Brazil: Securitisation

According to data published by Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais – ANBIMA¹ (“ANBIMA”), on 2020 the securitization issuances in Brazil totaled approximately R$61.5 Billion, corresponding to 16.6% of the principal amounts of securities issued on such year, divided in 706 transactions, corresponding to 52.7% of the number of transactions carried in such year.

As described in item “8” below, the securitization securities may be object of: (i) public offerings, (ii) restricted efforts public offerings; or (iii) private subscription. The numbers indicated herein does not consider securitization transactions destined to private subscription, referring, exclusively, to securitization issuances carried through public offerings or restricted efforts public offerings.

The typical forms of securitization in Brazil are:

(i) Certificados de Recebíveis Imobiliários – CRI (Real State Receivables Certificates) (“CRI”), which on 2020 totaled approximately R$14.5 Billion, corresponding to 23.5% of the principal amount of securitization securities issued on such year, divided in 354 transactions, corresponding to 50.1% of the number of securitization transactions carried in such year;

(ii) Certificados de Recebíveis do Agronegócio – CRA (Agribusiness Receivables Certificates) (“CRA”), which on 2020 totaled approximately R$15 Billion, corresponding to 24.3% of the principal amount of securitization securities issued on such year, divided in 82 transactions, corresponding to 11.6% of the number of securitization transactions carried in such year; and

(iii) Fundos de Investimento em Direitos Creditórios – FIDC (Credit Rights Investment Funds) (“FIDC”), which on 2020 totaled approximately R$32 Billion, corresponding to 52.1% of the principal amount of securitization securities issued on such year, divided in 270 transactions, corresponding to 38.2% of the number of securitization transactions carried in such year.

In addition to the aforementioned securitization forms, is also possible to identify occasional securitizations carried under the form of issuance of debentures by securitization companies. Despite possible under the law, the number of transactions and amounts involved on such form of securitization has not been relevant on the last years.

Footnote

1. Boletim de Mercado de Capitais e do Estudos Especiais Produtos de Captação of December of 2020.

Under the Brazilian Law, as a general rule, any payment stream can be securitized since it arises from licit activities. The exceptions are restricted to credits which its respective documents expressly forbid it and payment streams whose origin is related to its holder’s livelihood, such as alimony and social security benefits (retirement pension, death pension, etc.).

In this sense, although they represent a small number of transactions of the securitization universe in Brazil, it is worth to mention that Fundos de Investimento em Direitos Creditórios Não Padronizados (Non-standard Credit Rights Investiment Funds) (“FIDC NP”) may acquire credit rights:

(i) that are past due and pending payment when they are assigned to the Fund;

(ii) arising from public revenues originating or derived from the Union, the States, the Federal District and the Municipalities, as well as their autarchies and foundations;

(iii) that result from ongoing legal actions, are the subject of litigation, or have been judicially pledged or pledged as collateral;

(iv) whose constitution or legal validity of the assignment to the Fund is considered a major risk factor;

(v) originated from companies undergoing judicial or extrajudicial reorganization;

(vi) of future existence and unknown amount, as long as they arise from relationships already established; and

(vii) of a different nature, not acquirable by “standard” FIDCs (constituted under the CVM Rule nr 356/01)

Please note that, despite of the flexibility of the securitization rules, certain types of credits may demand specific measures regarding the securitization structure. Such demands usually are due to the nature of the activity which the credits arise and the specific regulation applicable to it, and do not represent an impediment to the carrying out of the securitization since the proper measures are taking.

The securitization transactions are subjected (i) to several specific regulations, which varies accordingly to the form of securitization adopted for the transaction, as well (ii) to general regulations which affects directly or indirectly the transactions and some of its aspects.

Regarding the main specific regulations applicable to CRIs transactions we may quote:

(i) Law nr. 9,514/97, which regulates the Real Estate Financing System and creates the CRIs; and

(ii) Instruction CVM nr. 414/04, which rules the process of registration of Real Estate Credit Securitization Companies and CRIs public offerings.

Regarding the main specific regulations applicable to CRAs transactions we may quote:

(i) Law nr. 11,076/04, which creates the CRAs and other agribusiness related financial instruments;

(ii) Law nr. 13,986/20, which rules the CRAs and other agribusiness related financial instruments; and

(iii) Instruction CVM nr. 600/18, which rules the CRAs public offerings.

