Creating value among chaos

When you are in the middle of a crisis, the interdependence that exists between the producer and the final consumer is very clear. It is like watching a row of dominoes collapse: suppliers are not paid, payroll goes through a close call, costs are reduced, wages are cut, sales fall. Everything seems lost. But humanity has already survived more pandemics and economic crises than we can count on our fingers.

And this was only possible because, in some way, we were able to create value through something that was believed dead or without access to credit. In the market, this value is created by investments in distressed assets. Be it NPL (non-performing loans), bad credit portfolios, companies in bankruptcy, or on the verge of, there are several ways to create value after – or even during – a pandemic that affects the financial health of companies.

One may ask: is it a good idea to invest in a company on the verge of bankruptcy? Contrary to common sense, it is possible to state that this situation can offer great investment opportunities. Obviously, a transaction involving an insolvent company presents risks, but with due assessment, negotiations with creditors and obtaining legal validations, it can present itself as a smart opportunity to pave the way for new markets and customers.

Finding a good asset in this context requires planning and several due diligence hours. Maintaining a business can be challenging even for more prepared entrepreneurs. Seeing opportunities in the midst of the crisis can be a smart way out, but it requires understanding the implications of a new layer of challenges.

The biggest benefit is related to the total cost of the operation. Buying companies whose biggest problem is financial difficulty is naturally cheaper than acquiring a business with a going concern. In addition, the existence of a consumer base, assets and the willingness of managers to pass on the business to third parties must be taken into account.

In the context of companies that are flirting with the judicial recovery filing (similar to the United States Chapter 11 filing), several precautions need to be taken. The Bankruptcy Law provides for the possibility of revoking acts previously performed with the intention of harming creditors and the ineffectiveness of certain acts performed before bankruptcy, such as the sale or transfer of an establishment made without the express consent or payment of all creditors, without allowing the debtor to have enough assets to pay its liabilities. And, still, there is the legal term of bankruptcy, that is, the possibility of the effects of bankruptcy going back up to 90 days before the request for judicial recovery. These and other concerns must be carefully considered by the investor.

There is also the opportunity to invest in healthy assets held by a company that is already under a judicial recovery. In order for this option to become feasible for investors, the ghost of succession had to be eliminated. In this sense, Law 11.105 created the possibility of investing in isolated productive units (UPI), in which tax and labor successions are ruled out, so that the investor can acquire the asset in its present form – as if there had been no past labor past or tax liabilities. However, it is still recommended that in these cases, a due diligence is still necessary.

When choosing guarantees for the operation, the utmost care is required. In addition to assessing the liquidity and condition of the asset given as a guarantee, the investor must choose a type of guarantee that protects it in the event of a judicial recovery. Even though the law governing the judicial recovery process defines a pre-established order for receiving credits, those protected by fiduciary guarantees, such as assignment and fiduciary assignment, are not subject to auction procedures. Thus, such guarantees, in principle, do not enter the waiting list for receipt in the judicial recovery plan.

It is worth remembering that poor business management is not always the determining cause for the company’s failure; economic crises such as the one we are experiencing can bring uncertainty, but they can also bring new horizons as to the way of investing. Betting on investments in insolvent companies presents itself as an alternative to create value. The moment is to refine the perception and take advantage of the opportunities that the market offers.

By Giovanna Paes Cruz, associate at Candido Martins Advogados