Securitisation 2022

Last Updated January 13, 2022

Brazil

Law and Practice

Authors



Monteiro, Rusu, Cameirão e Bercht Advogados is a law firm that specialises in structuring highly complex capital market, financial and commercial transactions. Its partners have a high level of specialisation and experience in structuring securitisations, public issues of debentures, promissory notes, real estate receivables certificates, agribusiness receivables certificates and investment funds. The firm, which is headquartered in São Paulo and works with clients from all over Brazil, has nine partners and, approximately, 25 lawyers working in the areas of capital markets, M&A, advisory and civil litigation, and advisory and tax litigation. Recent relevant work includes the public offering with restricted placement efforts of: (i) receivables investment fund quotas (MadeiraMadeira I and Keycash Home Equity), (ii) the 61st issuance of agribusiness receivables certificates by Vert Companhia de Securitização, and (iii) the 346th series of the fourth issuance of receivables certificates of Virgo Companhia de Securitização. The firm has also worked on the public offering of investment funds quotas (Sparta Infra).

Impact of Insolvency Law on Securitisations

The Brazilian bankruptcy and judicial recovery system provides that, in the case of credit securitisation, the assignment of referred credits shall not be declared ineffective nor be revoked to the detriment of the rights of investors, as mentioned in Article 136, paragraph 1 of Law No 11,101 dated 24 March 2005, as amended (Law No 11,101/05).

Real estate credit securitisation companies (real estate CSCs), agribusiness credit securitisation companies (agribusiness CSCs) and financial credit securitisation companies (financial CSCs), which are collectively known as “securitisation companies”, are subject to Law No 11,101/05 and can go bankrupt.

Pursuant to Article 9 of Law No 9,514, dated 20 November 1997, as amended (Law No 9,514/97) and Article 39 of Law No 11,076, dated 30 December 2004, as amended (Law No 11,076/04), real estate CSCs and agribusiness CSCs can institute a fiduciary regime by segregating the assets that backed the issuance of securitisation instruments (patrimônio separado).

In the event of a real estate or agribusiness CSC’s insolvency, the trustee shall immediately undertake the custody and administration of each segregated asset and shall call a general meeting of investors to deliberate on the settlement of the segregated asset or transfer to another securitisation company.

Nevertheless, in accordance with Article 76 of Provisional Measure No 2,158-35, dated 24 August 2001, as amended, the above-mentioned is not applicable in case of fiscal, social security and labour debts of real estate agribusiness CSCs, in particular, regarding the guarantees and privileges attributed to them, the option to constitute a segregated asset does not apply to financial CSCs.

Investment funds are not subject to Law No 11,101/05.

SPEs and Other Specific Entities

In Brazil there are different specific entities which can issue different types of securitisation asset.

  • Real estate CSCs are responsible for issuing real estate receivables certificates (CRI), whose main applicable regulations are Law No 9,514/97 and Brazilian Securities and Exchange Commission (CVM) Instruction No 414, dated 30 December 2004, as amended (CVM Instruction No 414/04).
  • Agribusiness CSCs are responsible for issuing agribusiness receivables certificates (CRA, whose main applicable regulations are Law No 11,076/2004 and CVM Instruction No 600, of 1 August 2018, as amended (CVM Instruction No 600/18).
  • Financial CSCs are responsible for the acquisition of financial credit through equity or debt instruments, whose main applicable regulation is Resolution of National Monetary Council (CMN) No 2,686, dated 26 January 2000, as amended (CMN Resolution No 2,686/00).
  • Investment funds in credit rights (FIDCs), which may acquire the rights and securities representing credit, originating from operations carried out in the financial, commercial, industrial, real estate, mortgage, leasing and service provision segments, and the warrants, whose main applicable regulation is CVM Instruction No 356, of 17 December 2001 (CVM Instruction No 356/01).
  • Investment funds in non-standardised credit rights (FIDC NPs), are regulated by CVM Instruction No 444, of 8 December 2006, as amended (CVM Instruction No 444/06) and may acquire credit rights that cannot be acquired by regular FIDCs, such as credit rights that are overdue and pending payment when they are transferred to the fund, and the credit rights listed in 8.1 Common Financial Assets.
  • Real estate investment funds (FII) are regulated by CVM Instruction No 472, of 31 October 2008 (CVM Instruction No 472/08), which regulates the constitution and operation of FII, which can acquire real estate credit rights.