Regarding the main specific regulations applicable to FIDCs transactions we may quote:

(i) Resolution CMN nr. 2,907/01, which rules the constitution and operation of FIDCs;

(ii) Instruction CVM nr. 356/01, which rules the constitution and operation of FIDCs;

(iii) Instruction CVM nr. 444/06, which rules the constitution and operation of FIDC-NPs; and

(iv) Instruction CVM nr. 489/11, which rules the preparation and publicity of financial statements of FIDCs.

Regarding to general regulations which may, directly or indirectly, affect the securitization transactions or their aspects we highlight:

(i) Brazilian Civil Code, especially in relation to Articles 286 to 298 which rule credit assignment transactions, and Articles 887 to 926 which rule credit titles;

(ii) Law 11,101, which establishes on its Article 136, Paragraph 1st that an eventual declaration of ineffectiveness of the Judicial Recuperation, such ineffectiveness shall not result on the declaration of inefficacy or revocation of the credit assignment to the detriment of the rights of holders of securities issued by the securitization issuer;

(iii) Law nr. 4,595/64, which rules the entire national financial intermediation system and created the National Monetary Council and the Brazilian Central Bank;

(iv) Law nr. 4,728/65, which regulates the capital market and establishes measures for its development;

(v) Law nr. 6,385/76, which created CVM and granted to it the competence to rule and inspect the capital market;

(vi) Instruction CVM nr. 400/03, which rules the public offering procedures; and

(vii) Instruction CVM nr. 476/09, which rules the restricted efforts public offering procedures.

As indicated in item “1” above, Securitization can be structured in different formats.

The securitizations carried though CRIs are composed, in synthesis by: (i) the acquisition of the real estate credit rights by the securitization company; (ii) the issuance of CRIs and their distribution to investors through a public offering or a restricted efforts public offering; (iii) the collection of the credit rights on their respective due dates; and (iv) the amortization of the CRIs.

The securitization may be structured with one or more classes of CRIs. In case the securitization count with more than one class of CRIs, the different classes may establish different interest rates, amortization schedule and levels of priority on their amortization.

The main parts involved on the transaction are:

(i) The assignor of the credit rights, which may or not retain risk over the assigned credit rights;

(ii) A Real Estate Securitization Company, which may be specially created to be used on the transaction, or a service renderer hired to carry on it;

(iii) One or more financial institutions hired to act as coordinator and distributor of the CRIs. In case the transaction count with more than one coordinator, one of them shall assume the role of leader coordinator;

(iv) A Fiduciary Agent, which is responsible by verifying the complying of the Term of Securitization dispositions and the defense of the investors rights;

(v) A Custodian, which is responsible by the custody of the credit rights and the moneys arose from their payment;

(vi) A Servicer, responsible by the processing of the documents of the credit rights and by the collection of the credit rights (optional);

(vii) A credit risk rating agency (optional depending on the form of the CRIs offering);

(viii) A Real Estate Consultant, which is responsible by the maintenance of the real estate linked to the credit rights object of the securitization, as well by other operational measures related to it, if applicable (optional).

The securitizations carried though CRAs have structure and participants substantially identical to the CRIs, with the following main differences:

(i) The credits to be securitized are related to agribusiness (instead of real estate transactions);

(ii) The issuer of the titles of the transaction is an Agribusiness Securitization Company (instead of a real estate securitization company); and

(iii) The Real Estate Consultant is replaced by a monitoring agent of the crops or the guarantees linked to the agribusiness credit rights.

Similarly to the observed in securitizations using CRIs, the securitization may be structured with one or more classes of CRAs. In case the securitization count with more than one class of CRAs, the different classes may establish different interest rates, amortization schedule and levels of priority on their amortization.

