PARTICIPANTES: THOMAS BENES FELSBERG (moderator, founding partner at Felsberg Advogados); RENATA MACHADO VELOZO (moderator, partner at Padis Mattar Advogados) e GARY T. HOLZER (debater, Weil Co-President, Gotshal & Manges LLP).
PALAVRAS-CHAVE: Lei de Recuperação de Empresas e Falência – Lei 11.101/2005 – Chapter 11 – U.S. Bankruptcy Code.
On May 2, 2023, TMA Brasil promoted a face-to-face event, from the “Café Internacional” series, whose theme was “A visão americana do Chapter 11 para empresas brasileiras”.
The debate was moderated by Mrs. Thomas Benes Felsberg, founding partner at Felsberg Advogados and Mrs. Renata Machado Velozo, partner at Padis Mattar Advogados, was discussed by Mr. Gary T. Holzer, co-chair at Weil, Gotshal & Manges LLP and was reported by Mrs. Maria Tereza Tedde, partner at Tedde Advogados.
After the opening presentations, the panelist was asked about the possibility of a Brazilian company filing a Chapter 11 in US.
It was answered that this will depend on the existence of relevant connection by the company to the US.
Mr. Holzer emphasised, though, that despite the easy of filing, one should bear in mind the difficulty of making a restructuring plan that not only can be approved by the court , but also that is enforceable against the creditors.
Enforceability, in this sense, must be evaluated from two main aspects.
The first of them is the natural limitation to what the US Court can do, with regard to acts subject to Brazilian law. To exemplify, due to the Supremacy Clause, the judge of the federal court, where the bankruptcy is in the US, has the power over any state law contracts or any state law companies. However, if the company has equity issued not under US law, but under Brazilian law, an order to – for instance - cancel that equity, must comply with local laws like preemptive rights or shareholders rights.
The second concerns the consequences of non-compliance with an order issued by the US court.
The problem is practical. If the party to whom the court order is addressed does not have, for example, assets in the United States that can be enforced in the event of a breach, in practical terms, it will be more inclined to violate it.
Then the question is whether the court in the US has personal jurisdiction over the relevant party and also whether or not their assets can be accessed by the US court in case of need.
It was also highlighted that the company shall further analyze the convenience of filling a Chapter 11 in US according to the problem that it is willing to fix. If the company just intends to sell assets that are in Brazil without assumption of liabilities by the purchaser, for example, it may not be the best option.
Mr. Holzer was then asked to address the prepackaged bankruptcy, including the possibility of having a prepack in one day.
He said he’s very conservative about this, pointing out that prepackaged bankruptcy is a plan for financial reorganization that a company prepares in cooperation with its creditors that will take effect once the company enters Chapter 11.
The aim of a prepackaged bankruptcy—which must be voted on by shareholders before the company files its petition for bankruptcy—is to save expenses and shorten the turnaround time to emerge from bankruptcy.
Specifically with regard to the fast prepack, he advised that despite there are some one or two recent examples of it occurring within a few days, he is not in favor of this, highlighting that one has to understand what it means to be prepackaged and emphasizing that it means that the operations of the company will not be fixed, only its finances.
He also mentioned that it tends to be that either one or two pieces of the capital structure is the purpose of the restructuring.
In this line of reasoning, if the aimed change requires 100% vote (because, for example, the company is equitizing, changing the maturity, changing the interest rate or all those things), may be a better option doing it withing a bankruptcy, since in chapter eleven the vote is only 66 and two thirds essentially (the other 33% can be dragged alone).
The way a prepackaged bankruptcy works is that a vote process is created before the bankruptcy, mirroring what would happen in Chapter 11 (all the documents are sent, typically looking like they would in Chapter Eleven).
Before the Chapter 11, there's a voting deadline. When the votes come back, the company knows that it has at least 66 and two thirds. Sometimes if the quorum achieved is enough, the company doesn't file bankruptcy.
On the first day of a prepacking, the company already know it has won because the only thing it is doing is fixing the balance sheet. If is told the judge before the bankruptcy that all kinds of notice were given, everybody were told about the filling, there are one or two judges in the United States who will agree to do it within a day or two. Even so, most of the time they will take several weeks or 28 days.
It was also raised that people don't like to do it in a day or two because the company must tell almost a month before the filling, to all its creditors, its operating creditors, its trade creditors, that it is going to file a bankruptcy.
Many companies don't want to do that because they will not be able to tell them they already have the vote. They will tell them they're planning on it, and it leads to people being unsure about the company.
When a regular prepackaged is filled, on the first day of filling, it will be announced that the company already has the vote, the case will be finished shortly, and creditors can continue to trade with the company without any fear. So many CEOs don't want a month before the bankruptcy to start telling their creditors they're going to file bankruptcy without being able to tell them the second piece, which is, we already have the vote.
Another important point discussed, which is worth mentioning here, concerns the DIP financing.
On this subject, Mr. Holzer explained that in Chapter 11, the company must have enough money to operate and pay for the bankruptcy process.
Therefore, the amount that the company needs during the Chapter 11 it is called bridge financing. In other words, bridge financing is meant to cover the company from the day it files bankruptcy until the day it comes out.
That bridge financing is what people call the Dip loan. It stands for debtor in Possession, which means that the borrower is the company in the bankruptcy or the debtor in possession.
According to the rule in Chapter 11, on the day the company comes out of bankruptcy, it has to pay that loan off in cash, in full, or it can't come out of Chapter 11 (unless the DIP lender agrees to different terms). So this loan must be inserted into the existing capital structure.
In many cases, there's already secured debt on the company, which means that some of its assets have already been pledged to lenders.
When new money comes in, either that money is junior to the existing lenders collateral or the company has collateral and hasn't pledged, and that can go to the Dip lender, or the Dip lender must agree to make an unsecured loan (although it's technically possible the new money can come in and be senior to the existing secured creditors obligations on the collateral, which is very rare).
Bearing that in mind, with increasing frequency the existing lender that's secured to be the one who gives the Dip Loan, and when that happens in a Chapter 11, it is done with a structure that is called a “roll-up”.
It was finally clarified that it can take place in multiple stages, and transforms the existing lenders’ prepetition claims into a postpetition, administrative expense (in other words, through the roll up, prepetition lenders, providing postpetition financing, obtain a postpetition facility that pays off the prepetition secured debt).
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