Without raising enough money for a limited company, Botafogo resorts to judicial reorganization.

Two weeks ago, Botafogo announced that it had not been able to raise the funds to proceed with the S/A (Sociedade Anônima, a type of corporation in Brazil). Now, president Nelson Mufarrej is talking about judicial reorganization as an alternative. This mechanism has always been the "plan B," but only now is it being acknowledged as such.

Fans have reason to worry. First, because raising money through a corporation was a solution that now seems lost. Second, because judicial reorganization is being mistreated by the superficiality of those who still haven't understood its risks.

Recapping the story

The public limited company project has three fundamental stages to be executed – or had, using the past tense, depending on what happens in the coming weeks behind the scenes at Botafogo.

• Political approval within the social framework
• Raising funds from investors
• Agreements with all private creditors

The fans celebrated when the club's General Assembly approved, by vote, the continuation of the project. Some understood that the process was over. In truth, this was the easiest part.

We need to revisit the project's concept. Botafogo de Futebol e Regatas, the non-profit civil association, would transfer all its football operations to be managed by Botafogo S/A – or whatever name was adopted. The association would retain the social club and amateur sports.

What was the problem? R$ 1 billion in debt. The transfer of professional football to the limited company would easily be characterized as fraud if this debt wasn't resolved first.

So the business structure would be as follows: Investors would put up their own money to sort out the debts. While they would be the main creditors, since they would recover their investment plus interest, they would also be the owners of Botafogo S/A.

Initially, those responsible for the project estimated that the limited company would need around R$ 320 million to get off the ground. Part of this would be allocated to the construction of a training center and to strengthen the football program, and another part to pay off debts.

How could so little possibly resolve almost R$1 billion in debt? Through renegotiation with creditors and aggressive discounts. Botafogo would need to convince those to whom they owe money to grant an average forgiveness of 80% of the total amount owed. All of them, without exception.

What went wrong?

The first piece of bad news was that the initial goal of R$ 320 million was far from being reached. The club then recalculated and concluded that R$ 250 million would be sufficient. Logically, the plan had just become more difficult in the renegotiation phase, but there was nothing else to be done.

After months of intense negotiations with Botafogo supporters of all kinds, as well as investment funds and other figures in the financial market, Botafogo managed to attract the interest of just over 30 investors. Formally, it obtained "non-binding commitments".

Roughly speaking, the sum of these contributions would reach R$ 210 million. Still below what was needed. Three things were welcome:

• R$ 20 million was advanced, with Globo's consent, for broadcasting rights related to the 2022 Brazilian Championship.
• R$15 million was negotiated with Globo in an agreement to terminate the contract for the Campeonato Carioca, which was set to last until 2024.
• R$ 25 million was obtained through the sale of Luis Henrique to Olympique de Marseille, a rare occurrence in the club's history.

A large portion of this money would be used to pay overdue salaries, various expenses, and debts. Executives did the math again. They believed that another part of these unexpected funds could be combined with investor contributions to get the corporation up and running.

The cold water was thrown on the Botafogo fans at the last minute. The coronavirus pandemic made investing in Botafogo S/A risky. In the official statement, the club also cited uncertainties in the United States and Europe and fears about the Brazilian economy.

Result: not even the R$ 210 million target was reached. Several tens of millions of reais were withdrawn when signing "binding agreements." Therefore, there would be no money for the agreements with creditors, no matter how large the discounts.

Some people at the club still dream of another project that involves attracting small investors. They imagine that this approach could raise the necessary funds to proceed with the S/A (Sociedade Anônima – Public Limited Company). However, this option is viewed with skepticism by those who follow the case more closely. In any case, any solution will have to remain on hold until the club elections on November 25th.

Another, still distant, and pessimistic possibility involves relegation to Série B. If Botafogo is relegated in February, when the current Brazilian Championship ends, the business plan could be jeopardized by at least R$ 70 million in broadcasting rights.

Judicial reorganization

Botafogo's management is now acknowledging what has been in the script from the beginning: judicial reorganization as a "plan B" to save the S/A project, should the script described above not be followed to the letter.

This is a tool available to the government to help companies on the verge of bankruptcy. The debtor acknowledges that they will not be able to pay their debts and brings together all creditors to make a proposal. Generally, this includes forgiving a considerable portion of the debt and renegotiating the remainder within a specified timeframe. The courts monitor the process.

Prominent Botafogo supporters are determined to proceed in this direction. They are clinging to one detail: while the company is preparing the proposal for creditors, it cannot suffer any type of asset freeze or seizure. This is precisely what is currently suffocating the football club. This period is theoretically six months, but it usually extends to up to two years.

Judicial reorganization, however, comes with many risks.

• Currently, civil associations cannot enter judicial reorganization. Even if it were to become a company, according to current rules, Botafogo would need to wait two years to be eligible for this mechanism.
• Botafogo is considering two options to qualify for judicial reorganization: the club-company bill currently being debated in Congress and an analogy with the process for a university. Both are uncertain.
• Judicial reorganization requires the payment of labor debts within a period of less than one year. Without finding a way to bend the rules in their favor, this condition makes success unlikely.
• If Botafogo's judicial reorganization process ends with creditors rejecting the proposal, the club will be declared bankrupt. All assets will be sold, and the football team will be relegated to the lowest division.

Aware that club directors would soon resort to bankruptcy protection to deal with their debts, ge prepared a guide at the beginning of the year to help clubs understand the options available to those on the verge of bankruptcy. Judge Marcelo Sacramone even participated in the Dinheiro em Jogo podcast.

Source: Globo Esporte