National and International Banks

The acquisition finance market in Brazil is very dynamic, and major Brazilian and international banks play an important role in structuring and advising acquisition deals. Top advisers in the recent past include local banks such as Banco BTG Pactual, Bradesco BBI, BR Partners, Vinci Partners, Safra and Itaú BBA, and global players such as UBS, JP Morgan, Bank of America, Rothschild and Goldman Sachs. In M&A financing, the annual base interest rate was as high as 14.25% in 2016 and has more recently experienced another upward trend, reaching 13.75% in March 2023, thus reducing the appetite for variable income assets and other riskier investments. However, the annual base interest rate has been falling since August 2023, reaching 10.5% in May 2024, in a trend that looks set to continue over the course of the following months, fostering investments in the local capital and financial markets.

Brazil still has an underdeveloped secondary market, while the acquisition finance market is highly concentrated, and most M&A deals are still funded by local banks, such as Banco BTG Pactual, Itaú Unibanco, Banco do Brasil, Bradesco and Caixa. Santander (the only foreign bank with a local presence among the major players) completes the list of the top lenders of acquisition finance transactions in Brazil.

The Brazilian National Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES) is a public entity created to foster economic and social development in the country, and has historically played a major role in the Brazilian market for acquisition finance by extending subsidised loans to certain buyers and companies meeting its requirements. BNDES reached its peak equity stake in such transactions in December 2014, totalling 23%. Recently, however, entities have started to resort more frequently to capital markets transactions co-ordinated by international banks to fund their acquisitions. Although the incumbent government administration may foster the increase of BNDES′s stake in the market, it appears that the recent capital markets growth and the greater participation of private lenders in acquisition finance transactions in Brazil will continue, and the country has experienced a huge growth of capital markets financing via debenture issuances over recent years.

Global Private Equity Funds

Many global private equity funds have notably been increasing their share in the local M&A arena over the past five years. As a result, more complex and sophisticated structures – whereby financing and funding are contracted offshore by international private equity firms (and then channelled through local investment funds) or made via investments in local vehicles backed by foreign investors to acquire target companies – are becoming increasingly common.

The cost of financing in Brazil is very high compared to more developed economies. Despite the reduction in interest rates and the potential for them to remain in a downward trajectory over the course of the coming months, the official interest rate is currently 10.5% per annum. In addition, raising funds through Brazilian companies is burdensome, considering the highly regulated and intricate legal and regulatory framework for such market structures. On top of the above hurdles for leveraged acquisitions, the highly unstable exchange rate of the Brazilian real and consequent expensive hedging cost contribute to the maintenance of a still underdeveloped secondary market and a very high concentration of direct loans in the acquisition finance space.

Therefore, leveraged buyouts (LBOs), as they are known in the US market, are not typically available in Brazil and in most cases lenders extend credit facilities or loans to buyers considering their credit risk, to fund M&A deals, rather than lending money to the target companies. Other reasons behind the low level of LBOs in Brazil are that the secondary market for securities is somewhat limited, and that the high cost of debt discourages companies from issuing long-term debt securities for financing their acquisitions. In any event, leveraged levels tend to be comparably low in Brazil.

Nevertheless, a number of international private equity powerhouses have recently landed in the onshore market, helping to foster LBO-like structures tailored to fit within local peculiarities.

As a large portion of financing transactions are carried out by means of corporate direct loans, their structures frequently follow a relatively standard set of documents, including a loan agreement and other ancillary security or guarantee documents.

In addition, a very common alternative for extending credit to local companies is via bank credit certificates (CCBs), which are instruments issued by obligors to represent a debt obligation vis-à-vis a lending bank. Under such an arrangement, the creditor bank may negotiate the CCBs in the secondary market as security and sell the certificates to third parties. Therefore, such instruments are widely used for credit securitisation structures.

Certain leveraged acquisition structures with specific local characteristics are becoming more common in Brazil, mimicking US LBO deals by incorporating SPVs that take on debt to finance the acquisition in the form of a loan or via debt securities. Upon the purchase of the equity interest in the target company, the SPV merges into the acquired entity, which succeeds the SPV in all its rights and obligations (including with respect to the loan or debt), having the same effect as a debt taken by or contributed to the target company itself.

There has also been a significant increase in structures involving the issuance of debt securities in the form of bonds (debentures) over the past ten years. As for documentation, such transactions require the execution of:

• a debenture indenture by and between the lender(s) (or a fiduciary agent for the lenders) and the debtor;
• a subscription agreement for the bonds (debentures); and
• if the securities are publicly offered, a distribution and/or underwriting agreement; such offering may require a prospectus and registration with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, or CVM) if the securities are offered to the public at large.

Companies may also issue promissory notes and sell them to the public, although the market for promissory notes is still small compared to the market for local bonds (debentures). Brazilian companies may also issue bonds offshore, the transaction documents of which are generally governed by foreign law. In such cases, certain registrations and disclosure obligations must be complied with in Brazil.

Election of Governing Laws

Parties to agreements entered into with Brazilian persons have limited freedom to choose the governing laws for their obligations. Decree Law No 4,657, of 4 September 1942, as amended (usually known as the “Law of Introduction to the Rules of Brazilian Law”), lays out the framework for any type of private arrangements and, as a rule, defines that any agreement should be governed by the laws of the place where the document is entered into. However, the parties may choose their governing laws for international agreements, with the following general caveats:

• the choice of a foreign law depends on the existence of a link between the underlying transaction to be performed or the parties and the law chosen by such parties to govern their obligations; and
• the governing law should not violate Brazilian national sovereignty, public policy and good morals or ethics.

Any actions relating to real estate property located in Brazil and probate proceedings of a deceased person’s Brazilian estate are subject to the exclusive jurisdiction of Brazilian courts.

