Boom and gloom
Friday, 17 June 2016 (1 week ago) by Joe Rowley
Over the life cycle of the average business, it is the corporate equivalent of suddenly being struck with a serious illness. After decades of excellent financial health, a company’s vital signs rapidly deteriorate and it suddenly finds itself deep in the red. Whether because of reckless management or environmental factors, the company finds itself fighting for survival. It is time to call in the insolvency and restructuring experts.
Over the last two years, it would not be too much of an exaggeration to claim that Brazil has been experiencing something of a bankruptcy epidemic. In the first quarter of 2016, applications for bankruptcy protection were 165 per cent higher than the same period last year, according to Boa Vista SCPC, a credit reporting service. Other figures compiled by credit research bureau Serasa Experian showed an increase of 114 per cent in the number of companies filing for judicial reorganisation over the same period, the highest level for the first quarter since Brazil’s bankruptcy law entered into force in 2005.
However, while such statistics may make a diagnosis of Brazil’s economic vitals far from optimistic, for the country’s bankruptcy and insolvency lawyers, the sharp rise in companies under financial stress has contributed to a healthy boost in revenues. “The market is booming and it looks like it will continue booming for some time, even if the political situation gets calmer,” says Pinheiro Guimarães – Advogados partner Eduardo Mattar. “Even if that is the case, the economy will take longer to recover, and that means the restructuring market will continue to be very active.”
Brazil’s leading bankruptcy lawyers say demand has never been hotter for their particular expertise. For example, Felsberg Advogados, which has one of the largest and best-regarded restructuring practices in Brazil, witnessed an increase of around 50 per cent over the last year, while family-run boutique Renato Mange Advogados Associados, which has been providing bankruptcy advice for three generations, says the number of clients on its books has steadily increased since 2013. The type of work demanded is also becoming more diverse. Rio-based Galdino, Coelho, Mendes, Advogados, for example, says clients are not only requesting assistance on restructuring and bankruptcy cases, but also individual insolvency. Full service firms, such as Pinheiro Neto Advogados, Demarest Advogados and Machado, Meyer, Sendacz e Opice Advogados are featuring on more high-profile restructuring cases and raising their profile in a market traditionally dominated by specialists.
Soaring demand has led firms to invest heavily in expanding both their headcount and service offering. Among the most aggressive is Felsberg Advogados, which culminated a 12-month hiring spree in April with the addition of insolvency, arbitration and litigation lawyer Fabiana Bruno Solano Pereira alongside another partner. More recently, Souza, Cescon, Barrieu & Flesch Advogados scored a high-profile coup by poaching Fábio Rosas from TozziniFreire Advogados to head its restructuring areas, while a year earlier, Dias Carneiro, Arystóbulo, Flores, Sanches, Turkienicz, Amendola, Waisberg and Thomaz Bastos Advogados made waves by hiring two bankruptcy and arbitration lawyers, including former name partner Ivo Waisberg from Costa e Tavares Paes Sociedade de Advogados. Meanwhile, steady growth at Renato Mange Advogados Associados saw the firm double the number of associates on its payroll, while organic growth at Soares Bumachar Chagas Barros Advogados has made the firm’s insolvency and restructuring practice its largest, with nine lawyers dedicated to the area.
Fuelling the battle for talent is the nature of work and the dynamics of the legal marketplace itself. Before the introduction of the new law in 2005, Brazil’s bankruptcy and insolvency legislation was relatively underdeveloped and less sophisticated than other jurisdictions in Latin America, giving lawyers few options to help companies avoid bankruptcy. The previous law was viewed as “just a step before liquidation”, according to Pinheiro Neto partner André Marques, with the result that many cases became little more than a box-ticking exercise. When larger firms did offer restructuring and insolvency advice, it tended to be concentrated in the litigation department. Few had a stand-alone area and even fewer partners were entirely dedicated to the practice. “Before 2005, we didn’t have a lot of firms working with the concordata,” reflects Renato Mange Advogados Associados managing partner Renato Mange. “It was a very specialised market and we knew everybody that worked in this field.”
André Marques, Renato Mange, Eduardo Munhoz, Joel Luís Thomaz Bastos and José Eduardo Carneiro Quieroz
Following the introduction of the new law in 2005, that all began to change. Armed with a modern law based on the US bankruptcy code, lawyers could draw on an expanded tool kit of options, ranging from DIP financing to the sale of independent productive units (UPIs), to help companies stave off bankruptcy. Several far-sighted lawyers, particularly from the litigation area, had already begun to specialise in insolvency and bankruptcy law, bringing in fresh blood and deepening the talent pool. “I was from the litigation area and I decided to join the insolvency practice in 2004,” recalls Marques. “I heard that the law would be a game-changer, as in fact it was, and I thought it would be an interesting and promising area of law to focus on. It has certainly been a great experience until now.”
With the introduction of the bankruptcy code coinciding with a period of rapid economic growth, Brazil’s favourable economic conditions provided the country’s bankruptcy and insolvency lawyers and judiciary with the breathing space to grow accustomed to the law. Today, a potent mix of unprecedented political and economic crises has brought lawyers’ skills to the fore. The weaknesses in the legislation and the particularities of the Brazilian market require them to develop creative solutions on behalf of clients. “When the new law came in we saw five years of adaptation and used to see a lot of cases based on the old view of the law,” reflects Machado Meyer partner Renato Maggio. “You would see some lawyers use the new law to procrastinate and delay on behalf of the debtors without being creative. Nowadays, you see everyone – the lawyers and the judges – becoming more sophisticated, and the law becoming a real alternative for overcoming a distressed situation.”
