Born to be alive: Brazil's new bankruptcy law favors creditors, and recovery.

It took 11 years for Brazil's politicians to approve a new bankruptcy law, just one year longer than it actually takes Brazilian companies to complete the country's cumbersome bankruptcy process. In Mexico and Argentina, by comparison, it takes two years to liquidate a failed firm.

The bill was introduced in 1993, updating law on books since 1945. The previous law liquidated companies by dismantling them, piecemeal, in order to quickly pay workers and outstanding taxes. Little is left over to pay lenders. When banks do get some cash back, it is only after nearly a decade of legal work.

The new law, approved in July and expected to be in force by January, focuses on saving troubled companies and protecting bankers. Creditors now follow salaried employees. Lenders who provide financing during reorganization get preference over creditors who lent money when the company was solvent. Workers, meanwhile, are limited to 150 times the minimum wage, US$13,600, even if they earned more.

"Banks put a lot of pressure on the government to not be left behind on this law. Without a doubt they came out with new privileges they have never had," says attorney Rodrigo Shirai in Curitiba, who advised Congress on the bill.

The goal is to expand credit by making risk easier to calculate. Brazil's credit volume represents 35% of gross domestic product (GDP), compared to over 68% in Chile, according to World Bank numbers. "What we really have here, though, is our first recovery law, where clients and creditors are required to do what is possible to keep the business open or sell it intact," Shirai says.

Often, banks ignore the law altogether. It's been 12 years since Rio de Janeiro and Sao Paulo have had a bankruptcy proceeding because companies and lenders would rather deal with the default without the courts, says Denis Borges Barbosa, attorney at Borges, Beildeck & Vilardo in Rio de Janeiro.

The former owners of supermarket chain Paes Mendonca and sauce maker Peixe, now reorganized as Super Mar, ran into financial troubles in 1994. At the time, they controlled 70% of the grocery market in Salvador, Bahia's capital. Five creditors, including Banco Itau and Bahia State Bank, took the $300 million bankruptcy filing into their own hands. They reorganized the companies to recover some losses, selling Paes Mendonca to investors.

"It was the first example of how bankruptcy should work, done totally outside the legal system," says Daltro Borges, one of the lawyers representing creditors. "If we did this under the new law, it would have gone much smoother because we would not have to wait for the bankruptcy proceeding to close before creating the new company."

Whether the banks will increase credit because of the law remains to be seen. Government bonds are still a Brazilian bank's top investment. If an improved bankruptcy mechanism means less risk, then it should result in a lower spread, the percentage over the benchmark federal funds rate that banks charge borrowers. The spread now is between 38% and 43%, among the highest in the world.

Banks blame the spread on their risky customers. They claim they are ready to lend, but business owner Humberto Ramos Cabral isn't buying. "Brazilian bankers are not here to help us. They're here for the government," says Cabral, president of 115-employee Embafort Industrial Packaging in Curitiba.

The company went belly up in 1996 after the government introduced the Real Plan, which created a new currency pegged to the U.S. dollar to tame inflation. But the dollar was then weaker than Brazil's new currency. Embrafort's debt grew to $650,000, five times assets. Two hundred checks bounced. Cabral's credit line was closed and he laid off 10 of his 16 employees, he says.

In a hole. Embafort is alive, Cabral says, because of Siemens, one of its main customers, not bankers and lawyers. "I lost everything. Two apartments and a 14-year marriage," the 48-year-old says. "My creditors wanted to kill me, not save me. I had Siemens and that was it. I lived in the office for two years and read up on business to see if I could figure out what the hell went wrong. People told me to call it quits and move to the United States because I was in such a hole."

Luck changed for Embafort in 1999, when the six remaining employees decided to create recycled wood crates for exporters. They started doing barter deals with clients. That same year, they paid up the company's back taxes. Today Embafort is an award-winning company building crates for Audi, Renault, Nissan, Mitsubishi, Bunge and York. Their old faithful, Siemens, is still on board.

Cabral might be the role model for "bad companies gone good," but he's not going to thank Brasilia, or his lenders, for his current status. "I remember these bankers," Cabral says. Embafort, a private company, holds no loans. "Today it's revenge. I'm an investor now. If they don't serve me, I leave 'em flat."

KENNETH RAPOZA * CURITIBA