As a rule, local courts should recognise and apply the foreign law chosen by the parties based on the parameters set forth above. Brazilian laws, however, also provide that local courts will always have jurisdiction over cases where:

• the defendant is domiciled in Brazil, regardless of their nationality;
• the obligation is to be performed in Brazil; or
• the lawsuit arises from facts or acts performed in Brazil.

Therefore, even if litigation is initiated abroad, this would not preclude Brazilian courts from judging cases involving the matters or facts above, which means that local courts will always have concurrent jurisdiction to resolve those issues.

Enforcement and Arbitration

Any judgments rendered abroad may be enforced in Brazil without a re-examination of the matter if the final sentence or decision issued offshore is submitted to an exequatur process in the Superior Court of Justice (Superior Tribunal de Justiça, or STJ), which may take up to 18 months to be granted. The confirmation of foreign judgments by the STJ is subject to the fulfilment of certain requirements, including that the judgment is accompanied by a certified translation into Portuguese, and that it is not manifestly against national sovereignty, public policy and good morals or ethics. After the exequatur is obtained, enforcement of the underlying ruling is made by Brazilian lower courts.

An alternative to local courts is the arbitration procedure, which follows more flexible rules under which the parties have the freedom to choose the governing law for the relevant arbitral procedure conducted in Brazil. By selecting the arbitral tribunal in Brazil as the exclusive authority to resolve such matters, the parties avoid the need for the lengthy exequatur process in the STJ and eliminate the concurrent jurisdiction of Brazilian courts in disputes that may be brought abroad.

Even though it is theoretically possible to enter into agreements in Brazil governed by foreign law (to the extent that the requirements of Decree Law No 4,657, of 4 September 1942, outlined above are duly complied with), security agreements in which the debtor or the assets are domiciled or located in Brazil are almost exclusively subject to Brazilian laws, as their foreclosure should occur in Brazil. In practice, most corporate loans involving Brazilian borrowers or securities issued by local companies are governed by Brazilian law or submitted to an arbitration procedure. However, Brazilian companies may access foreign markets by issuing debt securities offshore (indirect loans), the transaction documents for which are governed by foreign law.

It is also common to have structures whereby Brazilian borrowers issue Brazilian law-governed securities for an offshore entity, which then issues foreign law-governed securities backed by the Brazilian law-governed credit agreements or securities, with offshore offering documents and securities being subject to the relevant applicable foreign law.

In Brazil, there are no loan market associations or standard documentation. The documents usually follow the generally applicable rules and regulations, and the terms and conditions are agreed upon between the parties. The main documents for corporate loans are loan agreements or CCBs. As for debt securities, their offering primarily involves the execution of:

• a purchase/subscription or underwriting agreement;
• an indenture;
• an offering prospectus (if required under the regulations applicable to public offerings); and
• the reference form (formulário de referência), which must be filed with the CVM for the public offering of securities, with similar content to an offering memorandum.

There are no requirements for the documents to be executed in Portuguese. However, certain security documents and guarantee agreements must be filed with the competent Registry of Deeds and Documents or Board of Trades in order to be valid and enforceable vis-à-vis third parties, and any document filed before such public entities must be in Portuguese or must be attached to a certified translation into Portuguese. The same requirement for the certified translation applies to any enforcement of documents or judgments by Brazilian courts.

In general terms, legal opinions issued within the context of acquisition finance transactions usually cover:

• the certification by the law firm of the capacity and authority of the signatories for the Brazilian entities;
• confirmation of relevant corporate or regulatory authorisations; and
• the fulfilment of any other requirements for the legal existence of the companies and undertaking of obligations pursuant to the financing documentation, as well as the validity and effectiveness of such documents (subject to the general assumptions of the truthfulness and effectiveness of ancillary documents submitted for the opinion).

To the extent that the documents involve the creation of a security interest over any assets, the opinions usually cover the valid perfection of this.

Most of the acquisition finance transactions in Brazil involve the granting of direct loan facilities, the execution of CCBs in favour of banks, or the issuance of debt securities, such as bonds (debentures), per the structures below.

The prevalent arrangements for acquisition finance in Brazil do not involve a series of tranches, as may be common in other jurisdictions. Therefore, the usual lending structure is comprised almost exclusively of senior parallel or syndicated loans.

Direct Loan

The typical direct loan is straightforward, and the set of documents comprises a loan agreement whereby the lender extends a loan facility with specific proceeds for the relevant transaction.

Issuance of Bonds (Debentures)

Borrowers may also take on debt through the issuance of bonds (debentures), which may be offered publicly or privately to a single lender or a series of syndicated lenders, as the case may be. Bonds are also typically subordinated to other debts of the company (but rank higher than capital payments to equity holders).

Any loans are usually secured by shares of the obligor or subsidiaries, receivables and inventory, and provide restrictive covenants on the distribution of dividends, payments, change of control and corporate reorganisations.

Securitisation

Securitisation has become a widespread form of financing in Brazil as an alternative to credit facilities granted by major banks. Under Brazilian law, two specific vehicles may be used in such structures: financial securitisation companies and receivables funds (Fundos de Investimento em Direitos Creditórios, or FIDCs) regulated by the Central Bank of Brazil and the CVM.

Private Equity Fund

Another common structure for private equity investments is to channel investments through a special type of vehicle regulated by the CVM in Brazil, called a private equity fund (Fundo de Investimento em Participações, or FIP), which is akin to the limited partnership structure in the USA. These provide major advantages and benefits to sponsors compared to the traditional corporate structures, notably by not being taxed as an incorporated entity, allowing for a flexible and tailored structure and, at the same time, providing tax exemptions on capital gains for certain classes of sponsors (provided that certain requirements set forth under Brazilian laws and regulations are met). As the FIP’s units (or interest equity), called quotas, are deemed securities under Brazilian law and may be marketed to the public, such vehicles help to foster a secondary market and set the foundation for LBO-like structures.