The FIDCs, FIDC NPs, FIIs and securitisation companies (securitisation vehicles) mentioned above can be incorporated to carry out a single transaction or several transactions.

Regulation of Securitisation Companies

Securitisation companies are subject to the effects of Law No 11,101/05. It should be noted that real estate and agribusiness CSCs may constitute separate equity in order to mitigate risks in the event of insufficient equity to pay the receivables.

The insolvency of the originator does not affect the securitisation company, but can affect its creditworthiness.

Securitisation companies must have some characteristics or requirements as determined in specific legislation, such as complying with all requirements provided on CVM Instruction No 480, dated 7 December 2009, as amended (CVM Instruction No 480/09), producing periodic reports and disclosing the Registration Form and the Reference Form and financial statements.

Despite it not being mandatory by law, it is recommended that the securitisation company adopts a governance structure establishing the segregation of assets that backs the issuance of securitisation instruments in relation to the company’s assets.

At the time of the publication of this article (January 2022), it is important to mention that CVM Resolution No 60 of 23 December 2021 was published (resulting from the CVM public hearing (Audiência Pública SDM 05/20), which will only enter into force on 2 May 2022. The purpose of said rule is to consolidate and update the rules on securitisation companies, as well as to revoke some of the rules mentioned in this article, such as CVM Instruction No 414/04 and Instruction CVM No 600/18.

To carry out the transfer of financial assets, the following procedures must be observed:

  • execution of an assignment agreement through which the assignor will arrange for the transfer of the financial asset; and
  • payment of the purchase price of the financial assets by the assignee.

Despite it not being mandatory by law, it is usual that (i) the assignment agreement be registered under the title and deeds registry in order to publicise the assignment and make it enforceable over third parties, and (ii) the debtors of the assigned credits be notified in order to assure the enforceability of the assignment before the debtors. Additionally, the following instruments must be registered as indicated below to be considered duly valid and enforceable:

  • the corporate acts that approve the assignment are subject to registration with the competent Commercial Registry;
  • personal guarantee are subject to registration in the Registry of Deeds and Documents; and
  • real estate guarantee instruments are subject to registration at the Real Estate Registry.

Brazilian legislation does not establish the concept of “true sale”. If the formal provisions established in the legislation are taken, the assignment is considered as valid and perfect regardless of the existence of a debtor's co-obligation. The assignment of credit rights can be carried out with or without the assignor's co-obligation.

If the assignment is carried out in accordance with the applicable rules, the assignment of the credit shall not be declared ineffective nor revoked to the detriment of the rights of investors in the case of the bankruptcy of the originator/transferor, pursuant to Article 136, paragraph 1 of Law No 11,101/05.

Taxes on the transfer of assets depend on the type of issuer and the structure applied.

Assignors Taxation

From the perspective of the assignor, the taxation will be due depending on the nature of the assignor and on the taxation system adopted by that entity, as follows.

If the assignor is an investment fund, there will be no taxation over the assignment.

If the assignor is a legal person that adopts the actual profit (lucro real) system or the presumed profit system under an accrual basis, taxes, it will pay corporate income tax (IRPJ)/social contribution on net income (CSLL) at a combined rate of 34%, which will be due upon the due date of each instalment (or of the entire amount agreed, when carried out in a lump sum).

