- Portugal's insolvency laws, updated in 2013, created several new opportunities to revitalize distressed companies.
- Legislation and businesses in the country are still adapting and evolving, the post-crisis recovery plan can put them to a serious test.
- The cooperation of the government, the judicial system, and businesses will be crucial to prevent the wave of insolvencies expected in 2021.
Crises create turbulences, but they also create opportunities. There aren’t any rules set in stone to distinguish between a potentially profitable investment and a risky bet. What will help though, is a good understanding of the market, as well as various legal options to deal with distressed assets. The common thought is that the most developed frameworks for investing in special situations, insolvency, or pre-insolvency cases are offered by American or British legislation, with other European countries not lagging too far behind.
One of the examples of a rapidly evolving legal system can be found in Portugal, a country that had to learn several difficult lessons from the harsh situation that existed between 2008 and 2012. The troubles that are coming as a result of the pandemic could become a real test for what is, essentially, a rather small Southern European economy. Those troubles may well attract investors to start dealing with companies in distress. During the M&A Community webinar, we discussed several cases of distressed investments in Portugal that show how the legal tools there may become the cornerstone of a successful deal.
‘The Portuguese Legal System is still evolving’
João Rodrigo Santos, Founding Partner at Atena Equity Partners, explained how Portuguese distressed investing regulations function by describing a case from his own company’s portfolio. In 2016 his company bought the largest brass foundry in Iberia— ASBW, a producer of brass ingots and bars, with an annual capacity of 40,000 tons —. “This acquisition showed us the good, and the bad, that coexist in the Portuguese legal system and business environment,” he says. For instance, ASBW underwent the PER procedure, however, it didn’t work out so in 2014 the company filed for insolvency.
“Before buying ASBW in 2016, we had been actively working with all the stakeholders for almost two years. We had to set up a trading company with the former managers of ASBW which was structured together with the judicial administrator of the insolvent state, who took personal responsibilities by doing this. It was something that could not have been imagined in the early 2010s since the company would simply have been liquidated then,” Santos explains.
The scheme was rather atypical for Portugal, though quite common in the US or the UK. The insolvency administrator entered into an agreement with a trading company that the investor was pouring money into. “We actually performed debtor-in-possession financing during that phase,” Santos references the American Chapter 11 proceedings. The company also had to negotiate a deal with a bank that held the majority part of the foundry’s debt.
“So, we brought back the people that we deemed necessary, we injected money. Essentially, we grew the company from 10 million euros of sales at the pre-insolvent stage to 40 million euros in 2020. We eventually sold the company, closing the deal at the lockdown peak in mid-March.”
This case proves, states João, that the judicial system in Portugal works. However, he stresses, it is often abused since it is fairly young, just as the procedures like pre-insolvency state or the revitalization process of PER are. “People are adapting, the laws are evolving,” our panelist says. “It is happening slower than in the US or in the UK, but it would be unfair to say that these developments are slower than those in Spain, France, or Italy.”
Moreover, he points out, there are several examples in the market of this system working. The tools themselves, Santos adds, are helpful because the very idea of a company in trouble being able to sit at the table and negotiate its future with creditors changes the way business is being done. “Before PER was introduced, the idea of doing so was complete taboo. PER forced people to come to the table and discuss.” Nevertheless, he concludes, it is still vitally important to know the local peculiarities and to build trust with the participants of a deal.
‘Robust Legal System for Restructuring’
The legal system in Portugal is robust enough for restructuring operations, says Luis Quaresma, Partner at Iberis Capital. “You need to know all the details, you need to be extremely local, to be on the ground and know the actors,” he adds. His company usually uses PER or an executive action proceeding, Quaresma says, since they have found that the other options are not as effective.
One of the most interesting cases his company worked with was, the technological company Tekever. It was owned by three founding partners, Pedro Sinogas, the major shareholder, who also managed the company’s finances. “He had practically robbed the company through embezzlement, draining 10 million euros from the business through a straw firm,” Luis explains. The other partner, Ricardo Mendes, approached Iberis Capital asking for help. So, together, they set up a special legal scheme to remove Sinogas from the management structure so that they could take control of the company.
The suspicious cash movements made by Sinogas became the basis of the process that the company itself filed against him. After the suspension of the former CEO, Ricardo Mendes was appointed as the new executive director of the technology company. As Quaresma explains, the legal mechanisms in Portugal allowed them to make the business transparent again and initiate the processes to get the stolen assets back. “On day one, we extracted the party who were stealing, from both the shareholder structure and from the company’s management. Of course, there were a lot of litigations, but we won every suit.”
Speaking of the general economic situation, Luis says that the vast majority of businesses in Portugal have changed since the crisis of 2008-2010, so has the legal framework. In 2020-2021, another major disruption is coming with the Covid-caused turbulence, and the government measures put in place to limit its economic impact. Next year, our panelist adds, after the end of the loan repayment moratorium, the amount of liquidity coming to the market will be equivalent to 15% of the Portuguese GDP, this, he enthuses, is going to make it “a great time to do business here.”