There has also been a recent trend towards the establishment of special purpose acquisition companies (SPACs), which conduct initial public offerings of shares for the purpose of acquiring operational companies. However, the number of transactions in this regard is still not very significant in Brazil.

As indicated in 3.1 Senior Loans, the typical structure with revolver, senior, mezzanine junior and subordinate debt is not widely found in finance structures in Brazil. In the securitisation market, however, creditors often transfer their credit rights to FIDCs, which issue different classes of quotas, having their sponsors holding senior quotas and the assignors of credit rights generally holding mezzanine or subordinate quotas for the payment of proceeds from the FIDC in the redemption or amortisation of quotas, and also as a way to allow credit enhancement through over-collateralisation.

PIK loans are extremely rare in local deals. However, parties may structure convertible loans or take on debt by means of the issuance of convertible securities, such as debentures.

PIK-like loans may be achieved using merger transactions. In such arrangements, the shareholders of the merged company (or the company whose shares were merged into the other) become shareholders of the surviving or merging entity. As a result, the former shareholders of the merged entity receive shares in the surviving or merging entity as compensation for the takeover.

Bridge loans are typically contracted in the form of direct loans, CCBs entered into with major banks or, less frequently, via the issuance of local bonds (eg, debentures) or similar debt instruments subscribed for by the banks/underwriters. Although common in project finance transactions, such types of short-term loans are rarer in M&A transactions but are available for purchasers, such as in cases where a long-term loan is to be entered into in the future.

The issuance of bonds (debentures) and transactions with underwriting structures are not that common in Brazilian acquisition finance transactions. In any event, a number of transactions involve off-the-shelf vehicles structured to acquire target companies with the proceeds of debentures privately issued to local banks. As the secondary market is still somewhat underdeveloped in Brazil, banks subscribing for securities in such transactions usually keep the debentures instead of selling them in the market.

The capital markets have recently been revamped, and several public offerings of debt securities have been carried out since 2018. The typical structure involves banks underwriting and distributing the debentures in public offerings filed with the CVM (or by means of offerings with restricted efforts, exempt from registration requirements under the fast-track process set forth in Brazilian regulation), including the execution of underwriting and distribution agreements, an indenture, an offering prospectus (except in certain cases where an exemption may apply) and the reference form (formulário de referência) disclosing the issuer’s and the offering’s information.

Syndicated debentures entailing high-yield debt and capital market structures are expected to ramp up if the reforms that the Ministry of Economy supports and aims to implement ultimately take place.

A private placement of securities is available for acquisition finance in Brazil and is very common in view of the relatively small capital markets environment compared to developed economies. It is also possible and usual for obligors to issue promissory notes, either as a form of raising funds or as a guarantee for the payment of an underlying financing agreement.

Prevailing Brazilian laws and regulations do not provide sufficient elements for a clear distinction between a public and a private offering of securities. Therefore, certain precautions must be taken so that the offering to be privately negotiated is not deemed a public offering of securities and thereby become subject to filing and other requirements under the prevailing laws and regulations.

Asset-based financing is typically structured as secured loans or capital markets debt instruments, such as debentures. The preferred and most suitable security interest for an asset-based transaction is generally the fiduciary sale or assignment, whereby the guarantor assigns the fiduciary title/ownership of assets to the creditor. Full ownership is restored by the borrower upon payment of the obligations or consolidation with the creditor in the event of default. Alternatives involving the true sale of assets are also available but are more commonly used for the transfer of receivables owed by third parties upon payment of a purchase price to the original creditor – such transactions may be structured via receivables funds (FIDCs), regulated by the Central Bank of Brazil and the CVM.

In October 2023, Law No 14,711 – the “New Guarantee Framework” – was enacted to provide for greater flexibility on the out-of-court enforcement of security interests by creditors. This law further allowed the better use of real estate as collateral for loans, with the flexibility of being encumbered under second degree mortgages or fiduciary sales, for instance, and the possibility of recharging the outstanding debt (similar to the “Home Equity Line of Credit” model in the US). These features should promote the growth of structures akin to asset-based financings in Brazil, thereby stimulating the development of the sector.

The law also introduced the possibility to create more than one fiduciary sale over the same real estate property (akin to a second lien mortgage), and the alternative, when the same debt is secured by more than one property, for the creditor to choose to foreclose on the properties collectively or successively until the debt is satisfied. In the case of successive enforcement, the consolidation of the real estate ownership (and the payment of the transfer tax) only occurs as each property is auctioned. Also, based on the new law, whenever more than one debt is secured by the same property, the Real Estate Registry Officer shall notify all creditors to submit the updated amount of their credits and establish a creditors’ list so that the proceeds from the foreclosure are distributed among creditors according to their priority in time, and ultimately to the guarantor.

The recently enacted law also created a new out-of-court enforcement procedure for mortgages, which is very similar to the extrajudicial foreclosure of the fiduciary sale (the process taking place before the Real Estate Registry Office, and the auction sale being documented by a notarial record, which will serve as the title for the registration of the acquisition by the winning bidder). However, these portions of the law are still being challenged in the Brazilian Supreme Court (Supremo Tribunal Federal).

Moreover, with the enactment of Law No 14,430, of 3 August 2022, the Brazilian government has introduced the legal framework for securitisations in Brazil, and has brought about improvements in the legal certainty of securitisation structures and the development of transactions utilising such arrangements on a larger scale.

Intercreditor agreements are also available for lenders in Brazil, with the terms and conditions outlined in the relevant document entered into by and between the parties. Until recently, the use of intercreditor agreements was very limited, as syndication agreements would set forth the terms and conditions applicable to all creditors, and priority over collateral is to some extent set forth under Brazilian law. However, in more sophisticated transactions, and in those involving creditors with different profiles, there has been an increase in the number of intercreditor arrangements laying out detailed voting rules, the appointment of agents and clearer enforcement procedures.

