Investing in distressed businesses in Brazil

01

Choose the exposure before valuing it

Put each proposed instrument on a separate line of the investment memo. Name the issuing or selling entity, the counterparty that owes payment, the source of return, the approval path and the most serious unresolved condition. If the transaction combines claims, a loan and equity, model what the fund would hold if only one leg closed. Rights in one instrument may offer little protection against losses in another.

Date the case documents and the financial model. A petition can precede a processing order, a plan can change before the court grants restructuring, and an appellate order can alter what the deal team can execute. Keep the current Portuguese orders and sale documents next to the English memo. For proceedings that predate the 2020 reform, have local counsel check transitional provisions against the case chronology.

Sources for this section: Insolvency Law, Articles 49–60-A and 69-A–69-F · Law No. 14,112/2020, including transitional provisions

02

Buy a claim on expected cash and enforceable rights

Ask for the underlying debt, the full assignment chain, notices, the latest list entry and any related decision or appeal. Trace the collateral and guarantees separately. Check which rights and obligations the seller would transfer, which payments it has already received, and how it will handle money sent to the old account. If a Brazilian receivables fund is involved, confirm the fund or class and the authority of the party signing the transfer.

Underwrite the plan election, voting eligibility and deadlines independently of the price. If the thesis depends on having a say in the plan, check when the assignee can participate and which amount and class will count. Price at least a timely plan case, a delay or modified plan case and a bankruptcy downside. Use dates and expected net cash flows, allowing for recovery costs, currency moves and limits on parallel recoveries.

• Identify evidence that would move the claim amount, classification or payment date enough to change the price.
• Specify what the seller will deliver at closing and who will record the transfer and update the recipient of future payments.

Sources for this section: Civil Code, Articles 286–298 on assignments · Insolvency Law, Articles 39, 41, 49 and 83–84 · CVM Resolution No. 175, Annex II on receivables funds

03

Read the sale notice against the operating perimeter

An approved judicial restructuring plan can provide for a judicial sale of an isolated productive unit (unidade produtiva isolada, or UPI). The unit may contain assets, rights or equity interests. The statute provides for a qualifying sale free of liens and without succession to the debtor’s obligations, subject to its conditions and bidder exceptions. Review the plan, sale order, sale notice and asset schedules together. Establish the bidder’s relationship to the debtor and the exact process approved by the court. A negotiated asset purchase requires its own analysis of transfer and liabilities.

Walk through the assets, contracts and licences against the first week of operations. Confirm ownership, consents, possession, access to sites, data and systems, and which employees or contractors the buyer needs. For an auction or another authorized competitive procedure, calendar deposits, bidder qualification, bid form, payment, objections and handover from the notice and orders. Check which conditions the procedure permits a bidder to include before treating a bid as reversible.

Sources for this section: Insolvency Law, Articles 60, 60-A, 66 and 140–143

04

Price equity through the liabilities that stay

Start with a bridge from enterprise value to equity value. Include plan obligations, debt outside the plan, tax disputes, guarantees, related-party balances, contingent claims and commitments required to keep operating. Test whether the investment brings cash into the company or pays a selling shareholder. For a conversion of debt into equity, reconcile the claim extinguished, the shares issued and dilution across classes. Model any liabilities that stay with the company after the capital contribution.

Confirm the post-closing cap table and effective authority over bank accounts, budget, borrowing, related-party transactions and asset disposals. Compare shareholder documents, company approvals and any limits in court orders. Agree who can replace key managers and what happens if shareholders disagree while payroll or supplier payments are due. Governance is an input to the liquidity model whenever an approval can delay funding or spending.

Sources for this section: Insolvency Law, Articles 50, 59 and 64–66

05

Stress-test rescue financing and operating cash together

Brazil’s judicial restructuring law allows court-authorized financing under Articles 69-A–69-F, often called debtor-in-possession or DIP financing. Review the order, security documents, priority and existing encumbrances. A court-authorized subordinated security interest under Article 69-C is limited to surplus proceeds and has statutory exclusions for fiduciary transfers and assignments. If the case converts to bankruptcy before all funds are released, Article 69-D preserves the specified guarantees and preferences only up to the amounts actually delivered before the conversion judgment.

