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Date: 17 de July de 2023
Posted by: CPDMA Team

Exit financing: the unexplored option in Brazilian judicial reorganization

exit financing 1

The exit financing: is a financial strategy widely used in developed markets, such as the United States and Europe. However, in Brazil, this practice is still little explored or even known [1].

The term exit financing: refers to a form of financing provided to companies in the process of judicial reorganization, after the protection guaranteed by the stay period. This financing is often used to enable the creditor to pay the competing claims in accordance with the approved plan, enabling the closure of the judicial reorganization process.

The exit financing: can also be an alternative for the lender of a company in crisis whose credit is in default. In this case, the lender agrees to grant another loan that can be used to pay off the previously granted credit or other credits that, if defaulted, could lead the company to bankruptcy. This option is often more cost-effective in the long run for creditors than filing for bankruptcy or selling the assets to a third party, which could result in lower-than-market auction values.

Compared to DIP Financing, o exit financing: may involve a higher value and greater risks for the funder. This is because the exit financing: may imply the payment of all debts renegotiated in the reorganization plan, even if the deadline provided for in Article 61 of the Civil Code has not elapsed. Law 11.101/05.

For the company in a crisis situation, there are several benefits in the exit financing:It will be able to save the procedural costs of the judicial reorganization process, centralize its payments with one or a few creditors, reducing the costs of carrying its liabilities and the need to negotiate with unsophisticated creditors. In addition, it no longer uses the expression in Judicial Recovery next to your name, which helps your reputation in the market.

For creditors, the advantage lies in immediately receiving the amount renegotiated in the plan, reducing the risk of future defaults and the need to liquidate assets in the event of a bankruptcy decree, which would possibly result in even greater losses.

The only drawback of such a strategy lies in the lack of legal incentives for the lender, since its claim will not be treated as extra-conscursial in the event of the company's bankruptcy, as the judicial reorganization will have been terminated. Therefore, the exit financing: should have contractual mechanisms in place to protect against these risks, such as the provision of covenantsfinancial. In addition, it will be essential to negotiate with creditors excluded from the reorganization to prevent them from using the termination of the judicial reorganization as an opportunity to try to expropriate the assets of the company in crisis.

As indicated earlier, the exit financing: is a concept still little explored in Brazil, but it has the potential to transform the judicial reorganization process in the country. Despite the challenges, the evolution of judicial understanding and the need for solutions for companies in reorganization indicate a promising future for the concept. exit financing: in Brazilian law. Thus, it is essential that entrepreneurs and lawyers understand and exploit this financial resource so that it can be used effectively and safely.

By: Álvaro Scarpellini Campos

Special Situations | CPDMA Team

[1] On the subject: DIAS, Leonardo Adriano Ribeiro. Financing in Judicial Reorganization and Bankruptcy. São Paulo: Quartier Latin, 2014.


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