Heloísa Nogueira Engel
DIP (Debtor-in-Possession) financing is a type of investment in which a creditor injects money into a company that already owes them. Imported from the US, the procedure was incorporated into the Brazilian legal system by the reform introduced by Law 14.112/20.
On May 15, 2023, VICE filed for bankruptcy protection (Chapter 11) in the New York district, with debts estimated between US$ 500 million and US$ 1 billion.[1].
CNN reported that the bankruptcy filing was made to ensure a quick and efficient sale of the company, with an initial purchase price of US$ 225 million.[2].
This initial offer was made by a consortium of the company's creditors acting as the "stalking horse" in the sale process, as they have an interest in the continuation of VICE's operations—a company they still view as viable.
This procedure, in which creditors themselves inject additional funds into the company that owes them money, is known as DIP, an abbreviation for "Debtor in Possession."[3]
Under the North American legal system[4] —as well as the Brazilian system, which drew inspiration from it—the advantage for a creditor injecting more money into the company is that they take on greater risk in order to mitigate their overall risk.
It may seem somewhat contradictory, but the logic behind DIP financing is as follows: funds previously invested in the company will be repaid under the terms of the Judicial Reorganization Plan, subject to the vote of the relevant creditor class; in other words, the creditor relies not only on the debtor's proposal but also on the consensus of the collective body of creditors.
Conversely, when that same creditor—who previously held voting power based on their claim amount—chooses to bet on the company and inject "fresh money," they secure a privileged position regarding these new funds should the restructuring fail and bankruptcy ensue.
Article 69-J, introduced during the reform of Law No. 11.101/05,[5]governs the DIP procedure—a practice long utilized in Brazil but previously not explicitly codified in the reorganization statute. Similarly, Article 84 of the Law was amended to establish this privileged status for the creditor, ensuring that, in the event of bankruptcy, their claim is treated as *extraconcursal* (outside the general insolvency proceedings) and is paid even before labor claims.
Despite the similarities between the DIP financing procedure in the United States and Brazil, the effectiveness of this mechanism differs significantly; in this author's opinion, this is due to both economic and cultural factors.
In an investment profile survey conducted by ANBIMA (Brazilian Association of Financial and Capital Markets Entities)[6]in 2022, it was found that, even today, only 23% of the Brazilian population invests, with "savings accounts remaining the favorite."
This figure drops to 3% when looking specifically at those who invest in investment funds—investors who typically take greater risks in the reorganization process—and to 1% regarding the stock market.
This demonstrates that the average investor profile in Brazil is conservative and that there is still considerable apprehension about making investments. As mentioned above, cultural and economic issues go hand in hand; mistrust of institutions and economic uncertainty, combined with the country's history of inflation, mean that risk-taking—especially on the scale required for companies already undergoing judicial reorganization—is much more tentative in Brazil.
On the other hand, an analysis of the average investor profile in the United States—based on research published in January of this year—shows that 58% of Americans have some investment in the stock market and more than 150 million Americans engage in risk-bearing investments.[7]
Based on this data, one can conclude that the performance of DIP financing in Brazil differs considerably from that in the United States; for instance, in the case of VICE, creditors had already injected additional funds to boost the company's liquidity and allow operations to continue even before the reorganization filing took place.
Furthermore, the DIP operation is taking place following an initial restructuring. Thus, while the creditors' economic interest in maximizing their investment through this “bet”—acting as a “stalking horse” for VICE—is unquestionable, it is evident that this stance lends greater credibility to the U.S. reorganization process, as it signals to the market that the company remains a reliable and viable player.
Heloísa Nogueira is a partner at the law firm Nogueira Engel Sociedade de Advogados; holds a law degree from PUC-Campinas with a specialization in Economic Analysis of Law from the University of Augsburg; and serves as Coordinator of the Judicial Reorganization Unit for the State Young Lawyers' Section of the OAB (Brazilian Bar Association).
[1] VICE Media LLC Files for Chapter 11 Bankruptcy. Vice.com. Available at: <https://www.vice.com/en/article/pkap5v/vice-media-llc-files-for-chapter-11-bankruptcy>. Accessed on: May 27, 2023.
[2] ZIADY, Hanna. Vice Media files for judicial reorganization to facilitate sale. Cnnbrasil.com.br. Available at: <https://www.cnnbrasil.com.br/economia/vice-media-entra-com-pedido-de-recuperacao-judicial-para-facilitar-venda/>. Accessed on: May 27, 2023.
[3] Debtor in Possession (DIP): Meaning, Rules, Pros and Cons. Investopedia. Available at: <https://www.investopedia.com/terms/d/debtorinpossession.asp#toc-disadvantages-of-debtor-in-possession-dip>. Accessed on: May 29, 2023.
[4] Chapter 11 – Bankruptcy Basics. United States Courts. Available at: <https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics>. Accessed on: May 31, 2023.
[5] Law No. 11.101. Planalto.gov.br. Available at: <http://www.planalto.gov.br/ccivil_03/_Ato2004-2006/2005/Lei/L11101.htm>. Accessed on: May 31, 2023.
[6] ANBIMA. Investor X-Ray 2022 – ANBIMA. Anbima.com.br. Available at: <https://www.anbima.com.br/pt_br/especial/raio-x-do-investidor-2022.htm>. Accessed on: May 25, 2023.
[7] DALY, Lyle. How Many Americans Own Stock? About 150 Million | The Motley Fool. The Motley Fool. Available at: <https://www.fool.com/research/how-many-americans-own-stock/>. Accessed on: May 29, 2023.
