Brazilian provisions on DIP Financing fail the market test

Cássio Cavalli. Professor da FGV Direito SP. Avogado consultor e parecerista.

The Brazilian DIP Financing provisions recently enacted by the Law 14.112/2020 seem to have failed the market test. This is the central message of the report “Gol considers filing for bankruptcy in the USA” published by the newspaper Folha de São Paulo. According to the article, the Brazilian company Gol Airlines needs debt financing to reorganize its capital structure, and has evaluated that it has better possibilities to obtain a new loan filing for Chapter 11 in the USA instead of filing for judicial reorganization in Brazil. Therefore, according to the report, the company studies filing for Chapter 11 in the USA instead of judicial reorganization in Brazil.

This market assessment shows that the legal provisions recently included in the Bankruptcy Law under the label DIP financing are not adequate to endow Brazilian law with efficient rules for financing corporate debtors in judicial reorganization.

To endow the Brazilian legal system with adequate rules to promote the financing of companies in judicial reorganization, the Brazilian legislator has to understand what is the problem in the capital structure of a corporation that hinders debt financing (basically a debt overhang problem), and how legal rules can solve this problem (basically by granting full seniority to DIP lenders). After all, the global market for corporate debt financing assesses legal institutions governing loans when making decisions to extend debt financing to distressed corporations.

The assessment that the Brazilian provisions on DIP Financing open up fewer financing possibilities means that, to finance itself in a Brazilian reorganization, the distressed debtor has to pay a higher interest rate than the one charged in a DIP Financing granted in Chapter 11 in the USA. This is because lenders see a higher risk in the Brazilian provisions governing DIP loans and, therefore, price this risk by charging a higher rate of return.

But what are the specific characteristics of the legal rules of the Brazilian DIP financing that, compared to the rules of Chapter 11, prevents potential debt financiers from extending new loans to the corporate debtor? How to improve the Brazilian legislation on the matter to allow distressed corporations to finance themselves at a lower cost?

I analyzed some of these issues in articles that I published in my Newsletter Agenda Recuperacional (both on Linkedin and on www.AgendaRecuperacional.com.br), of which I highlight “DIP finance regime in Brazil and the Escher’s drawings: a dialogue with Aurelio Gurrea-Martínez” (in English) and "DIP Financing provisions in the recent reform of the Brazilian Bankruptcy law" (in English).

It would be highly positive if the topic entered the agenda of relevant economic reforms, such as those that are currently being conducted by the Secretariat of Economic Reforms of the Ministry of Finance.

After all, not all Brazilian companies can consider filing for bankruptcy in the USA to access debt financing with lower interest rates.