If the assignor is a legal person that adopts the presumed profit (lucro presumido) system under a cash method, it will pay IRPJ/CSLL at a combined rate of 34%, which will be due upon payment of each instalment (or of the entire amount agreed, when carried out in a lump sum).

Securitisation Companies Taxation

Securitisation Companies are subject to the actual profit system regardless of the nature of their activities, pursuant to Article 14, items vi and vii, of Law No 9,718, of 27 November 1998.

As a rule, the revenue accrued under a securitisation corresponds to the difference (spread) between the acquisition cost and the amount actually earned (discount).

For IRPJ/CSLL purposes, such discount is usually taxed at a 34% rate.

Investment Funds Taxation

In relation to (i) investment funds (closed-ended funds), that is, those in which the amortisation and redemption dates are programmed, the taxation will only occur in the case of amortisation and/or redemption of shares by the shareholders; and (ii) investment funds (open-ended funds), that is, those in which the amortisation and redemption dates can occur at any time, taxation will also be levied twice a year, in accordance with Normative Instruction of the Federal Revenue of Brazil No 1,585, of 31 August 2015 (Instruction RFB No 1,585/15).

As for FIDCs, no taxes are imposed, with the exception of withholding income tax (IRRF) levied upon payment, amortisation or redemption of shares.

Investors Taxation

In relation to investors, the following applies;

  • when they are individuals, income from CRIs and CRAs are fully exempt, while FIDCs are subject to withholding income tax at rates that start at 22.5% and are reduced by 2.5% each semester until reaching the minimum rate 15%; and
  • when they are legal entities, profits from CRIs, CRAs and FIDCs are subject to withholding income tax at rates that start at 22.5% percent and are reduced by 2.5% each semester until reaching the minimum rate 15%.

Regarding tax avoidance strategy, it may vary according to, among other factors, the nature of the credit, the system of taxation to which the assignor is subject and the legal nature of the issuer (investment fund, securitisation company, corporation, etc)

In each operation, the legal nature of the issuer must be analysed and identified, in order to design a structure that provides better tax efficiency for investors and other entities involved in the transaction.

Securitisation companies are subject to the actual profit (lucro real) system regardless of the nature of their activities.

The main tax levied on the financial asset and/or the transfer of financial assets is the income tax on capital gain, due to the appreciation of the transferor's net equity. The income tax rates vary if for a legal entity (as a rule, 34%, corresponding to the IRPJ and CSLL). For an individual, the income tax on capital gains can vary from 15% to 22.5% (IRPF), pursuant to Article 21, of Law No 8,981, of 20 January 1995.

To avoid the incidence of taxes or obtain better tax efficiency in securitisation operations, it is necessary to assess the most appropriate type of issuer, as well as the best tax classification of the issuer for the intended structure.

The transfer of resources made to entities outside Brazil, gives rise to the application of a tax on financial transactions (IOF/FX) at the rate of:

  • 15%, in the case of an investor resident or domiciled abroad, individual or collective, who carries out financial transactions in the country in accordance with the rules and conditions established by the National Monetary Council; or
  • 25% for investors residing or domiciled in a country with favoured taxation, pursuant to Article 24 of Law No 9,430, of 27 December 1996.

PIS/COFINS of Securitisation Companies

In addition to the taxes mentioned elsewhere in 2. Tax Laws and Issues, securitisation companies are subjected to the social integration programme (PIS) and the contribution to social security financing (COFINS), which will be levied under different calculation systems (cumulative or non- cumulative), depending on the nature of the activity carried out by the securitisation company, as follows.

  • Cumulative system: real estate CSCs, agribusiness CSCs and financial CSCs (as set forth by Article 119, items viii and viii of Normative Instruction of the Federal Revenue of Brazil No 1,911, of 11 October 2019 (RFB Instruction No 1,911/19).
  • Non-cumulative system: other securitisation companies (as set forth by Article 152, of RFB Instruction No 1,911/19).

For PIS/COFINS purposes, the discount may be taxed at 9.25% (non-cumulative system) or at 4.65% (cumulative system). The relevant statutes provide for the situations under which companies are obliged to one of the PIS/COFINS apportionment systems (cumulative or non-cumulative).

Please note that this also applies to the assignor, under a more conservative approach to the legislation.

No PIS/COFINS is levied on the discount accrued by an FIDC.

The entities responsible for the co-ordination of the public offering and distribution of securities (underwriters) are obliged to comply with certain diligence standards in order to assure their investors of the veracity, consistency, correction and sufficiency of the information disclosed by them in connection with the public offering.

Thus, it is usual that the underwriters commission legal opinions to evidence (i) the compliance of their due diligence duties and (ii) the good standing of the transaction documents.

In this sense, legal opinions issued in connection with securitisation transactions generally assess:

  • the regularity of the acquisition of the credits by the securitisation entity and of the respective documents;
  • the regularity of the instruments through which the securitisation transaction is formalised;
  • the regularity and sufficiency of the corporate act and/or acts approving the issue;
  • the scope of the due diligence carried on in connection with the transaction and the non-existence of matters that might jeopardise the credit assignment; and
  • the sufficiency of the powers of the signatories of the transaction documents.

Other observations can be made depending on the type of structure and issuers, such as limiting the enforceability of transaction documents and the regularity of interest rates charged above 12% per year for investment funds, as they are not financial institutions.

In addition, according to Article 7, paragraph 1 of CVM Instruction No 444/06, the registration of FIDC NPs is conditional on the presentation to CVM of a legal opinion attesting the validity of the constitution and the assignment of the credit.

Given the complexity of the matter and the interrelation between the legal and accounting rules, very often the securitisation transactions imply obligations of special reporting or disclosure of information on the financial statements of the assignor and/or the securitisation entities involved on the transactions, such as described below.

Segregation of Information by Securitisation Companies

Securitisation companies that adopt separated equity (patrimônio separado) must follow the following guidelines, provided by the CVM:

  • separate equity not subject to consolidation in the issuer's accounts;
  • presentation of assets, liabilities and results;
  • provision for asset recovery;
  • independent auditor’s report;
  • submission of separate equity financial statements; and
  • financial statements – separate equity.

Consolidation of Securitisations by Financial Institutions

Financial institutions and other institutions authorised to operate by the Central Bank of Brazil (BACEN) must issue financial statements that include data regarding (i) securitisation entities over which the institution holds direct or indirect control and (ii) investment funds in which the institution assumes or retains risks and benefits.

Furthermore, financial institutions must disclose the so-called Pillar 3 Report, through which they indicate the exposure of securitisation transactions carried out, pursuant to Article 13 of Resolution No 54 of 16 December 2020 of the BACEN.

It is very common for legal practioners to interact with the accounting consultants of the assignors and securitisation vehicles during the structuring of securitisation transactions in order to clarify doubts over the steps involved in the transaction, as well their effects in order to assure their correct interpretation, accounting launch and applicable rules.

In some cases, such interaction may result in the issuance of legal opinions specifically to assure the assignors and/or securitisation vehicles, officers, assignors, auditors or consultants about legal aspects of the relevant transaction. In these cases, such legal opinions are usually very specific, having no pattern or recurrent conclusions or qualifications.

There are several dispositions setting forth the information to be disclosed, both prior to and after the securitisation by the securitisation vehicles. The main disclosure rules regarding the period before the issue of the securities:

  • for state and agribusiness CSCs – the underwriter must ensure that the documents are being prepared pursuant to Article 6 of the ANBIMA Code for Public Offerings by the Brazilian Financial and Capital Markets Association (ANBIMA); and
  • for FIDCs and FIDC NPs – at the moment of their investment in the fund, the fund administrator must make available to investors the documents related to the fund and the fund’s periodic information, pursuant to CVM Instruction No 356/01, CVM Instruction No 444/06, of the Code ANBIMA Management of Third-Party Resources.

The main disclosure rules regarding the period after the issue of the securities are as follows.

  • In relation to a real estate CSC, the real estate CSC shall publish monthly reports for each issuance carried by it with the content set forth in Exhibit 32-II of CVM Instruction No 480/09.
  • In relation to a real estate CSC that adopt separate equity – in addition to the report mentioned in the point above, Article 25-A of CVM Instruction No 480/09, which establishes the reports to be issued in relation to each separate equity of the securitisation vehicle.
  • In relation to an agribusiness CSC – the agribusiness CSC shall publish monthly reports for each issuance carried by it with the content set forth in Exhibit 32-III of CVM Instruction No 480/09.
  • In relation to FIDCs and FIDC NPs – the fund administrator shall publish monthly reports on the fund assets and fund’s financial statements according to the rules set forth in CVM Instruction No 489, of 14 January 2011 (CVM Instruction No 489/11).

Brazilian Civil Code

Article 290 of the Brazilian Civil Code which provides for the obligation of notification to the debtor of the occurrence of the assignment of the credit against them, under penalty of non-enforceability of the assignment against them.

Lei de Registros Públicos

Law No 6015, 31 December 1973, stipulates, in general, the need to register documents in registry offices of titles and documents and real estate registry office so that the transaction document has effect against third parties.

Public Offerings

CVM Instruction No 400/03, regulates the public offering procedures and CVM Instruction No 476/09 regulates restricted placement efforts public offering procedures. Moreover, as mentioned in 4.1 Specific Disclosure Laws or Regulations, ANBIMA also regulates the public issuance of securitisation instruments by its regulation codes of regulation and best practices.

Brazilian law does not provide for the obligation of any risk retention by the originator. However, securitisation vehicles are obliged to publish information regarding risk retention on the transactions carried out by them, as described below.

FIDC

In relation to FIDCs, the CVM enacted CVM Instruction No 489/11, through which it classifies transactions into:

  • transactions with substantial acquisition of risks and benefits; and
  • transactions without substantial acquisition of risks and rewards.

Under the terms of the aforementioned rule, transactions with risk retention are those in which the fund substantially acquires all the risks and benefits of ownership of the credit right object of the transaction. As a consequence, it gives rise to the write-off of the credit right in the assignor's accounting records, such as:

  • unconditional assignment of credit right, including the right to sell it at fair value, in its entirety, autonomously and without imposing additional restrictions on the sale transaction; and
  • assignment of credit right together with a repurchase option at fair value at the time of repurchase.

Furthermore, this Instruction defines transactions without risk retention as those in which the fund does not substantially acquire all the risks and benefits of ownership of the credit right object of the transaction. As a result, they do not entail the write-off of the credit right in the assignor's accounting records. Examples include:

  • assignment of credit right together with a commitment to resell the same asset at a fixed price or purchase price added to any income;
  • assignment of credit rights combined with derivative or insurance operations in which the seller or related party guarantees a minimum return to any class of shares or transfers exposure to market or credit risk back to the seller or related party;
  • assignment of credit rights for which the assignor or related party guarantees, in any way, including with the acquisition of subordinated shares, to compensate the fund, at least, for the credit losses likely to occur; and
  • any other mechanisms, outside normal market conditions, aimed at mitigating the fund's exposure to market or credit risk, such as repurchase, replacement or exchange of credit rights or even contribution of subordinated shares by the assignor or related party, on a recurring or systematic basis.

The fund manager is responsible for providing information on the transactions and their due classification, under penalty of sanctions by the CVM, such as public warnings, fines, temporary disqualification and suspension of authorisation or registration for the exercise of activities.

Securitisation Companies

Pursuant to CVM Instruction No 480/09, securitisation companies must report monthly on the existence of guarantees and co-obligations in relation to the credits that back each issue of securitisation instruments, under the terms of Exhibit 32-II of CVM Instruction No 480/09.