The typical elements for intercreditor agreements are those generally required for any bilateral private obligations to be valid and effective in Brazil, which are that:

• the parties must be capable;
• there must be a lawful, possible and singled-out purpose (or it must be possible to determine or single out a purpose); and
• the agreement must be entered into pursuant to the form set forth or not prohibited by law.

There are no specific form requirements for intercreditor agreements.

There has been almost no controversy on the validity or enforceability of intercreditor agreements in Brazil, which are now customary in leveraged transactions. The main concerns about intercreditor agreements relate to the complete definition of the collateral enforceability mechanism in the document and the ability of the collateral agent acting on behalf of a foreign creditor to effect local foreclosure of the collateral and remit funds abroad to satisfy the obligations. Such issues have been mitigated because entering into intercreditor agreements has become more common, and banks are becoming more familiar with the structure, leading to an increase in the number of players willing to act as collateral agents in Brazil. Also, the New Guarantee Framework expressly introduced the “collateral agent” role into the Brazilian legal system, thus creating greater legal certainty for the scope and powers of this instrumental agent in financing transactions and contributing to the development of the market.

Moreover, ranking between creditors with respect to certain types of collateral is often set forth by law in Brazil (eg, the “first-in-time, first-in-right” rule). Therefore, any special rules outlined in intercreditor agreements would either follow the legal priority rankings or determine that the parties should be obliged to relocate the proceeds of any foreclosure proceeding among themselves.

The basic terms and conditions set forth in intercreditor agreements for bank or bond deals are substantially the same as those of simple intercreditor contracts, which provide priority over the collateral, sharing of payments, proceeds waterfall and special arrangements for the enforcement procedure.

As hedge products are not widely available in Brazil and typically involve high transaction costs, hedge counterparties in intercreditor agreements governed by Brazilian laws are extremely rare. However, hedging arrangements are commonly used in project financing transactions.

Virtually all acquisition finance transactions in the local market are secured. Security packages involving all types of assets and rights of obligors are commonplace. Typical collateral packages include shares of the obligor (or of any of its subsidiaries and affiliates), inventory, bank accounts, receivables, intellectual property rights, real property, equipment and movable assets, to the extent available for the creation of liens on such assets. It is also possible to have several rankings for liens among different creditors, which depend on the time of filing of the security agreement and the perfection of the security interest.

One key aspect to be considered when structuring an acquisition finance security package is obtaining the most straightforward access to collateral assets and, in the best-case scenario, granting the creditor the right to enforce on the collateral without facing the risk of bankruptcy or insolvency. The most common types of security interests in Brazilian financing structures are the fiduciary sale (alienação fiduciária) or assignment (cessão fiduciária), and the pledge (penhor) over the relevant assets granted in favour of lenders.

Fiduciary Sale/Assignment

The fiduciary sale or assignment is a type of security interest, pursuant to which the guarantor assigns the fiduciary title/ownership of certain movable assets (including receivables and equity interests) to the creditor. Fiduciary liens entail the temporary transfer and reversible ownership of the underlying assets to the creditor, meaning that such assets do not belong to the debtor’s estate until the secured obligation is fulfilled/paid.

In general, upon an event of default under the main credit obligation, the creditor is entitled to consolidate ownership/title over the assets encumbered in the fiduciary lien, and must sell the assets so that the proceeds can be used to satisfy the secured obligations. Therefore, a transaction is “bankruptcy remote” by law if it does not involve collateral deemed essential to the company’s existence – in which case, foreclosure on the collateral is subject to a stay period of 180 days – or if it is not challenged by other creditors of the company alleging fraud against creditors in general.

Pledge

Unlike the fiduciary sale, the pledge is an in rem guarantee and does not entail the transfer of ownership over the pledged assets, but rather represents a lien or encumbrance on the asset owned by the debtor. As a general rule, the pledge consists of the actual delivery of a movable asset as debt collateral, provided that the debtor retains ownership/property title of the pledged assets. If the obligor does not repay the secured obligation, the collateralised asset can be attached to an enforcement lawsuit filed by the creditor. Unlike the fiduciary assignment, the pledge is not deemed bankruptcy remote, and the foreclosure on the collateral is subject to the effects of the bankruptcy or reorganisation proceeding of the obligor.

Mortgage

Mortgages are another type of in rem guarantee available for creditors, and apply specifically to the encumbrance of real estate properties, ships or aeroplanes. The mortgage’s structure and enforcement rights are similar to those of the pledge, provided that the creation of a lien on specific types of collateral (such as real estate property) is subject to specific additional formalities set forth by law (such as by means of the execution of public deeds and registration with the competent real estate registry, etc, depending on the type of assets being collateralised).

Nevertheless, Law No 14,711, of 30 October 2023, modified Decree Law 911/69 and created a new extrajudicial procedure for enforcing creditors' rights under fiduciary sales or assignments. The new provisions of Decree Law 911/69 allow the creditor to cause the notification of the debtor and proceed with the consolidation of the property of the assets granted as security under a fiduciary sale or assignment by means of a procedure conducted directly via the competent Registry of Deeds and Documents. However, part of such changes are currently being challenged at the Brazilian Supreme Court (Supremo Tribunal Federal).

One of the most important aspects with a bearing on the effectiveness of security interests in Brazil is formalisation. In order to be valid and effective vis-à-vis third parties, liens on collateral must be perfected in writing by means of a security agreement (such agreement contains specific requirements depending on the type of security to be granted).

Under the general regime of guarantee agreements, the security documents will provide for:

• the total amount of the debt, or its estimated value;
• the term or time of payment;
• the interest rate, if any; and
• the description of the asset subject to the security interest, with the key characteristics for its identification.

