April 4, 2017 / 12:26 PM / 8 months ago

Fitch: Brazilian Bankruptcy Law Changes May Boost Lending Growth

(The following statement was released by the rating agency) SAO PAULO, April 04 (Fitch) Changes recently proposed by the Temer administration could improve legal framework for local credit, providing additional comfort to banks and ultimately supporting lending growth, according to Fitch Ratings. Pending updates to Brazil's 11.101/2005 bankruptcy law may have a special effect on this movement. Brazilian banks currently have on hand an impressive amount (around BRL 10 billion) of repossessed assets as collateral for unpaid loans; the majority relate to real estate and the rest to automobiles. Final losses for banks are typically reduced by low loan to value (LTV), usage of conservative market prices (in the case of real estate), and the adoption of high down payments (in the case of vehicles). Despite the high repossessed assets' levels, banks are better positioned than 20 years ago because of the improved legal framework for these classes of guarantees. Brazil's economy is still enmeshed in the worst recession since 1948. While GDP shrank by 7.2% during 2015 and 2016, the number of companies that requested 'Recuperacao Judicial' (RJ, bankruptcy protection equivalent to filing for Chapter Eleven) increased hugely by 44.8% in 2016 from 2015 levels. While some large corporates have requested RJ, the majority are small- or medium-sized enterprises. While the 11.101/2005 law is relatively new, it has not proven effective at helping companies to recover. Out of the 6,586 companies that filled for RJ in Brazil since 2005, only about 5% have recovered. Among the proposed changes, one of the most crucial is the treatment of the fiduciary alienation guarantee when a company files for RJ. Currently, fiduciary alienation strongly favors banks; a bank with fiduciary alienation as guarantee has the right to receive the property even if the company has already filled for the RJ. It is yet to be determined if under the updated law the guarantee under the fiduciary alienation regime also enters into the RJ. If this happens, the bank could lose the strong guarantee, which might ultimately increase the cost of credit even for this type of guarantee. Another key consideration is the determination of when the RJ process officially concludes from the point of view of debts restructured with banks. Under the current legal framework companies can show limited moral obligation to pay back debt, since the company can be backed by the law. Companies that resume operations (after passing through the restructuring process) can make dividends upstream even before fully repaying their restructured debts with the banks during the RJ filing. Possible limitations on the allocation of resources by the restructured companies could provide more comfort to lenders, at least until the company was able to repay the debts that were originated during the restructuring process. Other important changes under discussion include government treatment of taxes for companies under RJ. The possible creation of specialized courts to judge these situations is also important. Judges familiar with financial and technical laws would make a significant difference for banks. Fitch anticipates credit growth of 4.7% for the sector by year-end 2017. Should the government's measures (Including the revision of the bankruptcy law and other measures already announced to reduce the credit cost) be implemented quickly, this growth could accelerate, although the positive effects are more likely to be perceived starting in 2018 and thereafter. Fitch views the Brazilian government's efforts at bankruptcy reform as a positive attempt to pave the way for long-term sustainable growth. Fitch will continue to monitor the impact of the pending legislation as it is finalized. Contact: Claudio Gallina Senior Director +55 11 4504 2216 Fitch Ratings Brasil Ltda. 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