Restructuring Experts Say Brazil Will Be Their Hot Spot in 2016

Restructuring experts are planning to go to Rio in 2016.

Panelists at the M&A Advisor Distressed Investing Summit in Palm Beach, Florida, said South America, specifically Brazil, is the action spot this year.

“Brazil is hot, hot, hot,” said Sheila T. Smith, restructuring leader at Deloitte Financial Advisory Services.

Many Brazilian companies have run into problems as the country wrestles with its sovereign rating being downgraded to junk by Standard & Poor’s amid its worst economic slump in a century.

In 2015, 12 companies from Brazil were cut to junk status from investment-grade, led by state-controlled oil giant Petroleo Brasileiro SA, better known as Petrobras, according to an S&P report. That was the second most for any country in the world, behind only Russia. In addition, a corruption scandal at Petrobras has spilled over to other businesses in the region. S&P has a negative outlook for Brazil in 2016.

“There is a very, very vibrant restructuring community now in Brazil,” said Andrew Troop, a restructuring attorney at Pillsbury Winthrop Shaw Pittman LLP. “The restructuring has moved down from tier-one and tier-two companies. Now many mom-and-pops are in trouble.”

Many of the creditors holding South American corporate debt are U.S. investment funds. Those bondholders are now scrambling to figure out what to do with their securities because the restructuring proceedings in Brazil vary significantly from the U.S.

“In Brazil, you need a debtor’s consent to do anything,” Troop said. “It gives shareholders too much power,” which usually hurts creditors.

In addition, U.S. Bankruptcy Judge Robert Drain said that cases in Brazil can drag on for a long time “because almost everything can be appealed.”

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