Put Andre Jerusalem  – 01/04/2020

• INTRODUCTION:

In times of crisis, the accumulation of debt is one of the main (if not the main) problems that plague companies. In addition to the need to pay ordinary expenses to maintain the business, there is also the concern about paying off debts previously obtained and paid in installments over time. Furthermore, servicing debts obtained in the past may become excessively onerous over time if the base interest rate becomes lower than that practiced at the time the debt was obtained. Thus, a debt obtained in March 2018, when the SELIC was 6.5% per year, has probably become onerous today, given that the SELIC is at 3.75% per year.

Thus, in a scenario of debt accumulation, as a rule, the restructuring of the company will involve measures to reduce operating expenses and renegotiate the debts obtained. However, said debt may be of different natures and its renegotiation may have specific characteristics specific to the debt and the conditions agreed upon at the time of its contracting, which may facilitate or impede the desired renegotiation.

With this in mind, we will prepare some articles about some of the main securities and the path that should be followed by companies that need to renegotiate them. The first chapter of this series will deal with the renegotiation of debentures and promissory notes, and in the next chapters we will deal with the renegotiation of Real Estate Receivables Certificates (CRI) and Agribusiness Receivables Certificates, as well as the renegotiation of debts contracted with financial institutions.

• DIFFERENCES AND SIMILARITIES BETWEEN DEBENTURES AND PROMISSORY NOTES:

Debentures and Promissory Notes (or commercial papers) have many more similarities than differences. Both are debt securities issued by companies, and both can be issued by corporations and traded on the over-the-counter market. However, whereas the Promissory Note is a short-term debt security, regulated by Decree No.^the 2,044/08 and by an international convention (Uniform Law on Bills of Exchange and Promissory Notes, approved in Geneva in 1930, and enacted in Brazil by means of Decree no. 57,663/66), debentures are long-term debt securities, defined in art. 52 of Law 6,404/76 (Corporation Law)[1]

Finally, another relevant difference between both securities is that promissory notes have a limited redemption period (up to 360 days), while debentures do not have such a limitation.

• PROCESS OF RENEGOTIATION OF DEBENTURES AND PROMISSORY NOTES:

Despite the differences between the two securities, the renegotiation strategies and procedures involved in both are quite similar. However, this does not mean that the procedure is the same, since depending on the characteristics involved in the issuance and the number of securities in circulation, certain rules must be met (especially those involving public offerings). Below, we will discuss two of the main techniques for renegotiating debentures or promissory notes:

• Direct Renegotiation with Investors:

As with any debt security issued, the issuing company must comply with certain obligations to those investors who purchase the security. While the ordinary conduct of the remuneration (values, terms, adjustment, premium, etc.) must occur in accordance with the issuance deed, any changes involving such issues must be addressed not only by amending said deed, but also be subject to prior deliberation with the investors.

It is common to find that in requests to renegotiate the terms of the issue, one or more creditors' meetings are held, in which the issuer must detail the reasons that motivated the request to renegotiate the terms of the loan, as well as convince that the best way forward is to readjust said loan.

If the renegotiation is unsuccessful, the issuing company must maintain the terms of the loan unchanged. In the event of default, it is common for the issuance deeds to include some condition for early maturity of the debt. In other words, this means that the issuing company must pay the entire debt in advance, which may have undesirable effects on the company's cash flow and/or the execution of guarantees, which may be essential assets for the company.

Any lawsuit arising from the execution of guarantees that may have been granted must be carefully analyzed not only by the company, but also by investors, because although the guarantee serves precisely to ensure due payment, it is not uncommon to see that guarantees granted in the past may not represent the same thing at the time of their execution. This means that depending on the characteristics of the guarantee, its execution may mean that creditors will hold an unwanted asset. This hypothesis is relatively common when we analyze situations in which shares/quotas were granted as collateral, but at the time of execution, said shares/quotas may be accompanied by a liability (i.e. debts of all kinds).

• Repurchase of Securities (Early Redemption):

Another common hypothesis in the renegotiation of the securities covered by this article is the early repurchase of said securities by the issuer (also known as early redemption). In this case, whether as a result of a decision by management to use cash to pay off debts or by a mere “swap of papers” (exchanging a more expensive debt for a cheaper one), in principle the agreement of investors gathered in a general meeting will not be necessary, since this is the issuer's prerogative. However, the rules for early redemption must also be detailed in the issuance deed in order to avoid any interpretation that could harm the issuer or investors.

As was evident above, in addition to the basic care taken in reading the terms of the issuance deed in advance, it is also important that the issuing company and investors are aligned, in order to promote a restructuring of said debts that allows the issuing company to adapt payments to its reality, as well as protect the investor and prevent him from not receiving the amount invested.

[1] Art. 52. The company may issue debentures that will grant their holders the right to credit against it, under the conditions set out in the deed of issue and, if applicable, the certificate.