It is of the utmost importance for security agreements to properly individualise and identify the collateral subject to the lien created within the financing arrangements so that the creditor has a valid security interest on the assets and is able to quickly foreclose on the guarantee in the event of default under the secured credit transaction.

In general, to be effective vis-à-vis third parties, all security documents must be duly filed with the competent Registry of Deeds and Documents located in the domicile of the parties. Rural pledges (ie, on agricultural assets or cattle) and industrial pledges (ie, on machinery, equipment or other industrial tools or products) are subject to registration with the competent real estate registry of the place where the assets are located. Liens on receivables are also subject to the debtor being informed of such credit rights.

Perfection of a security interest over certain classes of collateral may be subject to additional specific procedures. Security interests over the following have the following requirements:

• shares of Brazilian corporations must be registered in the relevant Share Registry Book (or with the custodian bank, if applicable);
• quotas of limited liability companies must be registered in the company’s articles of association;
• real estate properties depend on the execution of public deeds and registration with the competent real estate registry; and
• intellectual property are subject to registration with the National Institute of Industrial Property (Instituto Nacional da Propriedade Industrial, or INPI).

Considering the requirement that the security agreements must individualise and identify the collateral subject to the lien, if the assets subject to a security interest are sold, transferred or replaced, an amendment to the security agreement may be required to perfect the lien on after-acquired or replaced assets, depending on the structure of the guarantee and the type of collateral.

Pursuant to Brazilian laws and regulations, as a general rule there are no limitations on a company guaranteeing borrowings of one or more members of its corporate group, as long as its by-laws (or an equivalent document) do not contain an express prohibition in this regard. There are a few exceptions to this general rule, such as:

• Brazilian financial institutions are not usually allowed to extend credit or provide a guarantee or financial assistance to their controlled or controlling individuals or entities; and
• financial assistance (including guarantees) provided by publicly held companies to the exclusive benefit of controlling shareholders could be considered an abuse of the power of control under the CVM regulations.

As a general rule, there are no restrictions on providing financial assistance in the form of granting security to guarantee obligations of related parties. However, it is not uncommon to find provisions in companies’ by-laws that prevent corporations from rendering guarantees or security for the benefit of third parties in such circumstances.

Moreover, financial institutions, insurance companies and pension plan corporations are generally not allowed to extend loans nor render guarantees/security for the benefit of certain persons (eg, controlling shareholders and managers).

In addition, fiduciary duties may restrict the ability of publicly held companies to offer collateral to secure the obligations of a third party, especially if such third party is in any way related to the controlling shareholder of said publicly held company.

As a rule, subject to certain recently created exemptions, Brazilian financial institutions cannot grant loans to related parties, such as:

• their controlling shareholders, executive officers and members of other corporate boards, and their respective spouses, partners and relatives to the second degree;
• individuals or companies that hold a qualified equity interest (ie, at least 15% of the total) in their capital stock;
• companies in which they hold a direct or indirect qualified equity interest;
• companies in which they hold effective management control or the power to determine the outcome of corporate resolutions, irrespective of holding any equity interest; and
• companies with which they share an executive officer or director.

Certain transactions are exempted from the prohibitions outlined above, such as those entered into on an arm’s length basis or involving interbank deposits, pursuant to applicable law.

The Brazilian National Monetary Council (Conselho Monetário Nacional, or CMN) currently has the power to regulate such restrictions on loans, specifically with regard to the definitions of credit transactions, credit limits and qualified ownership interest contained in CMN Resolution No 4,693 of 29 October 2018.

In addition to the restrictions and precautions identified elsewhere in this chapter with respect to granting security interests, based on the fiduciary duties of managers set forth under Brazilian laws, any acts of a company must comply with corporate benefit tests – ie, they must be practised for the benefit of the company rather than the benefit of its related parties, executives or directors. Executives must also ensure that transactions between related parties, if any, are carried out at arm′s length.

In addition, controlling stakeholders cannot abuse their power and must use their voting and control rights to further a company′s purpose and perform its social role. Controlling shareholders have duties and liabilities towards the other stakeholders, such as minority equity-holders, employees and contractors, and are liable for any deviation from their duty.

One key aspect regarding the principles of the enforcement of security interests is that Brazilian law forbids a creditor from keeping the collateral as payment for the debt as a means of foreclosure on the guarantee (pacto comissório), unless the guarantor expressly agrees to transfer the asset to the creditor as payment-in-kind of the debt after the maturity date of the debt or its acceleration, or otherwise pursuant to a court decision.

Fiduciary Sale/Assignment

As in the fiduciary sale or assignment, the ownership rights are transferred to the secured party, provided that certain formalities are met should an event of default occur (or as otherwise set forth in the relevant security agreement). A creditor may consolidate the ownership of assets subject to the fiduciary sale or assignment agreement without resorting to a court proceeding and, consequently, become entitled to all rights related to the lawful ownership of the collateral. The assets must then be sold to a third party to pay the secured and defaulted debt obligation.

Pledges/Mortgages

Unlike fiduciary liens, pledges and mortgages (like other in rem security interests) do not entail the transfer of ownership/title over the pledged assets to the creditor, but rather represent a lien or encumbrance on the asset owned by the obligor. If the debtor does not repay the secured obligation, the collateralised/encumbered asset can be attached in an enforcement lawsuit filed by the creditor, even if that asset is no longer part of the debtor’s estate. After attachment, an appraiser appointed by the judge will provide a valuation for the related assets. Upon appraisal of the guarantee, such property will be sold at a public auction.

New Guarantee Framework

Law No 14,711, of 30 October 2023, modified Decree Law 911/69 and created a new extrajudicial procedure for enforcing creditors' rights under fiduciary sales or assignments to allow the creditor to cause the notification of the debtor and proceed with the consolidation of the property of the assets granted as security under a fiduciary sale or assignment by means of a procedure conducted directly via the competent Registry of Deeds and Documents. However, part of such changes are currently being challenged at the Brazilian Supreme Court (Supremo Tribunal Federal).

