Publications

DIP Financing in Judicial Recovery

July 25, 2023

By Ivan Kubala, Luis Felipe Meira M. Simao, Vitor Antony Ferrari

It is true that companies that are heavily indebted and have low cash generation resort to the recovery procedures provided for in Law 11.101/05 to pay off their debts in the long term and still maintain their economic activity, thus avoiding bankruptcy.

However, cases in which the profits from business activity and the sale of assets of the company under recovery are not sufficient to settle all debts in a timely manner are very common. In these cases, companies must seek other means of financing themselves, such as DIP Financing.

Imported from Chapter 11, the Legal Standard that regulates judicial recovery in the United States of America, DIP Financing, an acronym for “debtor in possession”, was inserted into Brazilian recovery legislation after the reform carried out by Law 14,122/20.

This is a type of financing for companies undergoing recovery, which when used
will make up for the lack of cash flow to cover operating expenses during the Judicial Recovery procedure. In other words, it is an institution that allows companies to maintain not only their business activity, but also the generation of jobs and the consequent maintenance of the economic cycle.

DIP Financing enables the company undergoing recovery to obtain an injection
immediate inflow of new capital into its cash flow, provided by investors. These, in turn, provide capital to the company seeking payment of amounts in cash, and to do so negotiate terms and conditions to mitigate the risk of default, the so-called loan-oriented; or invest the amounts with the expectation of becoming partners in the company, that is, enabling a future transfer of the legal entity, the so-called loan-to-own.

DIP Financing has recently become popular due to the notice published by Grupo Americanas in its judicial recovery process, in which it informs creditors about the issuance of debentures to raise funds. According to the judicial recovery plan presented by the Group, the funds raised will be used to maintain the activities of the company under recovery and to pay creditors.

It is important to highlight that the investor who chooses to apply his capital via DIP
Financing in a company under judicial recovery has a natural reduction in
risks: in the event of failure to comply with the obligation by the recovering party, the
credits related to the amounts of the DIP investment will be considered extra-bankruptcy. Therefore, in the event of bankruptcy proceedings, the DIP investor will be the first to recover his capital.

However, it is essential to clarify that if the judicial recovery is converted into bankruptcy and the bankrupt company has no assets, the DIP investor's credit will not be satisfied. For this reason, this is an investment with inherent risk, even if mitigated.

Therefore, it is essential that the DIP investor is advised by lawyers with great expertise in the area, otherwise he runs the risk of losing the amounts invested.

If you have any questions about the topics covered in this publication, please contact any of the lawyers listed below or your usual Mazzucco&Mello contact.

Victor Ferrari

+55 11 3090-7310

vitor.ferrari@br-mm.com

Ivan Kubala

+55 11 3090-9195

ivan.kubala@br-mm.com

Louis Philippe Simon

+55 11 3090-9195

luisfelipe.simao@br-mm.com

This communication, which we believe may be of interest to our customers and friends of the company, is intended for general information only. It is not a complete analysis of the matters presented and should not be considered legal advice. In some jurisdictions, this may be considered lawyer advertising. Please see the company's privacy notice for more details.

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