The securitizations carried though FIDCs are composed, in synthesis by: (i) the incorporation of a FIDC; (ii) the celebration of a Credit Assignment Agreement through which the FIDC and the Assignor commit themselves to carry on the credit rights assignment; (iii) issuance and distribution of shares of the FIDC; (iv) the conclusion of the acquisition of the credit rights by the FIDC; (v) the collection of the credit rights on their respective due dates; and (vi) the amortization of the shares. The main parts involved on the transaction are:

(i) The assignor of the credit rights, which may or not retain risk over the assigned credit rights;

(ii) The FIDC, which may or not be specially created to be used on the transaction;

(iii) One or more financial institutions hired to act as coordinator and distributor of the shares of the FIDC. In case the transaction count with more than one coordinator, one of them shall assume the role of leader coordinator;

(iv) The Administrator of the FIDC, which is responsible, among other things by representing the FIDC before third parties, including CVM, ANBIMA, the investors and the other services renderers of the FIDC, as well by verifying the complying of the dispositions of the By Laws of the FIDC;

(v) A Custodian, which is responsible by the custody of the credit rights and the moneys arose from their payment, as well by the preparation of the FIDC financial demonstrations; and

(vi) A credit risk rating agency (optional depending on the form of the shares offering).

The securitization may be structured in order that the FIDC count with one or more classes of shares. In case the FIDC count with more than one class of shares, the different classes may establish different interest rates, amortization schedule, being mandatory the adoption of a hierarchy regarding priority of amortization between the different classes.

The securitization in Brazil regulation is composed by laws and by infra-legal rules.

The federal laws are created by the Brazilian National Congress (composed by the Legislative Assembly and the Senate.

In case of securitization transactions involving credit rights held by States or Municipalities is usual that such transactions be subject to laws edited by the Legislative Assembly of the relevant public entity that owns the credit rights.

The responsibility by the creation of the infra-legal rules are divided among the following entities:

(i) Conselho Monetário Nacional (National Monetary Council – CMN);

(ii) Banco Central do Brasil (Brazilian Central Bank); and

(iii) CVM (Brazilian Securities Exchange Comission).

In addition to the aforementioned Governmental Entities, the securitization transactions, as well the other capital markets transactions, are subject to the regulation of ANBIMA, which consists of an auto-regulatory entity formed by market participants, focused on the setting standards of good practices and on the supervision of its members.

There are no limitations regarding the participation of private entities as assignors on securitization transactions.

In general, the participation of public entities of securitization transactions depends on the previous authorization of its respective legislative organs. In addition, in case the securitization structure implies on any form of risk retention by the assignor in relation to the credit rights to be assigned, the participation of the assignor on the transaction shall be also conditioned to the previous approval of the Federal Senate, independently of the nature of such public entity (federal, state or municipality).

Regarding the participation as assignees, each form of securitization available in Brazil establish specific requirements to the respective vehicle to be used as issuer, which may be summarized as follows:

(i) Only Real Estate Securitization Companies are entitled to issue CRIs. The issuance of CRIs shall mandatorily be backed on real estate credit rights;

(ii) Only Agribusiness Securitization Companies are entitled to issue CRAs. The issuance of CRAs shall mandatorily be backed on agribusiness credit rights; and

(iii) “Standard” FIDC may not carry on securitizations of credits held by public entities.

No, Brazilian legislation does not adopt such concept.

Yes. The securitization securities may be object of:

(i) public offerings, which depend on previous registration under the CVM;

(ii) restricted efforts public offerings, which despite do not depend on previous registration under the CVM, are considered as public by CVM. Such offerings are subjected to certain restrictions regarding the qualification and number of investors that may participate, as well restrictions to the securities negotiation; and

(iii) Private placements.

Yes. The registration procedures and filing requirements vary in function of (i) the form adopted for the securitization (i.e. CRI, CRA, FIDC or FIDC-NP); and (ii) the distribution form intended (i.e. public offering or restricted efforts public offering).

The registration requirements and procedures are established on the respective CVM rules for each form of securitization, as indicated below, being them subjected to the subsidiary application of Instruction CVM nr. 400/03, in case of the distribution be carried in the form of a public offering, or of Instruction CVM nr. 476/09, in case of the distribution be carried in the form of a restricted effort public offering:

(i) CRI Securitizations – Instruction CVM nr. 414/04;

(ii) CRA Securitizations – Instruction CVM nr. 600/18; and

(iii) FIDC or FIDC-NP Securitizations – Instruction CVM nr. 356/01.

