The determinants of debt renegotiation: Evidence from Brazil

Abstract

We investigate factors that affect debt renegotiation in an emerging economy, focusing on Brazil's publicly-listed non-financial firms. We manually collect novel data from more than three thousand notes to financial statements. The results show that the deterioration in the financial condition of companies - marked by declining profitability and increasing leverage - increases the probability of debt renegotiations. Furthermore, our findings reveal that the impairment in a firm's payment capacity, such as reduced profitability, cash flow, and interest coverage heighten the chances of renegotiations incorporating debtholder compensation mechanisms. Our results expand the knowledge about renegotiation to a context that has been scarcely addressed in previous studies: emerging markets. Additionally, it provides novel insights into the use of compensation mechanisms during renegotiations — an aspect little explored in the literature, although very present in renegotiations. We also innovate by addressing renegotiations with bondholders, an aspect largely overlooked in extant literature.