Proceeds of the Collateral

The proceeds resulting from the sale of the assets subject to a security interest must be allocated by the creditor to amortise the secured debt and the expenses, if any, incurred with the enforcement of the collateral. Any remaining (positive) balance will be delivered to the debtor with a statement detailing the implemented action. If the proceeds of the sale of the assets are insufficient to pay the debt, the outstanding balance will be considered an unsecured debt of the creditor if there is no additional collateral to secure such an amount.

In addition, pledges and mortgages may be subject to multiple liens, with each of their payment rankings being based on the time of filing, the first to be filed having priority over the subsequent filings. Fiduciary sale or assignment, on the other hand, is not subject to multiple liens, given the nature of the security interest, which entails the transfer of ownership/title of the collateral to the creditor.

Bankruptcy/Insolvency Limitations

As indicated above, the fiduciary sale or assignment is generally exempt from the effects of the bankruptcy or insolvency of the obligor or grantor of the security interest. Assets subject to fiduciary sale agreements can have their foreclosure proceeding suspended for 180 days (stay period), renewable for an additional 180 days under certain circumstances, should the relevant reorganisation court consider such assets to be essential for the operations of the company.

Holders of pledges or mortgages, however, are subject to judicial reorganisation and a judicial reorganisation plan. Therefore, any creditor of such in rem guarantees would not be able to commence a foreclosure proceeding during the judicial reorganisation of the security grantor. The ranking of mortgage and pledge payments in reorganisation or bankruptcy scenarios is subject to specific rules set forth in the Bankruptcy Law.

In addition to security interests, obligors may also grant personal guarantees for the benefit of creditors in acquisition finance transactions. The term “personal guarantees” means that personal obligations are placed on the party giving the guarantee in their relationship with their creditor, corresponding to security that the creditor obtains from the guarantor. In its full sense, it is a fiduciary relationship since the creditor must have complete confidence in the integrity of the guarantor. A personal guarantee implies a principal obligation to which the guarantee is subsidiary. Personal guarantees can be rendered as a surety (fiança) or an endorsement by the guarantor (aval). Comfort letters are also typically issued to creditors. Such letters are not actual guarantees, although they may be included in the category of personal guarantees.

Personal guarantees granted by banks are also available for a fee paid to the guarantor bank. Due to the increasing number of such bank guarantees (fianças) rendered by Brazilian banks as guarantees to bid processes, judicial executions and major financing projects, the Central Bank of Brazil and the CMN established specific rules for the rendering of such special types of guarantee (fiança bancária), which must be complied with by any financial institution backing debt obligations with this type of guarantee.

As outlined in 6.1 Types of Guarantees, with respect to the granting of in rem guarantees for fiduciary sale or assignment, there are generally no restrictions on granting a guarantee in transactions involving related parties, even though they are often restricted by the corporate governance rules of the companies, in certain regulated entities or publicly held corporations. Also, any acts of the company should be subject to the fiduciary duties of senior management and controlling shareholders to further the company’s purpose (and not enter into transactions benefiting related or third parties to the detriment of the company) and, therefore, in essence, agreements should be entered into on an arm’s length basis.

Endorsement Made by Guarantor (Aval)

There are no requirements for guarantee fees under Brazilian laws, but grantors may seek compensation from the debtor to do so. Since most cases involve parties related to the obligor granting the aval, such guarantors do not typically charge for the guarantee.

Surety (Fiança)

As a rule, the grantor of a fiança (ie, the fiador) cannot charge the beneficiary a fee, but it can receive compensation from the debtor for agreeing to grant such guarantee. If the fiador settles the debt, it takes over the creditor’s position on the credit rights and thus may claim the relevant payment from the debtor, as established in Article 831 of the Brazilian Civil Code.

Bank Guarantee (Fiança Bancária)

Since these types of guarantees are granted as a service provided by financial institutions contracted by obligors or creditors, banks usually charge a fee, which is commonly paid by the debtor.

The prevailing laws and regulations set forth that only banks and other financial institutions regulated by the Central Bank of Brazil may grant credit facilities as their main and regular activities. Therefore, any local company not duly accredited by the Central Bank of Brazil that originates and provides credit on a regular basis may face the risk of being deemed a financial institution without proper authorisation, which may lead to sanctions being imposed, including in the criminal sphere. Any loan granted by non-regulated entities is also subject to a limitation on interest charged under the Usury Law.

As a general rule, under Brazilian law, entities considered as related parties – such as those that hold both shares and debt in an obligor – cannot vote the amount of their debt claims at a general meeting of creditors in a debtor’s bankruptcy proceeding (although these restrictions are being somewhat relaxed by court precedents).

In a bankruptcy liquidation scenario, the Brazilian Bankruptcy Law sets forth an order of priority for claims against the liquidating company. Such rankings may be applicable to the insolvency of financial institutions (where their liquidation is adjudicated) but are not applicable for reorganisation regimes set forth in the relevant Brazilian laws (where the debtor and creditors may agree on a different payment regime if certain requirements are met).

Based on the prevailing rules, the claims that should be paid before any existing pre-petition claim include:

• certain limited senior labour claims and critical expenses of the bankrupt estate;
• claims for restitution;
• debtor-in-possession financings;
• claims for restitution in cash proceeds; and
• administrative expenses and post-petition claims, including judicial administrators′ and advisers′ fees, creditors’ committee refunds, labour claims, other post-petition obligations, bankruptcy estate expenses, the estate’s general court fees and tax claims.

Any remaining balance is paid to creditors based on the following order of priority:

• labour-related claims, limited to 150 minimum wages per creditor (any excess amounts are paid concurrently with unsecured claims) and occupational accident claims;
• secured claims up to the value of the collateral;
• tax claims (excluding fines);
• unsecured claims;
• contractual penalties and monetary penalties for breach of criminal or administrative law, including tax law; and
• subordinated claims.