The requirements for carrying out public offerings are set out in Instruction CVM nr. 400/03, which determines that the intermediary institution and other participants in the offer make wide and detailed disclosure about all the characteristics of the offer, the participants and the assets object of the offer by the prospectus of the offer.

The necessary provisions of the prospectus include: (i) description of the transaction, including presentation of the issuer and the intermediary institutions involved, identification of the target audience, prices and amount of the issue and indication of admission to trading on stock exchanges, organized over-the-counter market or non-organized over-the-counter market; (ii) description of the issuer with the information that the offerer wishes to highlight in relation to those contained in the reference form; (iii) identification of administrators, consultants and auditors; (iv) description of the offer and assets to be issued, including, at a minimum, information relating to: (a) the quantity of assets to be issued of each class and type and their rights, advantages and restrictions, including regarding submission to preemptive right, also specifying those rights, advantages and restrictions resulting from any decisions of the meeting or the board of directors that decided on the increase; (b) the total issue value or the method of calculating the total issue value, in local currency; (c) the corporate authorizations necessary for the issue or distribution of the securities, identifying the responsible deliberative bodies and the respective meetings at which the transaction was approved; (d) any conditions to which the public offering is submitted; (e) in the event of issuance of securities with no par value, apart from the issue price intended for the formation of capital reserve, if any, among others.

No, there is no requirement of minimum risk retention by any of the entities.

No, securitization investors currently have no regulatory obligation to perform due diligence.

However, underwriters of a public offering will normally assess the due diligence performed by the leading intermediary responsible for distributing the securities, who will be responsible for verifying the veracity of the issuer’s information and documents, under penalty of liability for any information and / or false, incorrect and / or inaccurate documents that could lead investors to errors when acquiring assets.

In this sense, we emphasize that the offerer is responsible for the veracity, consistency, quality and sufficiency of the information provided at the time of registration and provided to the market during distribution. The lead institution must take all precautions and act with high standards of diligence, responding for the lack of diligence or omission, to ensure that: (i) the information provided by the offerer is true, consistent, correct and sufficient, allowing investors to make an informed decision. reasoned decision regarding the offer; and (ii) the information provided to the market during the entire distribution period, including any occasional or periodic information included in the update of the company’s registration and those contained in the economic and financial feasibility study of the enterprise, if applicable, which may be included in the Prospectus. , are sufficient, allowing investors to make an informed decision about the offer.

The lead institution shall keep, for 5 (five) years, at the disposal of CVM, the supporting documentation of their diligence to comply with the provisions of the paragraph above, under the terms of the Instruction CVM 400/03.

The penalties that securitization participants may be subject to for breaching regulatory obligations vary depending on the type of breach, the culpability of the violating party and the type of structure.

The possible penalties to be applied by CVM, after found, in an administrative inquiry, the practice of irregularities, correspond to warning, fine, suspension or disqualification for the exercise of the position and suspension or revocation of the authorization or registration, in addition to temporary ban for a specified period, not only for the practice of activities or operations by the members of the distribution system, but also to act as an investor, directly and indirectly, in the market.

The Law 9.457/97, while expanding the range of possible penalties to be applied by CVM, also instituted the Term of Commitment, which allows the suspension of the administrative procedure, provided that the accused interrupts the practice of the act illicit and indemnify those harmed. In addition, Instruction CVM nr. 607/19 provides for the rite of the procedures related to sanctioning actions within the scope of the Securities and Exchange Commission.

Yes, each form of securitization in Brazil is subject to a specific vehicle form and set of restrictions, as indicated below:

(i) CRI Securitizations – The issuer vehicle must be a Real Estate Securitization Companies, registered as a publicly held company under CVM and its activity shall be restricted to the acquisition of real estate credit rights and the issuance of the respective CRIs.

(ii) CRA Securitizations – The issuer vehicle must be an Agribusiness Securitization Companies, registered as a publicly held company under CVM and its activity shall be restricted to the acquisition of agribusiness credit rights and the issuance of the respective CRAs.

(iii) FIDC and FIDC-NP Securitizations – The FIDCs and FIDC-NPs regulations establish that their portfolio shall be represented preponderantly by credit rights, being the remaining part allocated exclusively in fixed rate assets

In addition to the aforementioned securitization forms, is also possible to identify occasional securitizations carried under the form of issuance of debentures by securitization companies not constituted under the form of public held companies and without the restrictions described in items “i” and “ii” above. However, despite possible under the law, the number of transactions and amounts involved on such form of securitization has not been relevant on the last years.

