Appraising isolated productive units in Brazilian judicial reorganizations

In a Brazilian judicial reorganization (recuperação judicial), the appraisal of an isolated productive unit, the UPI (unidade produtiva isolada), sets the floor for the auction, supports the judge's decision and gives creditors the reference they need to judge whether the sale is worthwhile. Despite that weight, it is usually built with the tools of a conventional valuation, without adjustment for the object being appraised, which is a set of assets carved out of a distressed company.

Judicial reorganization and the value of the unit

The common intuition is that a judicial reorganization destroys value. For the business that remains tied to the proceeding, that is frequently true, with suppliers demanding cash on delivery, credit lines closed and management consumed by the litigation. The value of a productive unit, however, depends on which obligations travel with its cash flow. The equity of a leveraged company behaves like an option on its assets, with a strike price equal to the debt (Merton, 1974). A judicial reorganization changes that strike price by staying enforcement and novating the liabilities, and it is this mechanism that allows the value of the operation and the debtor's liabilities to be treated separately.

The UPI is the clearest expression of that separation. Sold under article 60 of Law 11,101/2005, it transfers free of liens and without successor liability for the debtor's obligations of any nature, expressly including environmental, regulatory, tax and labor obligations, in the wording introduced by Law 14,112/2020. The Brazilian Supreme Court upheld the constitutionality of this rule in ADI 3,934, decided in 2009, with respect to labor succession, and the courts' application of the mechanism is well established (Ayoub and Cavalli, 2020). Without that protection, the same assets would only find a buyer willing to absorb successor risk, or would be sold at break-up prices. The rule in article 60 is what allows them to be priced as a clean business. The empirical literature supports the point by distinguishing financial distress from economic distress (Andrade and Kaplan, 1998). When the underlying operation is viable, most of the value loss sits in the capital structure, and the assets retain a large part of their going-concern value. International experience with restructurings points to the sale of assets and business units as one of the most effective instruments for preserving value in these processes (Gilson, 2010).

Perimeter

Article 60-A allows a UPI to combine assets, rights and interests of any nature, tangible or intangible, including equity stakes, an opening that Brazilian commentators regard as one of the advances of the 2020 reform (Sacramone, 2025). That freedom of design is useful to the proceeding, but it requires the appraiser to define, before any projection is built, what the buyer will receive.

The absence of successor liability removes the liabilities, but on its own it does not ensure that customer contracts follow the assets, that environmental and regulatory licenses tied to the debtor's legal entity are transferred, that key people stay, or that assets pledged under fiduciary liens are available for sale. Each of these items changes revenue, cost or the perimeter of the projection, and the statute settles none of them.

Points of attention

The errors we find in UPI appraisals concentrate in the assumptions, and some of them recur regularly.

1. Fixed assets are usually understated, because maintenance capex is suppressed in the years before the filing and during the proceeding. The historical figures understate normalized investment, and deferred maintenance has to enter the projection as catch-up capex or be reflected in the price. Book value is of no help in this assessment, and physical inspection is indispensable.
2. The perimeter frequently includes assets the debtor does not own, such as machinery under fiduciary liens or leases, receivables under fiduciary assignment and real estate belonging to third parties. Creditors holding fiduciary title are outside the reorganization (article 49, paragraph 3), and UPIs are frequently designed around assets the buyer will only receive if it assumes the corresponding debt.
3. Inventory and receivables arrive depleted, with aged stock, inputs not replenished for lack of cash and receivables already factored or pledged. The UPI leaves with reduced or no working capital, and the outlay the buyer will make to rebuild it has to be in the cash flow.
4. The history is distorted in both directions. Recent margins carry cash purchases, lost discounts and customers who left, but they may also be inflated by maintenance cuts, headcount reductions beyond what is sustainable and stretched suppliers. Normalization has to correct both effects (Damodaran, 2009).
5. A unit that never existed on its own carries costs that only surface once it is separated, such as back office, technology, brand, a shared warehouse or the power contract of a neighboring plant. The transition services agreement with the debtor covers part of this for a limited period, and the projection has to reflect the stand-alone cost after it ends.
6. Part of the contracts and licenses will not follow the assets, because of change-of-control clauses, termination triggered by the filing itself, or licenses attached to the debtor's legal entity. Projected revenue has to start from what the buyer receives.
7. The proceeding itself creates new encumbrances. Financing under article 69-A may be secured by non-current assets, including those that make up the UPI, and the appraisal must state whether the value is gross or net of those encumbrances.
8. The auction price is rarely comparable to the appraised value without adjustment. Installment payments, assumption of debt, payment in kind, earn-outs and credit bids all require bringing everything to present value at the same valuation date before any comparison is made.