Insolvency proceedings involving companies and corporations in Brazil, specifically with regard to bankruptcy liquidation (falência), and certain acts executed during the so-called legal term will have no effect on the bankrupt estate, regardless of whether or not the parties were aware of the debtor’s economic situation or had the intention of defrauding creditors.

The “legal term” is set by the competent bankruptcy court and cannot be greater than the 90 days preceding:

• the first protest in the protest registry by a creditor for an unpaid debt;
• the filing for bankruptcy liquidation; or
• the filing for judicial reorganisation (in case of subsequent conversion into bankruptcy liquidation).

The following transactions occurring during the legal term, among others, may be clawed back pursuant to prevailing laws:

• payment of debts not yet matured;
• payment of debts due and payable in any way other than originally set forth by the relevant contract in effect; and
• the granting of an in rem guarantee right (ie, security interests such as a mortgage or pledge), including the right of retention in respect of a debt contracted prior to or during the legal term.

If any of the acts/circumstances described above as being subject to claw-back occur, the relevant transaction is deemed ineffective regardless of the intent to harm creditors and the existence of effective damage to the bankrupt estate (ie, they would be considered objectively ineffective).

In addition to the events described above, any acts performed with the intent of defrauding creditors – ie, arising from fraudulent conveyance perpetrated by the debtor and the contracting party – may also be revoked (clawed back), whether within the legal term or not, provided that resulting losses to the estate are duly demonstrated.

There are no stamp taxes in Brazil. However, financial transactions such as the closing of foreign exchange transactions, loans, insurance and securities are subject to the tax on financial transactions (Imposto sobre Operações Financeiras, or IOF), which is, to some extent, similar to a stamp tax.

Onshore loans are generally subject to the levy of the IOF-Loan at a maximum rate of 1.88%.

Theoretically, cross-border loans trigger two financial transactions, each of which is potentially subject to the levy of the IOF:

• the execution of the loan itself; and
• the closing of the foreign exchange transaction to allow the inflow of cash into Brazil.

However, Brazilian legislation provides that the IOF on foreign exchange transactions (IOF-FX) prevails over the IOF-Loan. Until 2022, the inflow of cash into Brazil under a loan agreement was generally subject to the IOF-FX at the rate of 0%, provided that the term of the loan was longer than 180 days; otherwise, the IOF-FX would be levied at a rate of 6%. From March 2022 onwards, however, the Brazilian federal government reduced the IOF-FX rate applicable to loans with a term of up to 180 days to 0%. Therefore, cross-border loans should not be subject to the IOF-FX, irrespective of their terms.

Finally, transactions involving securities are generally subject to the assessment of the IOF as well. In practical terms, the IOF is levied at regressive rates varying in accordance with the term of the security or its holding period – the longer the holding period, the lower the rate, reaching a 0% rate for investments that last more than 30 days.

Onshore Lender

As a rule, an onshore payment of interest component is subject to the assessment of withholding income tax (WHT) on a cash basis, at regressive rates that vary in accordance with the lending period, starting at 22.5% and reaching 15% after two years have elapsed.

When the lender is a Brazilian company, such WHT is considered an anticipation of the corporate income tax (CIT), generally levied at a rate of 34%, in which case the taxpayer is entitled to offset the amount of WHT with the amount of CIT due. If the amount of CIT is insufficient to fully offset the WHT, such overpayment of WHT becomes a refundable credit to the company.

When the lender is an individual considered to be a tax resident in a Brazilian company, such WHT is treated as the final amount of income tax, and no adjustment will be made in the income tax return of the individual.

Offshore Lender

An interest component paid by a Brazilian entity to a foreign beneficiary is generally subject to WHT at 15% on a cash basis. The rate will be increased to 25% when the foreign beneficiary is resident or domiciled in a tax haven jurisdiction.

Special Situations – Equity Investment Funds

Acquisitions made by private equity investors are often carried out in Brazil by means of private equity funds (Fundos de Investimento em Participação, or FIPs), due to special tax treatment. As a rule, Brazilian investment funds, such as FIPs, are not subject to taxation at their level, as they are constituted as condominia (tax-neutral entities) rather than as legal entities. The taxation of the fund’s earnings should only occur at the level of its investors, following their corresponding tax regime and the specific characteristics of the fund.

While the FIP is not taxable on its capital gains, the distribution of income made by the FIP to non-resident investors that are not resident in a tax haven jurisdiction is subject to WHT at 0%, for as long as the FIP is classified as an Investment Entity under the terms of National Monetary Council’s Resolution No 5,111, of 21 December 2023.

Although FIPs are not allowed to raise debt due to regulatory restrictions, when properly structured it is possible to set up an onshore debt financing structure involving the FIP (lender) and the target company (borrower), to increase the efficiency of the acquisition.

Special Situations – Incentivised Debt Securities

Qualifying incentivised debentures regulated by Article 1 of Law 12,431/11 are entitled to a special tax treatment, whereby interest paid to foreign investors is subject to WHT at 0%, as long as the beneficiary is not resident in a tax haven jurisdiction.

Special Situations – Incentivised Debentures

Qualifying incentivised debentures regulated by Article 2 of Law 12,431/11 are entitled to special tax treatment, whereby interest paid to individuals resident in Brazil is subject to WHT at 0%.

Also, when the lender is a Brazilian company, WHT is levied at a flat rate of 15%, and such WHT is considered final, rather than an anticipation of CIT. Thus, the lender will pay no additional income tax, despite the fact that the CIT rate (34%) is significantly higher than the WHT levied on the infrastructure debentures.

Special Situations – Infrastructure Debentures

Law 14,801/24 sets forth a new tax treatment for qualifying infrastructure debentures. It specifically sets forth a more beneficial tax treatment for the issuer, which can deduct 130% of its interest expenses for the purposes of determining its CIT tax base (and add 30% over the regular deduction of interest).

