A wave of debt restructuring may be imminent.

Bankruptcy and judicial reorganization statistics are not yet clear, but a major wave of corporate debt restructurings is forming and is expected to hit between the end of this year and next. Financial advisors, bank executives, and lawyers foresee difficulties ahead, even though the economy appears to be recovering faster than initially expected.

“The wave of judicial reorganizations and corporate restructurings comes after the wave of Covid-19,” says lawyer Eduardo Munhoz, a specialist in restructurings and corporate disputes, who participated yesterday in Valor's Live broadcast. The emergency measures adopted by the government and the debt extensions granted by banks – with terms ranging from 60 to 180 days – provided some breathing room, but are not enough to balance the cash flow of all companies.

At the same time, the impact of the crisis was initially stronger among small companies, which should contribute to a large number of requests for judicial reorganization and bankruptcies, since they are more numerous. This does not mean that medium and large companies are immune. Despite having greater access to credit, some will also face difficulties.

At Pantalica Partners, a consulting firm specializing in business restructuring, inquiries from potential clients have come primarily from medium-sized and family-owned companies. Salvatore Milanese, a partner at Pantalica, has been stating since the beginning of the crisis that the number of requests for judicial reorganization this year could reach 3,000, surpassing the record of 1,863 requests filed in 2016. Now, he believes that next year could see an even higher number. "GDP data shows a battered industry, battered services, and banks have made a large volume of provisions," he says.

Lawyer Julio Mandel, partner at Mandel Advocacia, specializing in insolvency law, says that the number of consultations skyrocketed in April and has remained high "as never seen before" since then. There is particular demand from retail companies. Mandel says that many companies have their recovery process ready, but before seeking help from the courts, they have begun restructuring their businesses – reducing costs, improving inventory control, and attempting to increase online sales, in addition to negotiating liabilities directly with creditors.

According to him, the strategy, so far, has avoided or at least delayed the filing of bankruptcy protection requests. Companies have managed to reach agreements, especially with banks, shopping malls, and suppliers. But all this renegotiation was done with the perspective of economic recovery. Online sales have grown and physical sales have partially returned, but are not yet at the ideal level, says Mandel.

The unknown factor is precisely at what level the economy will stabilize. Some sectors are showing signs of already returning to pre-pandemic levels, but in others, the improvement is slow. At the beginning of August, an activity indicator calculated by Itaú Unibanco showed that the economy was at 90% of the level of a year ago.

"The truth is that, however positive the hope may be regarding economic recovery, the main economic fundamentals are not in place, quite the contrary," says Munhoz.

According to lawyer Otto Gübel, from Otto Gübel Sociedade de Advogados, there may be a boom in debt restructurings at the end of the year, and he notes that a large portion of the renegotiations made during the pandemic are scheduled to begin payments in November.

“These agreements were made without any technical basis because the company didn’t know what its revenue, cash flow, or profitability would be when the deadline arrived,” says Gübel, who in the last two weeks has been approached by at least ten companies seeking guidance. Two have opted to file for judicial reorganization – one in construction and the other in food.

Major banks have prepared for a rise in defaults starting at the end of this year, and have already increased their provisions against bad debts by almost R$ 60 billion in the first half of the year. Many clients still have their credit contracts on hold, but those who have resumed payments have, for the most part, been able to honor their commitments. "The drop in the Selic rate helps companies pay their debts," notes an executive in the sector.

Records from the São Paulo Court of Justice (TJ-SP) show that from January to August, 596 requests for judicial reorganization and bankruptcy were filed throughout the state. The months with the highest volume were May, with 101 requests, and July, when 110 were registered. In January and February, for example, when the country was not yet under the effect of the pandemic, there were 62 and 71 requests, respectively. From January to August of last year, 227 requests for judicial reorganization and bankruptcy had been filed.

By: Talita Moreira, Joice Bacelo and Taís Hirata

Source: Valor Econômico