their demands on the borrower. Lenders think that, if the document stablishes the obligation but is silent regarding the procedures to follow, they have the right to demand it takes place in the way the syndicate finds better. None of these approaches are correct.

The best option

Overall, it is recommendable to develop a document that contains all the operational details necessary to support both parts and ensure the commitments...

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