The issuer is usually a specific entity that has no history of changes in control, conflicts, processes and / or contingent liabilities. In cases where there is a public distribution of the securities, the leading institution performs due diligence on the issuer and on the securities to be securitized. In addition, to avoid bankruptcy or judicial recovery, the procedures of which are provided for in Law nr. 11,101/05, some measures are generally adopted, such as the inclusion in the transaction contracts that the issuer undertakes not to incur liabilities or to carry out activities outside those contemplated by the securitization transaction, the presence of consolidated financial statements, as well as that contract loans, financing and/or financial commitments above a certain amount and / or term.

In addition, the issuer also grants different types of guarantee, fiduciary assignment of the issuer’s assets in favor of the guarantee administrator to the issuer’s creditors, which will have priority over the other credits of the issuer in the event of bankruptcy or judicial recovery.

Although the measures reported above do not eliminate the risk of a bankruptcy filing or judicial reorganization of the issuer, the measures are intended to indicate to creditors that the issuer is likely to become insolvent and, therefore, to allow creditors to anticipate their claims. other eventual creditors, as well as preserve the issuer’s assets for securitization creditors.

Regarding the securitizations carried through FIDCs, due to their nature of investment funds (i) they are not subjected to bankruptcy procedures; and (ii) the subscription of their quotas does not grants to their investors a credit right but the right of participation on their net worth, limited to the amount of principal subscribed increased of a rentability benchmark. Thus, in case of the underlying assets held by the FIDC be not enough to cover the invested amount updated by the benchmark, the FIDC shall enter on a liquidation procedure being each investor entitled to receive the amount correspondent to the application of (a) their respective percentual of subscribed shares over (b) the then existing FIDC net worth, observed the priority amortization rights, if applicable.

The main forms of credit support in securitizations in Brazil are:

(i) Structural subordination created in consequence of the issuance of different classes of securitization titles (CRAs, CRIs or FIDC shares) with different levels of priority on the amortization;

(ii) Dynamic subordination created in consequence of the acquisition of the credit rights with at a discount rate superior than the remuneration of the securitization titles (CRAs, CRIs or FIDC shares);

(iii) Establishing of co-obligation of the assignor in relation to the debtors of the credit rights;

(iv) Undertaking of repurchasing obligation of the credit rights by the assignor in certain situations; and

(v) Setting forth of credit insurance, letters of credit, or guaranteed liquidity facilities, which involve the hiring of an external improvement of credit quality to the credit rights.

The Brazilian Law does note establishes requirements regarding the notification of the debtors or the absence of co-obligation or any other form of risk retention by the assignor in order to characterize the credits transferring as valid and definitive.

As general rule the transfer may not be challenged except as a result of legal rules which are not specific to securitisation transactions, such as the rules of consent, contract formation, parties representation or fraud.

In this sense, we highlight that as mentioned in item “3” above, even in case of an eventual declaration of ineffectiveness of the Judicial Recuperation, such ineffectiveness shall not result on the declaration of inefficacy or revocation of the credit assignment to the detriment of the rights of holders of securities issued by the securitization issuer.

There is no rule establishing specific protection over data regarding the obligors in a securitization. However, Law nr. 13,709/18 (General Data Protection Law) provides for the processing of personal data, including in digital media, by a natural person or a legal person under public or private law, with the objective of protecting the fundamental rights of freedom and privacy and the free development of the natural person’s personality.

In addition, the Complementary Law nr. 105/01 establishes the obligation of financial institutions to maintain confidentiality in their operations and keep their customers’ data protected. According to that legislation, a financial institution is considered to be: (i) Banks; (ii) distributors of securities; (iii) foreign exchange and securities brokers; (iv) credit, financing and investment companies; (v) real estate credit companies; (vi) credit card administrators; (vii) leasing companies; (viii) administrators of organized over-the-counter market; (ix) credit unions; (x) savings and loan associations; (xi) stock and commodity and futures exchanges; (xii) settlement and clearing entities; and (xiii) other companies that, due to the nature of their operations, will be considered by the Securities and Exchange Commission. Despite the securitization vehicles does not be strictly characterized as financial institutions, depending on the format in which the securitization is structured and its underlying asset, the Courts may understand that such obligations would also be applicable to the parties involved on the transaction.

