Text written by Luís Felício - Executive Director of Galeazzi & Associados

The number of companies with high levels of debt continues to grow, and there are no expectations that this number will decrease in the current environment.

Renegotiating corporate debts can be a challenging process, and the complexity depends on reconciling the different interested groups. We have administrators, shareholders, and creditors. Aligning these three groups is not an easy mission.

First question: who created the problem, the debt?

The company itself! This needs to be clear.

That said, it's pointless to try to blame banks, suppliers, or the government as the main culprits of the problem. In this article, I address some perspectives from both shareholders and creditors that interfere in this renegotiation process and present a series of elements indicating the importance of having a third party mediating the negotiations.

Shareholders

What we have seen is the resistance of shareholders to inject funds, often due to concerns about return on investment, financial risks, and actions that may harm the value of their holdings. Some common reasons, in our experience:

1 - Concerns about return on investment

If the company is facing financial difficulties, shareholders may question the effectiveness of injecting more resources and whether this will bring benefits. Here begins the first misalignment between partners and their business vision.

2 - Dilution of ownership

If the company chooses to increase capital through the issuance of new shares, existing shareholders may suffer dilution in their holdings. This means that even if they invest more money in the company, their proportional share of ownership of the company may decrease, which may be undesirable for them, although it may be desirable for the company.

3 - Lack of trust in management

If shareholders do not trust management's ability to efficiently use additional resources or implement effective strategies to overcome challenges, they may hesitate to inject more capital. If the management team has not presented a consistent plan and has not signaled that things will change, another reason for the shareholder to resist injecting new resources.

4 - Risk assessment

Shareholders may assess the risks associated with the company's business environment and the sector in which it operates. If they perceive that the risks are too high and that the likelihood of recovery is low, they may choose not to inject more resources.

5 - Investment alternatives

Shareholders may consider other investment opportunities that offer more attractive returns or present lower risks than investing more in a struggling company. Efficient capital allocation is an important consideration for shareholders.

6 - Lack of visibility about the future

If the company cannot provide a clear and compelling vision of how it intends to overcome challenges and restore financial health, shareholders may hesitate to invest more. Uncertainty about the future can negatively affect shareholders' willingness to inject additional resources.

7 - Need to preserve capital

In some cases, shareholders may prefer to preserve their capital rather than invest more in a company that consistently does not generate enough cash to honor its commitments. The decision to inject additional resources is often based on a careful analysis of risks and benefits.

Creditors

From the creditors' perspective, they also have doubts about the company's perpetuity, position of the shareholders, quality of management, and the market. These ingredients make renegotiating debt more difficult, or they may even choose not to engage in the operation.

Some problems from the creditor's perspective are:

1 - Default risks

Creditors are concerned about the risk of the debtor company not complying with the renegotiated terms (it has not complied in the past) and eventually defaulting. This can result in financial losses for creditors.

2 - Credit risks

Creditors are concerned about the risk of not receiving the full amount of the debt. They assess the debtor company's ability to comply with the renegotiated terms. If the debtor company has already faced financial difficulties, creditors may be more reluctant to agree to a favorable renegotiation.

3 - Impact on the creditor company's finances

Often, creditor companies depend on receiving debt payments to maintain their own operations and fulfill their obligations. Renegotiating debts can directly affect cash flow and the financial health of creditors, which can make the process more complicated. This happens more on the side of suppliers and small banks. See the case of Lojas Americanas, among others.

4 - Negotiation of divergent interests

Creditor and debtor companies have conflicting interests. Creditors aim to recover as much as possible from the debt, while debtor companies often seek more favorable terms to alleviate their financial situation. Achieving a balance that serves both parties can be challenging. Usually, the debtor company seeks to extend the debt, reduce the interest rate, a grace period, and most importantly: a reduction in the debt amount. Now, this is not the creditor's ideal world.

5 - Lack of guarantees or assets

If the debtor company does not have significant collateral or liquid assets to offer as security, creditor companies may be more reluctant to renegotiate the debt. The lack of security can increase the perceived risk for creditors. It is at this moment that creditors may require guarantees from the partners, which complicates the relationship/interests of the partners if they have resources.

6 - General economic conditions

General economic conditions, both nationally and globally, can impact companies' willingness to renegotiate debts. In times of economic uncertainty, creditor companies may be more cautious in making concessions.

7 - Market conditions

In unfavorable economic conditions (such as today's days), creditors may be more reluctant to renegotiate debts, as they face greater risks and uncertainties regarding the business environment.

Path to renegotiation

Indebted companies often choose to hire third parties, such as consulting firms specializing in financial restructuring or financial advisory professionals, to assist in renegotiating their debts. There are several strategic and operational reasons that justify this:

1 - Specialized experience

Consultants specialized in financial restructuring have specific knowledge and experience in dealing with complex debt situations. They understand the nuances of the renegotiation process, industry practices, and can offer valuable insights into the best approaches to achieve favorable agreements.

2 - Objectivity

Outsourcing debt renegotiation can bring an objective and impartial perspective to the situation. External consultants can analyze the company's financial situation more dispassionately, which can be beneficial for making informed and strategic decisions. This is the moment to seek alignment between shareholders.

3 - Reduction of conflicts of interest

If the debtor company already has established relationships with its creditors, there may be conflicts of interest when negotiating directly. Hiring third parties can help minimize these conflicts since consultants act as independent intermediaries. The difficult thing at this moment is to take the shareholders out of the forefront of the negotiation, which is not an easy task, including because the creditor has the habit of talking to him.

4 - More technical negotiations

Debt restructuring may involve complex technical and legal considerations. Specialized consultants have knowledge in areas such as bankruptcy laws, financial accounting, and restructuring strategies, making them better equipped to deal with the complexities of the process.

5 - Confidentiality

Hiring third parties can offer an additional level of confidentiality to negotiations. This can be especially important for companies that want to manage sensitive information related to their financial difficulties without negatively impacting the trust of customers, partners, or investors.

6 - Access to additional resources

Specialized consultancies may have access to extensive networks of professionals, including lawyers, accountants, and finance experts, who can be mobilized as needed during the renegotiation process.

7 - Time savings

Debt renegotiation can be a lengthy and complex process. By outsourcing this responsibility, the company can gain time to focus on other critical areas of the business, allowing specialized professionals to deal with the nuances of renegotiation.

8 - Consultancy credibility

In our case, Galeazzi & Associates, due to our experience in this activity, has already built a good relationship with creditors. The market, creditors, tend to believe more in specialized consulting than in debtor proposals. For this reason, the importance of discussing the renegotiation plan and the restructuring plan. Remembering that at the end of the day, it's the cash that will pay the debt. And if the company doesn't have a good adjustment/restructuring plan, the success rate of the renegotiation is low. Creditors have already seen many plans from the company that never happened. Sending "projections" detached from reality to creditors is of no use.

In summary, hiring third parties to renegotiate debts offers several advantages, including specialized expertise, objectivity, efficient management of conflicts of interest, and access to additional resources, helping indebted companies navigate financial challenges more effectively.