Considerations for Brazilian Borrowers and Lenders of U.S. Syndicated LoansSullivan & Cromwell LLP - January 18, 2019
A mix of changing credit market conditions and political and economic factors in major economies may be opening up a window of opportunity for Brazilian borrowers to access cross-border lending. Given market dynamics in the United States, Brazilian borrowers may gain both covenant and pricing advantages by syndicating transactions in the U.S. rather than borrowing in the Brazilian loan or CCB markets. In some instances, this may allow Brazilian borrowers to optimize their capital structure with a multi-tiered composition of U.S. term loans, local Brazilian revolvers and, potentially, a CCB. This note highlights several key considerations that both Brazilian borrowers considering borrowing in the U.S. syndicated loan market and arrangers and lenders that might provide these loans should take into account in evaluating whether to pursue these cross-border financings.
Differences in Parties
The Brazilian loan market has long been characterized by traditional buy-and-hold banks who often have long-running (in some cases, decades-long) relationships with the borrower. In addition to being important from a relationship perspective, this can materially affect the process for potential amendments. The amendment process in Brazil for loans and CCBs can be quite cumbersome, involving lender meetings and notices. This is very different from the U.S. leveraged loan market, where banks often (particularly in the sub-investment grade space) syndicate deals to investors and do not hold the debt long term (other than revolvers). Although this means that the lender relationship in the U.S. loan market can be more transactional as the loans trade, the flip side is that the contractual requirements for amendments can be more streamlined and generally do not require the formalities Brazilian borrowers are typically accustomed to. Amendments and waivers for U.S. loans can be obtained in certain instances in a couple weeks.
The covenant packages in U.S. syndicated loans tend to generally (taken as a whole) be significantly more permissive than local Brazilian loans or CCBs in many respects for corporate borrowers, particularly for non-investment grade credits. For instance, the restricted payments covenant (i.e., dividend capacity) and ability to incur debt are often less restrictive in the U.S. market than in Brazil. One exception, however, where Brazilian borrowers may find U.S. loans to be more restrictive is in their limitations on third-party investments. In many local Brazilian transactions, companies have a relatively broad ability to make acquisitions or investments (outside of borrower mergers and changes of control). These tend to be more restrictive in the U.S. market and it is important for both borrowers and lenders to take this into consideration.
Environmental, Social and Governance (ESG) Terms
Local Brazilian lenders often are subject to regimes which require a number of mandatory provisions relating to ESG terms, particularly relating to anti-slavery and trafficking regimes. These types of provisions tend not to be included in U.S. syndicated loans, which generally focus specific compliance requirements to anti-money laundering and corruption matters. Additionally, anti-money laundering and corruption covenants can be more restrictive, and related representations and warranties more expansive, in Brazilian instruments. Both borrowers and lenders should consider whether some version of these terms should be included in U.S. loans so that Brazilian lenders could participate in the initial syndication or potentially as purchasers of the loans on the syndicated market. In our experience, it can be difficult or impossible for Brazilian bank lenders to participate in a syndication lacking such terms.
Multi-Layered Capital Structure
To the extent a capital structure will consist of a mix of both U.S. syndicated loans and local Brazilian loans and CCBs, special attention will need to be paid to how these instruments interact. For instance, the Brazilian loans or CCBs may have stricter covenants in certain respects that could cross-default to the U.S. leveraged loans. This would mitigate the advantages of having U.S. leveraged loans. In addition, particular attention should be paid on all sides to the differences in the amendment and enforcement processes in these instruments to understand how a work-out or amendment process would work cross-jurisdictionally.
Another important consideration for lenders will be putting in place comprehensive collateral packages. For many Brazilian borrowers, this will not only require collateral in Brazil but across a number of other countries in Latin America and beyond. The security requirements across Latin America alone differ country-by-country in significant respects, as do the enforcement and priority mechanics. In general, the security process in the region can often require significantly more formalities than is typical in the U.S. and most of Europe. Often 90-120 days post-transaction is needed to put in place a security in Latin American jurisdictions. It is important to ensure all of the formalities are followed on a jurisdiction-by-jurisdiction basis and to have an appropriate focus on how the downside case could play out in diverse jurisdictions.
Borrowers and lenders should also carefully consider the differences in bankruptcy regimes and understand how potential restructurings involving multiple jurisdictions would work. In particular, all sides should pay special attention to, and be familiar with, the features of the two types of restructuring proceedings in Brazil (i.e., judicial and extrajudicial reorganization), including how different types of claims are treated and how the decision-making process works. Lenders should consider that Brazilian reorganizations can be slower, more formalistic and involve more legal uncertainties than is typical in the U.S. and the U.K. Brazilian borrowers with assets and creditors in multiple jurisdictions should consider the implications of seeking bankruptcy relief abroad, particularly by filing for protection under Chapter 15 of the U.S. Bankruptcy Code, which is increasingly common among Brazilian companies.
We expect that the next 18 months and potentially beyond will be an interesting time for the intersection between Brazilian borrowers and the U.S. loan market. In arranging these transactions, borrowers, arrangers and lenders will need to pay particular attention to the differences in these markets and how to craft appropriate financing arrangements that reconcile jurisdictional requirements, market conventions and the expectations of constituencies in an optimal way. S&C has a leading U.S. bank financing practice and also has been at the forefront in developing Brazilian cross-border financing products and strategies, including the first U.S.-style CCB financing. S&C’s Latin America and bank financing practices work seamlessly to deliver integrated financing teams that are uniquely situated to provide counsel to borrowers, arrangers, and lenders as structures and market terms for these transactions evolve.
If you would like to discuss, please feel free to contact any of the below: