Securitisation 2019 Comparisons

Last Updated January 24, 2019

Law and Practice

Authors



Cascione Pulino Boulos Advogados The full-service, independent law firm has offices in Rio de Janeiro and São Paulo, with a securitisation practice group that comprises 12 lawyers – led by partners Fabio Cascione, Marcos Pulino and Diego Coelho – working in conjunction with the tax, corporate, banking regulatory, real estate and agribusiness practice groups. Its key areas of practice in relation to the securitisation sector are real estate, agribusiness, governmental contracts and banking, with Cascione Pulino Boulos Advogados among the most active firms in real estate and agribusiness securitisations in Brazil.

Insolvency laws affect the structuring of securitisation transactions in Brazil in two main ways, the first of which relates to the risk of judicial revocation, nullification or unenforceability of transactions entered into with an insolvent entity.

At the request of unsecured or insufficiently secured creditors, courts may nullify the transfer of property or the creation of a security interest over receivables and other financial assets if the owner/transferor was known to be insolvent at the time of entering into the transaction. If the owner/transferor was not known to be insolvent, the courts may still nullify the transaction if it is found to be gratuitous, or if the owner/transferor becomes insolvent as a result of it. This may be of particular concern if the securitisation involves the transfer of receivables at a heavy discount.

In bankruptcy proceedings, certain transactions – such as gratuitous acts entered into up to two years before the judicial declaration of bankruptcy, or the creation of in rem security rights over the insolvent entity’s property within a specific court-fixed period prior to bankruptcy – are not enforceable against the bankruptcy state. Finally, within three years of the judicial declaration of bankruptcy, the estate administrator, any creditor or the public prosecutor’s office may ask the bankruptcy court to revoke any transaction entered into with the intent of harming creditors and that results in harm to the bankrupt estate.

To mitigate the risk of judicial revocation, nullification or unenforceability of transactions with an insolvent entity, investors and their agents will want to make sure that neither the financial asset originator nor the securitisation vehicle or vehicles is insolvent at the time of closing the transaction and the transfer of the financial assets; that all formalities required to perfect the transfer of the financial assets are complied with; and that the transaction is entered into on an arm’s length basis.

The other way in which insolvency laws affect securitisation transactions relates to the enforcement of claims against the originator or the securitisation vehicle(s). In bankruptcy, judicial or extrajudicial debt restructuring or other insolvency proceedings, the ability of investors to collect on debt, enforce contractual obligations or foreclose on collateral from the insolvent entity may be limited.

In transactions with significant originator insolvency risk, investors will seek to structure a “true sale” to a special purpose entity (SPE), in which exposure to originator insolvency risk is mostly limited to the moment of transfer of the assets, as discussed above, and the SPE is insulated from insolvency risk.

The characteristics and main differences between a true sale and a secured loan are rooted in Brazil’s civil law system of in rem rights over assets.

In a true sale, the originator makes a definitive transfer of ownership and property claims to the financial assets to another person – typically, but not necessarily, an SPE. Certain conditions regarding the form of the true sale agreement, publicity of the transaction and notice to debtors must be complied with in order to ensure that the true sale is effective against third parties. Such conditions may vary depending on the type of financial asset involved. The originator/assignor is liable for claims that the transferred assets did not exist at the time of transfer, but shall only be liable for liquidation of the assets if transaction documents expressly provide for recourse against the originator/assignor. As a general rule, financial institutions can only assign credit rights to non-financial institutions without recourse.

In a secured loan, the originator borrows money and offers its credits rights as collateral. The collateral typically involves the creation of an in rem security interest – a pledge (penhor) or fiduciary assignment (cessão fiduciária) – and contractual arrangements that allow the creditor to control the proceeds from the credit rights and to divert them to repay the loan as necessary. The originator remains as owner of the credit rights granted as security. Perfection of the security interest is subject to the completion of certain formalities, which may vary according to the security interest involved. The originator/assignor is typically obligated to repay the debt in full, regardless of whether or not the proceeds from the credit rights suffice for repayment. There are limitations on the level of interest rates that non-financial institutions may charge. If the originator defaults and creditors foreclose on the security interest, they typically cannot remain as owners of the credit rights and must sell them to a third party.

If disbursement of the purchase price or of the loan proceeds involves an international flow of funds into Brazil, the transaction must be registered as incoming foreign capital with the Central Bank of Brazil.

A well-structured true sale essentially insulates investors from originator insolvency risk after the transfer of the assets is perfected.

In a secured loan, assuming that the originator/borrower remains as owner of the credit rights, investors are more exposed to originator insolvency risk. There are ways to mitigate such risk, such as through the use of the fiduciary assignment (cessão fiduciária), a type of security interest that allows creditors to mostly avoid the impact of insolvency proceedings, and the transfer of the credit rights to an SPE affiliated with the originator, but in most cases such precautions would still result in less insulation from originator insolvency risk than a true sale.

Insolvency laws can only affect a true sale in instances of judicial revocation, nullification or unenforceability, as discussed above. There are judicial precedents in which courts upheld the segregation of assets transferred upon a true sale to a third party from those of the bankrupt estate or insolvent entity assets.

A secured loan would generally be treated as a secured credit subject to a bankruptcy, debt restructuring or other insolvency proceeding, and payable in accordance with insolvency laws, under which credits may be subject to certain stay periods, forced restructuring, and priority of certain credits. Secured credits rank higher than unsecured credits, but below certain labour claims and other credits. As discussed above, it is possible to limit the impact of insolvency laws through certain legal and contractual instruments and mechanisms, such as the fiduciary assignment.

Investors usually require a capacity, regulatory compliance and enforceability legal opinion in connection with a securitisation transaction. As a matter of market practice, opinions on domestic securitisation transactions do not usually specifically address bankruptcy remoteness, but it is common to address it in transactions structured as true sales with an international angle. In those cases, the opinion typically affirms that the transaction is a true sale and is bankruptcy remote, under assumptions related to the absence of circumstances that might result in judicial revocation, nullification or unenforceability, as discussed above, to the extent that such circumstances cannot be discarded through due diligence.

A legal entity under judicial debt restructuring may sell its financial assets if the court-approved judicial debt restructuring plan provides for such a sale. Likewise, the judicial administrator of a bankrupt state may sell financial assets in the context of the estate’s liquidation. A true sale of financial assets under judicial debt restructuring or bankruptcy proceedings typically involves a public tender process, and is more protracted than a private negotiation with a non-insolvent entity. However, investors may achieve greater insulation against originator insolvency risks in such sales, as insolvency laws provide that the purchaser shall not succeed the insolvent entity in certain liabilities.

Insulation from originator insolvency risk is best achieved through a true sale from originator to a securitisation vehicle. Strictly for purposes of originator insolvency risk, it does not matter if the securitisation vehicle is organised as an SPE. However, such vehicles are indeed typically SPEs, because of regulatory and tax considerations, and to provide insulation from the risk of insolvency of the securitisation vehicle itself.

The SPE may play a more direct role in insulating investors from originator insolvency risk in a secured loan. For example, the originator may drop down its credit rights into a wholly-owned, newly incorporated SPE, which then receives the loan using the financial assets as security. Under certain circumstances, the SPE could be subject to substantive consolidation with the originator, but in most cases the segregation of financial assets into an SPE provides significant insulation from originator insolvency risk.

The legal form of the SPE may vary according to the role it plays in the securitisation – ie, whether it is the issuer, or part of a credit enhancement mechanism, etc – and the type of securities issued. Most SPEs are organised as corporations (sociedades anônimas), but in certain cases the SPE can take the form of an investment fund or (if the SPE is not the securities issuer) a limited liability company (sociedade limitada).

Only securitisation companies (companhias securitizadoras) organised as corporations and registered with the Brazilian Securities Commission (CVM) as capital market companies (companhias abertas) may issue real state receivables certificates (CRI) or agribusiness receivables certificates (CRA), which are two of the most commonly used securitisation instruments. A securitisation company can take part in multiple CRI and CRA securitisation transactions, but for each such transaction it may set up a segregated pool of assets, which shall remain insulated from other transactions and debts, including other securitisations.

The securitisation company must comply with all legal requirements applicable to corporations in general. A corporation registered as a capital market company, or with authorised capital, must have a Board of Directors (Conselho de Administração) and a Board of Officers (Diretoria), whereas other corporations can have solely the Board of Officers. The Board of Directors is a collegiate decision-making body with at least three members, while the Board of Officers is responsible for day-to-day operations and must have at least two members. All members of the Board of Directors and the Board of Officers must be individuals, and all members of the Board of Officers must reside in Brazil.

Only credit rights investment funds (FIDCs) registered with the CVM can issue FIDC quotas, which is another commonly used securitisation instrument. FIDCs are non-personified financial asset pools held in condominium by quota holders and administered by an administrator authorised by the CVM. CVM regulations provide for several requirements and conditions concerning the by-laws of the FIDC, its activities, its administration and the service providers it must engage.

Other types of securitisation instruments are associated with regulatory requirements on the legal form and other aspects of SPEs.

Brazilian insolvency laws do not provide for substantive consolidation, but in several cases courts have recognised substantive consolidation and the extended effects of the insolvency proceeding to legal entities within the same economic group of the insolvent entity, based on the doctrine of piercing the corporate veil. According to Article 50 of the Brazilian Civil Code, courts can pierce the corporate veil in cases of abuse of corporate form, characterised by deviation from corporate purpose or the commingling of assets.

Courts have ruled in favour of substantial consolidation in cases in which, among other things, legal entities pertaining to the same economic group shared the administration team (ie, the same directors and/or officers), offered each other cross collateral or guarantees, commingled assets and/or funds, and/or did business and presented themselves to third parties as a single entity.

As a matter of market practice, opinions on domestic securitisation transactions do not usually specifically address bankruptcy remoteness, but it is commonly addressed in transactions with an international angle. In such cases, the opinion may affirm that the SPE is bankruptcy remote, under assumptions on the absence of circumstances that might result in judicial revocation, nullification or unenforceability, as discussed above, to the extent that such circumstances cannot be discarded through due diligence.

Investors receiving a security interest (pledge or fiduciary assignment) over shares of the SPE may provide structure veto rights by providing in the security documentation and on the SPE’s corporate documents that certain corporate acts and resolutions shall be subject to investors’ consent. This may help to mitigate the risk that the SPE may deviate from its limited scope of business and other corporate restrictions.

Subject to the risks of judicial revocation, nullification and unenforceability discussed above, the transfer shall become effective and enforceable against the debtor when the debtor receives notice of it or acknowledges the transfer in writing, and against the transferor’s other creditors and third parties in general upon the registration of the deed of transfer/assignment agreement with a registrar of titles and deeds in each of the cities in Brazil where the contracting parties are domiciled. Alternative or additional registrations may be required or advised, depending on the type of financial asset and whether the transaction involves the creation of in rem security interests.

In order to register the deed of transfer/assignment agreement, as a general rule the signatures of parties signing outside of the Brazilian territory must be notarised and apostilled or legalised at a Brazilian consulate and, if in a foreign language, the deed of transfer/assignment agreement and notary/consular annotations must be translated into Portuguese by a sworn translator.

A domestic loan is not subject to registration itself, but in rem security interests granted as collateral to the loan are subject to registration requirements similar to those that apply to financial asset transfers. Requirements may vary with the type of asset and in rem security interest involved. Notarisation, apostille/consular legalisation and translation requirements discussed above apply to secured loans as well.

A true sale that does not comply with such requirements may not be effective or enforceable against the debtor, other creditors and third parties, meaning that insulation from insolvency and other risks provided by the structure would be defeated.

Securitisation transactions essentially use variations of the structures discussed above.

There is no tax on the transfer of credit rights.

Securitisations are subject to the same disclosure laws and regulations that apply to securities issues in general.

Laws and regulations that govern certain securitisation instruments, such as CRA, CRI, and real estate covered bonds (LIG), among others, require the securitisation vehicle (securities issuer) to enter into a securitisation deed that clearly identifies the characteristics of the securities, its collateral, the underlying financial assets, agents and other service providers, and the economic and voting rights of securities holders, among other aspects. Similar requirements apply to the by-laws of investment funds such as the FIDC. Regulatory requirements vary with each type of security.

The CVM is the main regulator of capital markets in general, and has the power to regulate most securitisation instruments, including the contents of securitisation deeds and investment fund by-laws.

The National Monetary Council (CMN) and the Central Bank of Brazil regulate aspects of the securitisation of financial assets held by financial and payments institutions, and related securitisation instruments.

Securities placements are also subject to regulations from the Brazilian Association of Capital and Financial Markets Entities (Anbima), a self-regulatory organisation, and B3 – Brasil, Bolsa, Balcão, the leading securities exchange and organised OTC market in Brazil.

The main laws on violations of regulatory requirements for the contents of securitisation deeds or investment fund by-laws are Law No. 6,385, of December 7, 1973, as amended, and Law No. 13,506, of November 13, 2017. Penalties range from admonishment to punitive fines and damages, and suspension or disqualification from certain activities. 

Offending parties may also be liable for damages and criminal liability under circumstances, particularly in cases involving fraud.

Regulatory requirements on the contents of securitisation deeds and investment fund by-laws are mostly the same, regardless of whether the transaction is placed with the private or public market, with certain variations according to the type of security.

The general characteristics of the public and private market for securities placements are discussed below.

Investors usually require a capacity, regulatory compliance and enforceability legal opinion in connection with a securitisation transaction.

The main laws and regulations on disclosure in connection with securities placements, including securitisation transactions, are as follows:

  • Law No. 6,385, of December 7, 1973, as amended (the Capital Markets Law);
  • CVM Instruction No. 358, of January 3, 2002, as amended, which regulates the disclosure to the market of facts or circumstances that may have an impact on capital markets;
  • CVM Instruction No. 400, of December 29, 2003, as amended, which regulates the public offering of securities to the public in general (Public Offerings);
  • CVM Instruction No. 476, of January 16, 2009, as amended, which regulates the public offerings of securities with restricted placement efforts (Restricted Offerings); and
  • CVM Instruction No. 480, of December 7, 2009, as amended, which regulates the registration of securities issuers.

Public Offerings in connection with securitisation generally require the registration of both the issuer and the offering with the CVM. Upon applying for registration as a securities issuer, and then periodically, the relevant entity must submit information on its corporate structure, governance, financials, risk factors, risk management policies and internal controls, history, activities and securities outstanding, among other matters.

A Public Offering can only begin after the publication of an announcement of the opening of a placement and a prospectus, which must be made available electronically on the websites of the issuer, the underwriters, the CVM and B3. The prospectus, which along with all other offering materials is subject to review and approval by the CVM, must provide complete, accurate, current and sufficient information on the offering, the issuer’s corporate structure, governance, financials, history and industry, risk factors affecting the securities, service providers engaged in connection with the offering, and other matters. The prospectus can be waived under specific circumstances, depending on the structure of the transaction, the volume of the offering, the placement plan, and the profile of investors targeted in the offering.

Promotion materials must be consistent with the prospectus, and must also be approved by the CVM.

Disclosure requirements in a Restricted Offering are much less extensive and specific. There is a general obligation to provide investors with truthful, consistent, correct, sufficient information, and to disclose information to potential investors and the market simultaneously and on an equitable basis. As long as the securities remain outstanding in the market, the securities issuer must periodically make certain financial statements available on its webpage and to B3.

Through its investor relations director, the company must inform CVM and B3, and publicise to the market, regarding any act or fact that may affect the market value of the securities registered for negotiation in capital markets, or investors’ decisions to buy, sell, hold or exercise any right attributed to the holder of such securities.

Private offerings are generally not subject to disclosure requirements.

The CVM is the main regulator of capital markets in general, and has the power to regulate most securitisation instruments, including the contents of the corresponding securitisation deeds and investment fund by-laws.

The National Monetary Council and the Central Bank of Brazil regulate aspects of the securitisation of financial assets held by financial and payments institutions, and related securitisation instruments.

Securities placements are also subject to regulations from the Brazilian Association of Capital and Financial Markets Entities (Anbima), a self-regulatory organisation, and B3.

The main laws on violations of regulatory requirements on the contents of securitisation deeds or investment fund by-laws are Law No. 6,385, of December 7, 1973, as amended, and Law No. 13,506, of November 13, 2017.

Penalties may range from admonishment to punitive fines and damages, suspension or disqualification from certain activities. 

Offending parties may also be liable for damages and criminal liability under certain circumstances, particularly in cases involving fraud.

Most securitisations are placed through Restricted Offerings targeting professional investors, as defined in applicable CVM regulations, including UHNW individuals, institutional investors and foreign investors. The volume of a Restricted Offering may range from USD5 million or less to USD50 million or more. The regulatory emphasis is on eliminating unnecessary transaction costs while ensuring that the offering is restricted to sophisticated investors and complies with legal and regulatory requirements applicable to the security.

Securitisations with larger volumes are structured more commonly as Public Offerings targeting retail and private banking clients and institutional investors. Regulatory emphasis is on full disclosure and suitability.

Investors usually require a capacity, regulatory compliance and enforceability legal opinion in connection with a securitisation transaction. As a matter of market practice, opinions usually address compliance with disclosure requirements before financial closing only, such as whether the prospectus complies with all applicable regulatory requirements.

Brazilian laws and regulations do not require any level of credit risk retention by the originator.

There are specific instances in which the credit risk retention is not allowed – eg, as a general rule financial institutions can only sell credit rights to an entity that is not a financial institution or a securitisation company without recourse, according to CMN Resolution No. 2,686, of January 26, 2000, as amended, and CMN Resolution No. 2,836, of May 30, 2001, as amended. This rule is directed to financial institutions, and the Central Bank of Brazil enforces it in the course of its monitoring of the financial system. Failure to comply may subject the financial institution to penalties that apply to a breach of regulatory obligations generally, such as admonishment and fines.

CVM Instruction No. 600, of August 1st, 2018, as amended, provides for certain disclosure obligations in connection with credit risk retention in CRA issues. According to CVM Instruction No. 600, non-qualified investors (as defined elsewhere) can only buy CRAs that rely on substantial credit risk retention by the transferor or a third party, unless the CRA is backed up by debt of a single debtor or group of debtors under common control.

Periodic reporting obligations are discussed in the answers on disclosure requirements. The CVM is responsible for enforcing such obligations. Penalties for non-compliance may range from admonishment to punitive fines and damages, suspension or disqualification from certain activities.

RAs are regulated under CVM Instruction No. 521, of April 25, 2012. According to Instruction No. 521, only domestic RAs registered with the CVM, and foreign RAs acknowledged by the CVM can issue opinions destined to third parties on the credit quality of issuers or securities or financial instruments. Registration is conditioned upon the domestic RA meeting certain requirements on corporate governance, human and technological resources. Acknowledgement is reserved to foreign RAs that (i) are registered and subject to regulatory oversight in their country of origin, (ii) are subject to regulations with at least the same scope of Instruction No. 521, and (iii) appoint a legal representative in Brazil to receive service of process and notices.

Instruction No. 521 also provides rules on how RAs should prepare and disclose their ratings, on periodic information that the RA must provide to CVM and disclose to the market, on rules of conduct, and on the RA’s internal controls, among other matters.

Penalties for failure to comply with applicable regulations may range from admonishment to punitive fines and damages, suspension or disqualification from certain activities.

No response provided.

The use of derivatives in securitisations is generally subject to the same rules that apply to the use of derivatives in other contexts.

Certain types of securitisation instruments are subject to specific legal rules concerning the use and disclosure of derivatives. For instance, according to CVM Instruction No. 600, the proceeds from a CRA issue can only be used in derivatives for the purpose of hedging, and the policy for using derivatives must be disclosed in the CRA’s deed of securitisation. There is more flexibility to use derivatives in connection with the LIG, in accordance with Law No. 13,097, of January 19, 2015.

Rules regarding the use of derivatives are enforced by the CVM or the Central Bank of Brazil, depending on the type of securitisation instrument and the nature of the issuer. Penalties for non-compliance are similar to those for other regulatory breaches, as discussed elsewhere.

No response provided.

The main law concerning investor protection is Law No. 6,385 (Capital Markets Law). Investor protection is structured around registration of issuer and offering with the CVM and disclosure requirements, discussed elsewhere in these answers.

CMN Resolution No. 2,836 regulates transfers of credit rights by banks, including for purposes of securitisation. According to Article 6 of Resolution No. 2,836, banks can only sell credit rights to an entity that is not a financial institution, including an SPE in the context of securitisation, under the following conditions:

  • the transferee shall have no recourse for liquidation of the credits against the bank;
  • the bank cannot repurchase the credits;
  • the transferee must pay the purchase price in a lump-sum at sight;
  • the assignment agreement must detail the transaction and remain available to the Central Bank of Brazil at the bank's headquarters;
  • any future transaction involving the credits cannot result in a return of the risk, directly or indirectly, to the bank; and
  • the bank shall include a note in its first balance sheet published after the transfer informing the book and transaction value of the credits, as well as the impact of the transaction on its assets, net worth and results.

CMN Resolution No. 2,686 regulates the transfer of credit rights by banks to corporations organised as securitisation companies whose scope of business is limited to the acquisition of credits originated by financial institutions. Most of the conditions provided for in CMN Resolution No. 2,836 do not apply to transfers to such securitisation companies, including the possibility of recourse against the bank, as indicated above.

Banks are subject to limitations on portfolio concentration and other requirements that apply to their holdings of fixed-income securities generally, and that also apply to securitisations.

Most securitisation vehicles are organised as corporations (sociedades anônimas), but in certain cases the SPE can take the form of an investment fund or (if the SPE is not the securities issuer) a limited liability company (sociedade limitada).

Regulatory requirements associated with the type of security instrument are usually the most important factor in choosing the legal form of the securitisation vehicle, as each of the most widely used securitisation instruments can only be issued by a specific type of entity. In turn, the tax treatment is an important factor in choosing the securitisation instrument, meaning that it may indirectly determine the legal form of the securitisation vehicle.

If more than one type of security is equally suitable to the transaction, the tax treatment and other factors such as regulatory maintenance costs may play a key role in determining the form of the securitisation vehicle.

Securitisation vehicles are usually SPEs, with a regulatory structure that leaves little room for them to be regarded as other types of entities. There is no equivalency with the “investment company” scenario under US law.

Securitisation vehicles are usually SPEs that cannot engage in other activities. There is no equivalency with potential treatments under the Volker Rule.

Securitisations may rely on a variety of credit enhancement mechanisms, depending on the type of credit right being securitised, the credit risk of the originator and its shareholders, and other factors. The most common types of credit enhancement are overcollateralisation through in rem security rights over additional receivables and/or tangible assets, corporate guarantees by affiliates, and segregation of the receivables into an asset pool insulated from unrelated debts and liabilities, to the extent allowed under the laws and regulations governing the type of securities being issued.

In certain structures, particularly (but not limited to) those involving the issue of FIDC quotas or CRIs, the originator may transfer additional financial assets to the securitisation vehicle in exchange for subordinated securities that are paid only after senior securities held by investors, effectively providing overcollateralisation and/or a liquidity cushion.

Relatively small cash reserves are also common, as are structures in which a significant part of the originator’s operating cash flow is diverted to an escrow account and released after the payment of securitisation obligations under a waterfall scheme.

The securitisation deed and/or the prospectus, when applicable, must clearly identify the credit enhancement mechanisms used in the structure. Practitioners should ensure that all formalities for perfection of the credit enhancement are complied with, with failure to maintain such mechanisms resulting in acceleration.

If the structure relies on cash reserves and/or other mechanisms in which the securitisation vehicle may, temporarily or on a continued basis, hold assets other than the securitised receivables, practitioners must carefully consider whether this may result in a breach of regulatory requirements on the types of assets that such vehicles may hold.

Government-sponsored entities play an important role in several industries in Brazil. Two of the country’s largest banks are corporations controlled by the federal government, and companies controlled by federal, estate or municipal governments run key businesses in the infrastructure and other realms. Government-sponsored entities participate in securitisations, either as originators or as underwriters, essentially as a natural consequence of their overall footprint in the economy and the competition for businesses and capital. Certain government-sponsored entities, such as the FI-FGTS, CEF and BNDES, may participate in securitisations as investors as a means to finance infrastructure and other projects deemed to be in the public interest, and/or to incentivise the development of capital markets.

Government-sponsored entities are subject to specific rules on procurement and contracts, on financing constraints, and on other matters. The contents and impact of such rules may vary according to whether the entity is organised as a governmental or business concern, whether it is deemed to be providing a public service or developing an economic activity, and whether or not it is financially dependent on the treasury. Generally speaking, in the role of underwriters, government-sponsored entities are subject to the same rules as private sector underwrites. When acting as originators, government-controlled corporations tend to use a simplified competitive bidding process to choose the transferee, underwriters and other service providers.

There have been cases of the securitisation of government revenues, mostly at the state and city levels. Such structures are still controversial, as important questions regarding the possibility of transferring title and/or collection of such receivables, the rate of discount, and other matters have not yet been settled by th e courts. Draft bills to change the legal framework in order to facilitate the securitisation of government revenues are currently under discussion in Congress.

Investors in securitisation include investment funds, banks and their affiliates, pension funds, UHNW individuals, and (if the transaction is placed through a Public Offering) retail investors.

Each class of investor is subject to a different set of material rules. In general, applicable laws and regulations do not impose limits specifically targeting securitisations, but investment may nonetheless be limited by regulatory restrictions on the type of investor that may purchase the securities in the primary or secondary market, or on investment by a certain class of investor on fixed-income securities or other asset classes that may include securitisation instruments.

For example, CMN Resolution No. 4,444, of November 13, 2015, as amended, and CMN Resolution No. 4,661, of May 25, 2018 regulate the portfolio of pension funds organised as open or closed supplementary retirement plan entities (respectively, EAPCs and EFPCs). Resolution No. 4,444 provides the following, among other limits by asset class and issuer:

  • the sum of receivable certificates issued by securitisation companies, FIDC quotas, fixed-income securities issued by SPEs and held by the EAPC, together with certain other assets, cannot exceed 25% of the EAPC’s portfolio (this limit can be raised to 30% if the securities were issued to raise funds for infrastructure projects approved by the federal government);
  • securities issued by a single SPE, FIDC or segregated pool of assets of a securitisation company cannot exceed 10% of the EAPC’s portfolio.

Among other limits, Resolution No. 4,661 provides that:

  • the sum of CRAs, FIDC quotas and certain other assets held by the EFPC cannot exceed 20% of the portfolio;
  • the sum of CRIs and other financial assets related to real estate held by the EFPC cannot exceed 20% of the portfolio;
  • as a general rule, securities issued by a single SPE, FIDC or segregated pool of assets of a securitisation company cannot exceed 10% of the EFPC’s portfolio; and
  • as a general rule, securities held by the EFPC cannot represent more than 25% of the net worth of each SPE, FIDC or segregated pool of assets of a securitisation company.

As discussed above, only professional investors can subscribe for securities placed through a Restricted Offering. According to CVM Instruction No. 554, of December 14, 2014, as amended, professional investors are financial institutions, insurance companies, pension funds, individuals and companies holding financial assets worth more than BRL10 million (approx. USD2.5 million) in aggregate, investment funds, investment clubs managed by a portfolio manager authorised by the CVM, non-resident investors, and, when investing their own funds, autonomous investment agents, portfolio managers, securities consultants and analysis authorised by the CVM.

Ninety days after acquiring securities in a Restricted Offering, professional investors may sell them to qualified investors. According to CVM Instruction No. 554, as amended, in addition to professional investors, qualified investors can include individuals and companies with financial assets worth more than BRL1 million (approx. USD250,000) in aggregate, and certain other entities. Non-qualified investors may acquire CRAs and CRIs originally placed in a Restricted Offering under specific conditions provided for in the applicable regulations.

As a general rule, non-qualified investors may acquire securities in a Public Offering. However, in certain cases, applicable regulations or the CVM will require the Public Offering to be limited to qualified investors, depending on whether or not (i) investors are exposed to performance risk, (ii) there is substantial risk retention by the originator or a third party, or (iii) the securities are rated by a rating agency, among other factors.

Bankruptcy remote transfers are usually effected through a private instrument or assignment agreement signed by the assignor, the assignee, any intervening parties and two witnesses. The private instrument is usually registered with the registrars of titles and deeds in the city of domicile of both the assignor and assignee, if in Brazil. Bankruptcy remote transfers can also be effected through a public deed of assignment agreement executed before a notary public.

The assignment agreement includes a clear description of the credit rights being transferred; the purchase price and when/how it will be paid; any precedent conditions for the transfer and payment of the purchase price; representations and warranties; risks to be retained by the assignor, if applicable; financial and other covenants; obligations related to perfection of the sale; servicing arrangements; obligations to replace or repurchase the receivables under certain conditions; events of default and acceleration; credit enhancement mechanisms; acknowledgement that the assignment is related to a securitisation transaction; and dispute resolution.

The assignment agreement and other securitisation documents may include warranties from the originator/transferor on the following:

  • corporate powers and authority to execute and perform the agreements to which it is a party;
  • the binding effect and enforceability of such agreements and of any documents providing for credit enhancement;
  • the regular formation and enforceability of the receivables;
  • the absence of material liabilities or other circumstances that might cause the assignment or the collateral package to be revoked, nullified or declared unenforceable; and
  • compliance with labour, tax, social security, environmental, AML, anti-corruption and/or other laws and regulations that apply to its activities and to the performance of its obligations under the securitisation documents.

Remedies against breach of warranties are based on the enforcement of contractual penalties and other contractual provisions. If a warranty is found to have been breached and the breach has not been cured after the relevant cure period, securitisation documentation may provide that, if applicable, the originator/transferor shall replace or repurchase the affected receivables (if the breach relates to a particular subset of receivables), repurchase all of the receivables, pay a contractual fine and/or indemnify the transferee for damages. Such remedies are enforceable in courts.

The originator/transferor typically undertakes to take the necessary steps (discussed above) to perfect the transfer and any guarantee or security interest within a few business days of closing, and to deliver documentary evidence that the transfer and the security interests have been perfected.

To the extent that perfection can be achieved within a few days of closing, the parties may condition the payment of the purchase price on evidence of perfection. However, there are instances in which perfection can only be achieved after financial closing, depending, eg, on the registrars of titles and deeds involved, the number and types of debtors, and the assets being granted as security.

If perfection obligations are breached and the breach is not cured within the relevant cure period, securitisation documentation may provide that, if applicable, the originator/transferor shall replace or repurchase the affected receivables (if the breach relates to a particular subset of receivables), repurchase all receivables, pay a contractual fine and/or indemnify the transferee for damages. Such remedies are enforceable in courts.

Covenants may vary depending on the financial strength of originator/transferor and on whether or not the receivables are subject to originator performance risk. Originator/transferor may undertake, among other things: (i) to pass through to transferee any proceeds unduly pay to it by debtors, (ii) to periodically provide transferee with its financial statements and other documents, (iii) to promptly inform transferee of any circumstance which might affect the assignment or the collateral package, (iv) to comply with all labour, tax, social security, environmental, AML, anticorruption and/or other laws and regulations applicable to its activities and to performance of its obligations under the securitisation documents, (v) not to incur into new debt, not to take part in corporate restructuring, not to dispose of material assets and similar negative covenants.

Financial covenants, if applicable, may refer to levels of defaulted receivables, cash reserve account balance, security coverage, and other matters.

Enforcement is as discussed in our answer to enforcement of perfection obligations above.

Management and collection of receivables can remain with the originator (this is most common when the receivables are not yet fully performed, there is a large number of debtors, and the originator is creditworthy), be assumed by the SPE (typically if the receivables are performed, the number of debtors is small, and the SPE has servicing capabilities), or be outsourced to a professional servicer approved by the SPE and paid by the originator.

If the originator is acting as servicer, its obligations in that capacity may include:

  • to manage and collect the receivables diligently and in accordance with applicable law;
  • to provide the transferee with any documents and information related to servicing that it may require from time to time;
  • and, upon an event of default, or in certain cases at the SPE’s request, to transfer all servicing activities to the SPE or a third party appointed by it.

See 5.3 Principal Perfection Provisions regarding enforcement.

Events of default may include the following:

  • breach of representations and warranties;
  • breach of contractual obligations, including perfection obligations and covenants;
  • insolvency;
  • material change in originator’s financial strength;
  • changes in law that may affect the ability of any party, investor or service provider to participate in the transaction or its costs to do so; and
  • a change in control or corporate reorganisation without the transferee’s consent.

See 5.3 Principal Perfection Provisions regarding enforcement.

The originator may be obligated to indemnify the SPE and investors for the following:

  • a breach of representations and warranties or contractual obligations;
  • claims of labour, environmental, consumer and other liabilities from debtors, originator’s employees and other entities affiliated with the originator
  • the non-existence of the assigned receivables; and
  • a breach of capital market regulations, to the extent not caused by the SPE or investors.

In certain transactions, particularly in connection with CRA issues, the originator may be liable to indemnify the SPE and investors if the tax authorities dispute the tax treatment that applies to the securities.

See 5.3 Principal Perfection Provisions regarding enforcement.

No response provided.

No response provided.

The enforcement regime for securitisation is reasonably effective. Participants rely on the same judicial system and procedural rules that apply to the enforcement of financial obligations in general. Securitisation instruments are provided for in specific laws and regulations, meaning that courts can generally rely on a clear legal framework when ruling on securitisation matters.

