OAS Dip loan sets Brazil precedent

Author: Zoe Thomas | Published: 3 Sep 2015
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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 the financing.

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.

KEY TAKEAWAYS

  • 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 assets difficult.

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 firm Brookfield stepped in to grant a Dip loan.

Deal structure

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 Brookfield.


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.

Going forward

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 as collateral.

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 market.

See also

Brazil’s new listing standards for SOEs

Liability risks jeopardise Petrobras asset sale

Necessity is the mother of Brazilian O&G change

 


 

 

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