It should be noted that Instruction CVM nr. 400/03, which regulates public offerings for the distribution of securities, provides that the issuer, the issuer and the intermediary financial institutions involved in public offerings for distribution, as well as the people with they are working or advising them in any way has an obligation of secrecy, that is, they will not be able to present any manifestations in the press or in any media about the offer and the issuer. Observed that the duty of confidentiality ends with the announcement of the closing announcement of the offer in the press. This conduct also applies to public offers distributed with restricted efforts, as provided for in Article 12 of Instruction CVM nr. 476.

Yes, the activities of credit risk rating agencies in Brazil are regulated under the Instruction CVM nr. 521/12, being its practice by a local or a foreign entity conditioned to its registration or recognition by CVM.

In Brazil there is no favored tax treatment for the Assignors regarding securitization transactions. As general rule, the amounts received by the Assignor as consequence of the credit rights assignment are fully taxed as if the payment would had been made by the respective debtor.

Under the SPVs perspective: (i) the Securitization Companies have no favored tax treatment, being their receipts fully subjected to taxation under the systematic of Real Profit (Lucro Real); while (ii) FIDCs, by other side, have their receipts fully exempt.

Finally, under the Investor perspective:

(i) when invested by natural persons: (a) CRIs and CRAs profits are fully exempt; while (b) FIDCs profits are subject to Withholding Income Tax at rates which starts at 22.5% and are reduced in 2.5% in each semester until reach the minimum rate of 15%; and

(ii) when invested by legal persons, CRIs, CRAs and FIDCs profits are subjected to Withholding Income Tax at rates which starts at 22.5% and are reduced in 2.5% in each semester until reach the minimum rate of 15%, being however the total profit amount taxed under the systematic of Real Profit (Lucro Real), being the withheld amount treated as a tax payment anticipation.

Brazilian law allows for global and international transactions. In this sense, there are specific rules for the assets to be traded abroad or even acquired from foreign issuers, observing that the referred operations may depend on specific approvals and requirements of CVM and the Brazilian Central Bank.

The Brazilian Securitization Market is referred exclusively: (i) on Special Settlement and Custody System – Selic Rate, the Brazilian risk free rate, or (ii) on fixed interest rates set forth on the transactions respective bookbuilding processes increased of a domestic inflation index.

There are several discussions and even public consultations with regulatory bodies to improve norms related to securitization in Brazil. In this sense, we can highlight the following examples²:

(i) making adjustments to ambiguities and uncertainties, as well as updating the existing rules in Brazilian legislation, such as Instruction nr. 356, in order to provide for the updating of currently used electronic procedures the Securities and Exchange Commission;

(ii) the creation of unified rules for regularization of similar entities, such as securitization companies, since there is currently no customized regulatory regime that understands and regulates securitization companies with all their specificities. They follow rules scattered in various instructions from the Securities and Exchange Commission;

(iii) creation of mechanisms for the implementation of Law nr. 13,874/19 (Economic Freedom Law), which stipulated rules for the creation of quota classes and the segregation of equity in investment funds, limitation of investor liability and the liability of investors; and

(iv) reform and consolidation of the rules governing public offers for the distribution of securities in the primary or secondary markets, to simplify and accelerate the granting of registration and to comply with recent IOSCO recommendations.

Footnote:

2. Consulta Pública nº 02/20

Through Legislative Decree nr. 06/20, the occurrence of a state of public calamity in Brazil was recognized, which led to several changes and more flexible provisions in the regulations of the Securities and Exchange Commission and other entities participating in public offerings. In this sense and in order to contribute to the mitigation of the aforementioned impacts of COVID-19, Resolution 848/20 of the Securities and Exchange Commission temporarily extended and suspended some of the terms set out in regulations issued by the Securities and Exchange Commission.

Also, in response to COVID-19, the regulatory bodies started to allow several procedures to take place in electronic / digital form, among them the possibility of holding meetings in electronic / digital form.