A divided market
In recent years, there has been a surge in the number of law firms setting up or expanding their bankruptcy practices, with a clear dividing line appearing between firms that advise creditors and firms that advice debtors.
Several factors have contributed to this situation. Firstly, although Brazil’s new law has helped bring greater formality and clarity to bankruptcy proceedings compared to the closed-door, bilateral discussions between debtors and creditors of the past, certain legal concepts still lack a clear definition, meaning legal counsel often have to be creative in interpreting the legislation on behalf of their client. For example, although the legislation provides for the sale of UPIs to raise financing, it is vague on the types of assets that can be included under this concept. Therefore, legal counsel could argue to include, or exclude, a particular asset from the bankruptcy procedure depending on the best interest of their particular client; requiring a legal interpretation of the law that would be difficult to argue against if advising the other side. “If we had a more developed bankruptcy law, including final and clearer precedents and definitions, our legal market wouldn’t need to be split between creditor’s and debtor’s attorneys,” says Soares Bumachar Chagas Barros Advogados partner Laura Bumachar. “Notwithstanding, since that is not our case and our rules still have many grey zones, sometimes you find yourself fighting within those zones – and that’s when you can’t work for both sides.”
A second factor stems from the relatively small number of lenders in the Brazilian market. With 80 per cent of Brazil’s banking sector controlled by five main banks – Itaú Unibanco, Banco Bradesco, Santander and state-run banks Banco do Brasil and Caixa Econômica Federal – full-service firms with strong banking and finance, capital markets or M&A practices can be highly dependent on a relatively small number of clients for much of their deal flow. Traditionally, this has meant that firms that regularly advise banks are either explicitly prohibited from representing debtors in bankruptcy cases or prevented from doing so by conflicts of interest. “Many of these banks consider that the firm is conflicted representing any company in any case where they are creditors, so they impose a kind of restriction,” explains E. Munhoz Advogados founding partner Eduardo Munhoz. “Maybe in the near future that will change, but I believe that until now it has been a very strict division.”
Several full-service law firms have already begun to test this division. Pinheiro Neto, which is better known for advising creditors such as BTG Pactual in Eneva’s restructuring or Citibank, Scotiabank, Bradesco and Credit Suisse in the Aralco case, has nevertheless also been seen advising companies, such as Independencia, on the debtor’s side. Although it can be time-consuming to ensure that advising a debtor will not create a conflict of interest, the rewards for doing so can often be substantial. “If you advise the debtor you can make a lot of money, provided the debtor is able to pay you,” says one lawyer. “Compared to a creditor that might know they will receive a haircut, but receive their money, the debtor has much more to lose.”
Testing the boundary
Quite how sensitive making the transition can prove was demonstrated by Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados in its representation of OAS last year. Despite previous experience advising debtors such as EBX, the firm’s decision to advise the engineering and construction company raised eyebrows throughout Brazil’s legal community. Unlike previous cases, when the full-service firm distanced itself from contentious matters by delegating the work to a smaller firm or a boutique, Mattos Filho became associated with the legal arguments put forward by Dias Carneiro when its branding was included in a motion submitted to the court. Partners at rival firms began to pay close attention to see whether full-service firms could play a more active role advising debtors without compromising the assistance they provide to banking and finance clients as creditors.
When Munhoz announced in the middle of the case that he was leaving Mattos Filho to set up his own boutique (and his former firm announced it was changing the focus of its restructuring practice owing to conflicts of interest), several had their suspicions confirmed that it would prove too difficult for large full-service firms to play a more active role advising the debtors. “What we’ve done is to change the focus of this practice,” explains Mattos Filho managing partner José Eduardo Carneiro Queiroz. “Our focus is to represent creditors and investors willing to acquire business in distressed financial conditions. Due to our very close relationship with banks and insurance companies, and our very strong practice in finance, insurance and capital markets, this is our natural position.”
Munhoz’s decision to establish his own boutique firm also reflected the broader trend towards specialisation in the market as growing demand from companies for sophisticated assistance on complex cases creates sufficient deal flow to make restructuring boutiques a viable option. “My decision to leave was not based on problems with creditors,” explains Munhoz. “When I was at Mattos Filho, I was able to build constructive relations with creditors even when representing debtors. My decision to leave Mattos Filho was very personal on my part because I realised that not only in restructuring cases, but also in litigation cases, you had to involve [a lot of parties], so the transactional costs were quite high, and it would make more sense to start a new law firm focused on litigation, arbitration and restructuring and be really free to organise the practice to allow us to do the cases we wanted.”
Looking to the future, although several lawyers predict the trend towards specialisation will continue in the near term, they argue that a combination of legislative amendments and precedent-setting cases in the longer term will help resolve many of the ambiguities in the current law. For full-service law firms, the market’s continued development along the lines of the US, on which the country’s law is based, will only help increase their potential pool of clients by resolving many of the grey areas in the law and helping free their lawyers from many of the conflicts of interest that make it a challenge to advise debtors. Meanwhile, others also expect specialised boutiques to continue to expand, leveraging the valuable expertise and talent they have accumulated over decades. “Due to Brazil’s situation, we think there will be a lot of new restructuring cases for the next two or three years and we hope that the courts are prepared for that,” says Dias Carneiro partner Joel Luís Thomaz Bastos. Many hope a law introduced at the start of Brazil’s boom years to encourage investment will allow many of its leading companies survive the recession and nurse the economy back to health.