Brazilian construction company OAS has secured the
first debtor in possession (Dip) financing to take full
advantage of the country’s restructuring law which
was passed 10 years ago.
After several appeals and an injunction, last week
an appeals court confirmed a lower ruling approving
Dip loans have been used in Brazil before, but
those came after a reorganisation plan was approved by the
court. This loan more closely resembles those used in the US,
in that it allows the company to receive a cash influx to help
it through the bankruptcy process.
This is also the first Dip loan whereby the lender
is not already associated with the distressed company.
With the number of bankruptcy cases expected grow
as a result of the country’s troubled economy and
mounting corruption scandals, Dip financing will likely become
a more common feature in Brazil.
According to Fabio Rosas, a TozziniFreire partner based in São Paulo,
this structure and its judicial approval created important case
law for the country. "This is a precedent that will allow new
financers and Dip providers to come to the market and have
assurance that they are lending money with a guarantee
authorised by the courts," he said
Brazilian law requires court approval of both the
Dip financing and collateral guaranteeing it. This means even
if the negotiated restructure is voted down by the creditor
committee, this loan is still protected and senior.
- OAS has become the first company in Brazil to use
Dip financing during a restructuring;
- It sets a precedent for future bankruptcies,
which are expected to grow as a result of the struggling
economy and government corruption scandal;
- The transaction gave the lender the ability to
seek repayment if it did not have the winning bid in a
court-monitored asset sale.
Facing liquidity issues in December 2014, OAS decided to
sell its shareholdings in
Inverpark Stake, a public concessions company. But when the
operation car wash investigation tied OAS to allegations of
government corruption, it made the sale of even desirable
To reduce liabilities on the purchaser, OAS was
reportedly pushed by potential buyers to undergo judicial restructuring. Under Brazilian
regulation, the asset would have to be sold through an auction
process and then approved by a creditors committee.
To ensure cash flow during this period, OAS needed a new
source of liquidity. As a result, Canadian asset management
Brookfield stepped in to grant a Dip loan.
Brookfield is also a participating bidder in the auction
process for the Inverpark Stake assets that will be part of the
restructuring process. In addition, these assets are the
collateral being used by OAS to secure its loan to
The OAS deal was an
appropriate first because the company only needed
financing to make it through restructuring
If the lender is unsuccessful in the bid, the loan will be
repaid; however if it has the winning bid, Brookfield will only
receive the assets.
This structure is not dictated by the Brazil code. A lender
does not need to participate in any asset bids, but in this
case both sides were looking at the benefits of extending the
relationships. This will be used as an example of how Dip
financing can be adjusted to meet the needs of the deal.
As Brookfield was not already a creditor to OAS, it does not
have a vote in the restructuring plan. This potentially creates
an additional risk that the sale of the assets will not be
approved, thereby prolonging the repayment.
Brookfield’s trust should help build confidence
in the court’s ability to protect lenders, and
encourage financiers not involved in the bankruptcy to be more
receptive to offering this type of financing.
Though the potential to have this type of loan has existed
for a decade – since Brazil adopted a new
bankruptcy regime – no deal has used it in this
way before. According to Rosas, the OAS deal was an appropriate
first because the company only needed financing to make it
through restructuring, and had liquid assets that could be used
The true success of the transaction cannot be measured until
the restructuring is completed – which requires both
creditor and court approval.
But as a number of other Brazilian companies prepare for
bankruptcy – either out of necessity or to reassure
potential buyers that they will not be exposed to successor
liability – this example will prove useful to the
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