Study reveals factors that influence debt renegotiation in Brazil
Debt renegotiation is a common practice in financial markets, emerging as a response to the incompleteness of financial contracts. When a borrower or lender cannot comply with or wants to change the initial terms of a contract, a renegotiation process can be initiated. It is crucial to improve the company's financial health during times of difficulty, and may obtain grace periods or extension of payment terms.
In the context of emerging markets, a study by Rafael Felipe Schiozer, from the São Paulo School of Business Administration (FGV EAESP), together with João Paulo Eça, Tatiana Albanez and Mauricio Ribeiro do Valle, was published in the Quarterly Review of Economics and Finance. The research aims to understand the determinants of debt renegotiation in Brazil.
The team carried out a manual collection of unpublished data on loan renegotiations of Brazilian companies. They analyzed more than three thousand financial statement notes between 2010 and 2021. The sample included 11,602 quarterly observations from 326 non-financial companies listed on the Brazilian stock exchange, B3. Thus, the focus was to identify if, when and how the renegotiations occurred and what their results were.
The results show that the deterioration of the financial health of companies increases the probability of debt renegotiation. In such cases, borrowers often need to provide compensation to lenders, which may include additional collateral requirements, stricter restrictive clauses, or higher interest rates. Therefore, these compensations serve as a way to protect creditors in the face of increased default risk.
In addition, the motivators for debt renegotiation differ between developed and emerging economies.
This is due to the heterogeneity of the institutional characteristics of each jurisdiction. In emerging markets, such as Brazil, there is greater information asymmetry and less protection for creditors, resulting in higher agency costs. This makes creditors more likely to renegotiate with distressed companies, preferring renegotiations to the long and costly process of recovering and selling collateral.
As for the profile of companies that have renegotiated their debts, they tend to be large, but face greater financial difficulties. Creditors often impose stricter conditions in renegotiations with these companies, including interest rate increases, covenants, and additional collateral requirements. Moreover, this behavior is more pronounced among bondholders, who are more likely to demand compensation than private and public banks.
The study concludes that in emerging markets, where creditor protection is lower and information asymmetry is high, offsetting in debt renegotiation is a common practice aimed at reducing risk for creditors. Additionally, these findings are essential for businesses looking to renegotiate their debts, as they provide valuable insights into creditors' expectations and the potential conditions they may face. Understanding these factors allows companies to better prepare and adopt more effective strategies during the renegotiation process.
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