Discount rate

The most frequent error, and the most expensive one, is in the rate. The cost of capital reflects the risk of the cash flow being discounted, not the condition of whoever generates it. The classic formulation is from Brealey and Myers, for whom the true cost of capital depends on the use to which the capital is put, and Pratt and Grabowski develop it throughout their treatise on the subject.

Applied to a UPI, the principle has a direct consequence. The buyer of a clean unit will discount that cash flow at the cost of capital of the assets, with the capital structure of a market participant, as required by the fair value concept in IFRS 13 (CPC 46 in Brazil) and by the definition of market value in the IVS. The seller's distress premium, the cost of financing during the proceeding and the novated debt stay out of that rate, because they do not travel with the cash flow. Damodaran shows that the observed cost of capital of a distressed company bears no relation to the risk of its operating assets.

A normalized cash flow of R$ 10 million per year, growing at 3% in perpetuity, is worth R$ 100 million at a 13% rate, consistent with the assets of a mature industrial business. The same cash flow discounted at 21%, the typical result of a beta relevered to the debtor's capital structure or of a distress premium added to the CAPM without support, is worth approximately R$ 56 million. The gap, of approximately 44%, comes from an assumption that charges the buyer for a risk it will not bear, and the creditors pay for it, because the auction floor is set below what the market would pay.

By the same logic, the residual cash flow that remains in the debtor after the sale concentrates the risks the UPI left behind and deserves a higher rate.

Purpose of the appraisal and premise of value

The appraisal required by article 53 demonstrates the feasibility of the plan and values the debtor's assets, while the appraisal that frames the sale under article 142 sets the reference for the auction, whose first call has to respect the appraised value. In both, the premise of value has to be stated, as the IVS require, and the liquidation value of the assets that make up the UPI serves as the reference floor for creditors.

When a UPI is sold through an organized competitive process, it is competition among bidders that forms the price, and the appraisal establishes the level below which the sale stops serving the proceeding.

A UPI appraisal supports the judge's decision and the creditors' comfort to the extent that the perimeter was verified in the field, the cash flow was rebuilt for a unit that never existed on its own and the rate reflects the risk of that cash flow. When one of those elements is missing, the number stops serving the proceeding.

How we can help

CBG Valuation Services' work in judicial reorganizations and bankruptcies spans the firm's three disciplines.

In business valuation, the firm prepares the economic and financial appraisal and the demonstration of economic feasibility that support the plan (article 53, II and III), values isolated productive units, including those composed of intangible assets and equity stakes (articles 60 and 60-A), and values the sale of the debtor as a whole, which the statute treats as a UPI for all purposes (article 50, XVIII). It also measures at fair value the claims and equity interests held by funds and investors in companies under reorganization (IFRS 13 / CPC 46).

In real estate appraisal and in fixed asset appraisal and inventory work, the firm values the real estate, machinery and equipment involved in the transfer, lease or partial sale of assets (article 50, VII and XI), collateral whose release or substitution depends on the secured creditor's express approval (article 50, paragraph 1) and assets taken to auction, whose first call has to respect the appraised value (article 142). In bankruptcy, it prepares the appraisal that forms part of the estate's collection report (auto de arrecadação, articles 108 and 110), including when engaged by the judicial administrator (article 22, III, h).

The work is carried out by a robust team of consultants based in the firm's Rio de Janeiro and São Paulo offices, under the International Valuation Standards. CBG is one of the few Brazilian firms that are members of the IVSC.

Carlos Bernardo Gonçalves, MRICS, is Managing Partner of CBG Valuation Services.