Crisis Management Replaces Transactional Work for Brazilian Lawyers as COVID-19 Spreads

Brazil’s capital markets were headed for a busy year prior to the global spread of the new coronavirus, with around 25 companies moving toward initial public offerings. Market volatility has suspended those efforts in Latin America’s largest economy, but the need for cash—and legal advice—remains acute.

Health ministry statistics on Sunday showed 1,546 confirmed cases of COVID-19, up from 234 a week before. Respiratory failure from the virus has killed at least 25 people in Brazil.

Numerous states in Brazil have closed shopping malls and schools in recent days, while also banning public meetings, soccer games and religious assemblies. The biggest city, São Paulo, has begun a lockdown. Brazilian President Jair Bolsonaro has labeled those precautions “job killers.”

Gabriella Maranesi Najjar, a partner in the corporate and finance practice at Vella Pugliese Buosi e Guidoni Advogados in São Paulo, began working from home last week along with 120 other lawyers at her firm. Vella Pugliese has a strategic alliance with Dentons, which has more than 10,000 lawyers in its worldwide network.

Here are some of Maranesi Najjar’s thoughts on Brazil’s reaction to COVID-19 and what’s keeping her occupied:

How busy are you with lawyer work these days, and what sort of questions are clients asking?

We have been quite busy. While the transactional work is reduced, we are actively involved in crisis management-related work, discussions on economic rebalance of agreements, enforceability of Material Adverse Change clauses, assessment of legal consequences for delay in project development, interface with governmental authorities, etc.

How prepared is Brazil for the spread of coronavirus?

We have seen that no country is prepared, with the exception of a few prosperous islands, such as Korea and Singapore.

In terms of the number of ICU beds, we are better than other countries, with just over 20 beds for every 100,000 inhabitants. However, this number will probably not be enough if the virus continues to spread at the current pace. Because of that, the Brazilian authorities are imposing mandatory quarantine in the main urban centers like São Paulo and Rio de Janeiro and the closure of commercial establishments that do not provide essential goods. There’s a ban on public assemblies, closing of squares and schools. There is no ban on the operation of company offices, although there is a strong recommendation to work from home.

In economic terms, developing countries, such as Brazil, tend to suffer more than China, the U.S. and others in these types of emergencies. We have a very tight fiscal situation (we recently made reforms to try to balance government spending and tax collection) and Brazil’s accounts will certainly be impacted by the crisis.

Tax collection will decrease—both because of the retraction of the economy and because of the program recently launched by the government to suspend tax collection for 90 days—while the government will need to inject money into the economy via monetary and fiscal expansion. Depending on how long it takes, this situation may generate a solvency problem for the Brazilian government.

In addition to this, there are questions about whether the Brazilian government has sufficient fiscal power to prevent a massive collapse of small and medium-sized entrepreneurs who will suffer, first, with the mandatory quarantine and, second, with the economic depression that will follow.

Are clients hesitant to move forward with M&A and financing?

Projects and M&As that are not core to companies are being suspended, as a way of not pressuring cash flow during this uncertain period. Other transactions continue to move forward, with certain terms and conditions being revisited.

There is also a level of uncertainty about whether and when the transactions will actually close. I believe most investors will wait for a drop in the rate of contagion or encouraging news about vaccines and treatments to move forward toward closing.

What sort of precautions are clients taking? Will coronavirus be considered a force majeure event that triggers material adverse clauses?

For transactions not yet signed, there was an increase in the negotiation of contractual protections. Price adjustments deriving from exchange rate volatility, reassessment of the base balance sheet that supports the price formation, definition of the security package, the due diligence scope and the extension of the MAC and MAE clauses are some examples of hot topics post-COVID-19 breakout.

For deals already signed, it should be assessed whether the COVID-19 pandemic fits the agreed contractual definition. Although the effects of the pandemic are presumably relevant and adverse to the operations of most target companies, some exclusions that are frequently contracted may prevent the impacts of COVID-19 from being characterized as force majeure events.

The conditions prior to triggering the MAC clause must also be taken into account, as well as the causal link between the force majeure event and the contractual obligation that is intended to be suspended or changed. For example, if a delay in construction, lack of a specific license or governmental approval, unavailability of funds, etc., was already in place before the breakout, it becomes more difficult to correlate the impacts of COVID-19 with noncompliance with the contract.

Are clients rushing to secure bridge loans or revolving credits to get them through what could be months of turmoil?

There is not much revolving in Brazil, but everyone who has some type of revolving credit is accessing it. The big banks are giving lines of no more than three months to first-tier companies, while small and medium-sized banks have practically suspended all.

What’s in store for debt and equity issuance?

Before the crisis broke out, it is estimated that around 25 companies had IPO processes going forward. Some of these companies sought to issue shares in the equity market to improve their capital structure, pay debts, etc., which is even more latent and necessary in an environment of crisis and low liquidity. In other words, the need for cash continues to exist, and there is already a reduction in the liquidity of private and public banks, so it will be necessary for companies to issue debt or access the stock market.

However, we are all waiting to see what will happen in the coming weeks or months. Debt transactions continue to be structured and are expected to be launched as soon as the market stabilizes, especially by high-grade companies. Equity issues should return in a second phase, with the first to access the market being those that benefit from the crisis—such as food, pharmaceutical, internet and telephone companies and maybe banks.

On the other hand, our capital markets team has been busy with regulatory and governance-related matters for publicly held companies. While the CVM (the Brazilian SEC) is studying the postponement of the timeframe legally required for holding annual general meetings (which should take place within four months after the end of the fiscal year), publicly held companies will continue to be obliged to observe the various governance and disclosure obligations applicable to them, such as disclosing earnings releases, updating reference forms and keeping the market informed of any adverse effects resulting from the crisis and corresponding measures being taken.