As a general rule, the tax treatment applicable to investors is the same as would apply to non-incentivised fixed-income investments, as described under the “Onshore Lender” and “Offshore Lender” sections above.

Corporate Income Tax Deduction: Interest Expenses

As a rule, interest expenses recognised by the Brazilian borrower/debtor are deductible when assessing the CIT base. It is worth noting, however, that when the borrower/debtor is purely a holding company incorporated in Brazil, such interest expenses will tend to become tax losses, as dividends distributed by a Brazilian company to such holding company would be considered tax exempt.

For this reason, a common strategy to avoid such tax inefficiency is to implement a corporate reorganisation to push the debt down to the level of the target company, which would recognise taxable revenues from its ordinary operations. Although debatable, Brazilian tax authorities understand that interest recognised by the target company after the debt push-down would not be deductible from the CIT base.

In addition, the interest expenses recognised by the Brazilian company are only deductible if the Brazilian transfer pricing and thin-capitalisation rules are observed when the lender is a related party resident abroad or an unrelated party resident in a grey or blacklisted jurisdiction.

Until June 2023, Brazil utilised a unique transfer pricing (TP) system. Deviating from OECD standards, Law No 9,430, of 27 December 1996, provided for TP control methods based on fixed margins and allowed taxpayers to elect the most favourable method to assess their transactions.

However, Law No 14,596 introduced new TP rules aimed at aligning the Brazilian system with OECD standards. The new rules will apply to a wider range of controlled transactions but will also be subject to more suitable and flexible control methods to ensure that related parties adopt prices in line with the arm's length principle.

The concept of “controlled transactions” is similar to the one adopted by OECD guidelines, which have been expressly embraced as a subsidiary source of interpretation for the new Brazilian TP rules.

The new rules came into force on 1 January 2024.Thin-capitalisation rules, in turn, set a maximum deductibility limit based on the ratio between the amount of indebtedness of the borrower and the amount of its net equity. The ratio may vary depending on the jurisdiction where the borrower is domiciled. When the level of indebtedness of the Brazilian company exceeds this legal ratio, a pro rata portion of the interest expense becomes non-deductible.

Most types of regulated entities are subject to strict control of their equity interests and, as a rule, any changes to the corporate structure or control depend on the prior approval of the relevant regulatory bodies. The prevailing laws in Brazil also set limits on the percentage of equity interest that may ultimately be held by foreign entities in certain regulated companies. Moreover, companies engaged in selected industries (especially those deemed key for the national economy or sovereignty) cannot receive foreign capital investments unless the Brazilian executive branch grants prior approval.

In terms of general restrictions applicable to the financing of banks, apart from the prevailing Basel Standards adopted in Brazil, Brazilian law generally prohibits financial institutions from concentrating their risk on one person or a group of only related persons, and from extending credit to any person or group of related persons in an aggregate amount equivalent to 25% or more of the financial institution’s regulatory capital.

There has been a recent trend in Brazil with respect to M&A transactions being vastly sponsored by and channelled through local FIPs. Pursuant to the current regulation in effect, FIPs cannot take on debt, except in specific cases, such as:

• where FIPs are sponsored by multilateral organisations (provided that debt is limited to up to 30% of the fund’s assets);
• in transactions authorised by the CVM, such as lending or borrowing securities in the capital markets; and
• to pay up subscribed quotas if a FIP’s quota holder fails to do so.

Tender offers for listed companies in Brazil have to follow a specific set of rules provided for in the Brazilian Corporations Law (ie, Law No 6,404, of 15 December 1976, as amended) and CVM Resolution 85, of 31 March 2022. Any “going-private tender offer” or “delisting tender offer” must be carried out at a fair price as a condition for cancelling the registration of a listed company.

Moreover, any minority shareholder should generally be entitled to the same treatment and have access to the same information as the purchaser. Even if the offeror is obtaining finance from a related party, such as a minority shareholder, this should not entail additional advantages to such shareholders compared to the others. In addition, any offer for the purchase of an equity interest representing a controlling stake in a listed company triggers a mandatory public offering for the purchase of the remaining voting shares held by minority shareholders for at least 80% of the price offered for the controlling equity stake (subject to any potential poison pills or other specific rules established in the company’s by-laws, by self-regulatory bodies and/or special listing segments of the stock exchange). Information on the purchase should also be disclosed in a tender offer prospectus.

Appoint a Collateral Agent Onshore

Taking into account the specific requirements for creating a security interest on assets in Brazil, such as the precise and identifiable description of assets, one key factor to consider in secured or asset-based structures involving Brazilian collateral is to appoint a collateral agent established onshore, which may be able to control and take action in connection with the collateral on behalf of the creditors. Many international players in the sector (including global financial institutions) have a presence in Brazil and can carry out such roles. The New Guarantee Framework (Law No 14,711) codified certain rules applicable to these services, thus providing greater legal certainty on the matter.

New Regulatory Milestones

The CVM has recently enacted new regulatory milestones that are expected to have a significant impact on the capital markets. These milestones aim to drive innovation in the market by:

• improving the efficiency of negotiations among institutional investors;
• promoting competition among entities that manage organised markets;
• simplifying the information disclosed to investors;
• aligning with international standards; and
• reducing the compliance costs for market agents.

In addition, there have been discussions in Congress and new laws aimed at aligning the legal framework applicable to security interests in Brazil with UNCITRAL’s standards.

ESG Principles

A remarkable trend in Brazil relates to abiding by ESG principles in financing and business activities. One key sector with great potential in this regard in Brazil is clean energy, boosted by the recently enacted law governing distributed power generation and the availability of financing for solar panels, and other renewable sources. There has been growing market appetite for transactions promoting environmental, social and/or governance improvements.