Start the weekly forecast with verified bank cash, separating balances available to the borrower from restricted or pledged cash. Test receivables collections, supplier credit, payroll, taxes, essential maintenance and inventory replenishment. Mark the first date the business runs out of usable cash if closing slips or a major customer pays late. Compare the purchase price, operating funding and transition costs in separate lines.

• Require a named owner and objective evidence for each drawdown condition.
• Track actual cash versus forecast, minimum liquidity and the response to a missed milestone.
• Test collateral proceeds after senior liens and realization costs under a bankruptcy scenario.

For a transaction that depends on a carve-out, a liquidity plan or tighter operating controls, Ritus Partners ↗ (opens in a new tab), a PreservaCred restructuring partner, can be a point of contact for restructuring execution, integration and short-term cash management with leadership.

Sources for this section: Insolvency Law, Articles 69-A–69-F and 84

06

Price gaps in the seller’s information

Separate missing evidence that can be obtained before bidding from uncertainty the buyer would have to assume. Use the administrator’s activity reports, available court exhibits and independent records to challenge the data room where they cover the same question. A cash model based on consolidated company accounts needs a bridge to the entity or assets being acquired. Check whether recent margins reflect normal operations or a period when suppliers were unpaid or inventory was being run down.

When a point is material, choose a practical treatment. An unresolved ownership issue may need evidence before commitment. A known transition expense may belong in the bid model. An unverified customer contract may need a lower-volume scenario and separate consent before handover. Check which mechanisms the sale process permits.

Sources for this section: Insolvency Law, Articles 22 and 51 on reports and documents

07

Rehearse both directions of the cross-border payment

Have Brazilian counsel, tax advisers and the payment institution map funding into Brazil, any local settlement, the recipient of distributions and the route for funds leaving Brazil. The Central Bank framework distinguishes direct investment and external credit from investment in the financial and securities markets. Confirm which framework applies, whether reporting is required, who files it and what evidence the bank or intermediary needs. For qualifying foreign creditor payments, check any case-specific orders and the procedure under Article 167-G.

Obtain the investor’s and counterparty’s ownership and signatory documents early. Confirm the institution’s customer and beneficial ownership checks, evidence of the origin and purpose of funds and the expected processing time. Ask tax advisers to model the relevant withholding, gains, transaction taxes and exchange costs for each leg and each exit. Run a delayed-remittance scenario using the investment vehicle’s reporting currency. The day a Brazilian payer releases funds can differ from the day the fund can use them.

Sources for this section: Central Bank Resolution No. 277 on the foreign exchange market · Central Bank Resolution No. 278 on external credit and direct investment · Central Bank and CVM Joint Resolution No. 13 on nonresident financial and securities investment · Central Bank Circular No. 3,978 on customer identification and AML controls · Law No. 10,833/2003, Article 26 on specified nonresident capital gains · Insolvency Law, Article 167-G, paragraph 5 on remittances

08

Make the investment decision conditional on evidence

At committee, separate the maximum bid from the cash reserve and proposed conditions to funding. Assign the evidence and signer for each condition, including the required order and its current effect, clearance or consent, funds flow, transfer instruments and day-one access. Check whether competition clearance or sector approval applies to the proposed structure. Reopen approval if the sale perimeter, operating cash needs, FX exposure or conditions to taking possession change materially.

Keep an information gap register. For each unanswered question, record what the seller controls, what can be verified independently and how the downside changes if the answer remains unavailable. PreservaCred’s reports service describes available creditor files and custom requests. Case follow-up can support monitoring a selected proceeding. Use both to direct attention to documents and events, with the operative court file and executed transaction documents governing the deal review.

• Record the latest date the transaction can close and the assumption that would bring that date forward.
• Assign responsibility for monitoring the docket through funding and for the first cash and operating report after closing.

Explore available creditor files and custom report requests (Portuguese)

Sources for this section: CADE guidance on transactions subject to competition notification