In the (relatively few) instances in which disputes in connection with securitisation have been submitted to judicial resolution, courts have mostly favoured enforcement of the obligations assumed in the securitisation document, including with respect to the bankruptcy remoteness of true sales.

Issuers issue the securities, engage underwriters and other service providers, receive proceeds from investors, purchase and pay the price of the receivables, apply for registration with the CVM, receive the proceeds from payment by debtors and repay investors, among other roles. Issuers and underwriters are subject to most regulatory and self-regulatory obligations imposed by the CVM, Anbima and B3.

Issuers are typically SPEs. The legal form of issuers is discussed elsewhere.

Sponsors typically provide credit enhancements. Their responsibilities are mostly contractual in nature, and vary according to the type of credit enhancement provided. Sponsors may be domestic or foreign companies engaged in any type of lawful business activity.

Underwriters/placement agents (coordenadores) often play an important role in structuring the transaction and its documentation. Their responsibilities typically include:

  • seeking out potential investors;
  • providing appropriate information on the offering to them;
  • receiving and processing investment orders; and
  • receiving offering proceeds from investors and delivering them to the issuer, among other duties, in accordance with the Capital Market Laws and other applicable laws and regulations. Underwriters/placement agents can work on a best placement efforts basis or can provide a firm placement commitment, in which case they shall be obligated to purchase securities up to the amount of the commitment if there is insufficient demand from investors.

The roles and responsibilities of service providers are discussed above.

Professional servicers can be either affiliates of securitisation entities or financial institutions or independent companies. Servicers are most commonly organised as limited liability companies or corporations.

Investors must subscribe for the securities; declare their condition as professional investors or qualified investors, to the extent required under the applicable regulations; pay the securities price; and receive payments as provided in the securitisation deed or other securitisation documents.

Investors may participate in general investor meetings and vote on the matters pertaining to the transactions as provided for in the securitisation documents.

Types of investors are discussed elsewhere in these answers.

The appointment of a trustee (agente fiduciário) is required under regulations that apply to certain types of securities. Trustees are subject to the rules of CVM Instruction No. 583, of December 20, 2016, as amended, and other regulations.

The roles and responsibilities of trustees include:

  • to represent and protect the rights and interests of investors;
  • to keep in custody any documents related to its duties;
  • to check the veracity of information on collateral and the consistency of other information provided in the securitisation documents, endeavouring to solve any omissions, flaws or shortcomings of which the trustee becomes aware;
  • to ensure the issuer registers the securitisation documents as applicable;
  • to oversee the submission of periodic information by the issuer, as provided for under the applicable regulations;
  • to verify the perfection of collateral and the value of assets granted as security;
  • to request an external audit of the issuer when necessary;
  • to summon the general meeting of securities holders when necessary, and take part in such meeting to provide any information that investors may demand;
  • to supervise compliance with the securitisation documentation; and
  • to inform securities holders of any default by the issuer.

As a general rule, only financial institutions that are authorised by the Central Bank of Brazil and whose scope of business includes the management or custody or third party assets may act as trustees.

Synthetic securitisation is generally permitted in Brazil, but there is not yet a developed market for such transactions. 

Derivatives in general, including instruments that may be used for purposes of synthetic securitisation, are regulated by the CMN, the Central Bank of Brazil and the CVM.

Commonly securitised financial assets include agribusiness financing, residential and commercial real estate financing, commercial receivables, and public sector receivables.

Agribusiness financing receivables are commonly securitised through the issue of CRAs. The principal applicable laws and regulations are Law No. 11,076, of December 30, 2004, CVM Instruction No. 600, the Capital Markets Law and CVM Instructions No. 400 and 476.

Residential and commercial real estate financing receivables are commonly securitised through the issue of CRIs. The principal laws and regulations are Law No. 9,514, of November 20, 1997, as amended, CVM Instruction No. 414, of December 30, 2004, as amended, the Capital Markets Law and CVM Instructions No. 400 and 476.

Commercial and public sector receivables are commonly securitised through the issue of quotas of FIDCs. The principal laws and regulations are CVM Instruction 356, of December 17, 2001, as amended, CVM Instruction 444, of December 8, 2006, as amended, the Capital Markets Law and CVM Instructions No. 400 and 476.

Cascione, Pulino, Boulos Advogados

Av. Brig. Faria Lima,
4.440 – 14º andar
CEP 04538-132

+55 11 3165 3071

ldenadai@cascione.com.br www.cascione.com.br
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Cascione Pulino Boulos Advogados The full-service, independent law firm has offices in Rio de Janeiro and São Paulo, with a securitisation practice group that comprises 12 lawyers – led by partners Fabio Cascione, Marcos Pulino and Diego Coelho – working in conjunction with the tax, corporate, banking regulatory, real estate and agribusiness practice groups. Its key areas of practice in relation to the securitisation sector are real estate, agribusiness, governmental contracts and banking, with Cascione Pulino Boulos Advogados among the most active firms in real estate and agribusiness securitisations in Brazil.

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