Brazilian law provides for the mandatory periodic reporting of information about assets and issuers, as well as risk retention and the filing of documents supporting the securitisation operations, as described in 4.1 Specific Disclosure Laws or Regulations and 4.3 Credit Risk Retention.

The entities responsible for supervising the periodic reporting activities provided for above are CVM, ANBIMA and BACEN.

The failure to comply with the above obligations may result in the application of the following penalties:

  • public warning;
  • fine;
  • prohibition against providing certain services;
  • prohibition against carrying out certain activities or modes of operation;
  • disqualification from acting as a manager and holding a position in a body provided for in the by-laws or articles of incorporation of financial institutions; and
  • cancellation of authorisation to operate.

The registration and recognition processes, as well as the inspection of the activities of rating agencies are regulated by the CVM Resolution No 9, of 27 October 2020 (CVM Resolution No 9/20).

CVM Resolution No 9/20 addresses the requirements and attributions necessary for rating agencies to carry out their activities.

Credit risk rating agencies are subject to penalties for non-compliance with the obligations set forth in CVM Resolution No 9/20, including the payment of a daily fine for failure to comply with the deadlines provided for in CVM Resolution No 9/20.

Financial institutions and insurance companies have specific rules that address capital and liquidity parameters in relation to securitisation transactions. In this sense, financial institutions are regulated by BACEN and the CMN, which determine requirements for the correct classification of transactions, as well as the rules on capital and liquidity of securitisation transactions.

Among the rules applicable to financial institutions, of particular note are:

  • CMN Resolution No 4,280, of 31 October 2013, as amended, which deals with the preparation, disclosure and submission of consolidated financial statements of the prudential conglomerate to the BACEN;
  • CMN Resolution No 4,193, of 1 March 2013, as amended, which deals with the determination of minimum requirements for reference equity (PR), Tier I and principal capital and additional principal capital; and
  • CMN Resolution No 4,557, of 23 February 2017, as amended, (Resolution 4,557) which deals with the risk management structure, the capital management structure and the policy for disclosing information by financial institutions.

Insurance companies are regulated by the Superintendency of Private Insurance (SUSEP) and by the National Council of Private Insurance (CNSP), which determine requirements for the correct classification of transactions, as well as the rules on capital and liquidity of securitisation transactions.

In synthesis, the Brazilian regulation of derivatives restricts their use to the hedging of the underlying assets of the securities issued as follows.

  • Regarding FIDCs, such rule is set forth in paragraph 2 of Article 40 of CVM Instruction No 356/01.
  • Regarding agribusiness CSCs, such rule is set forth in Article 4 of CVM Instruction No 600/18; additionally, the aforementioned article provides that, in the event of the constitution of separate equity, the derivatives used for protection purposes must have the same fiduciary regime as the credit rights that back the CRA and be registered in a specific account, directly in the name of the separate equity.
  • Regarding real estate CSCs, there is no rule expressly limiting the use of derivatives; notwithstanding this, the CRIs usual indenture establishes voluntarily the above-mentioned restriction.

Compliance with the above-mentioned rules is monitored by the CVM, ANBIMA and BACEN and their violation would lead to the same penalties listed in 4.4 Periodic Reporting.

The rules for protecting investors in securitisations are issued by the Brazilian Securities Commission, the National Monetary Council and BACEN.

In this regard, please note CVM Resolution No 30, of 11 May 2021 (CVM Resolution No 30/21), which establishes the duty to verify the adequacy and suitability of products, services and transactions to the client's profile, to be carried out by the members of the distribution system and the securities consultants, who cannot recommend products, carry out operations or provide services without verifying their suitability for their clients.

The institutions that are part of the distribution system and the securities consultants must keep, for a minimum period of five years from the last recommendation made to the client, or from the last transaction carried out by the client, as the case may be, all documents and statements required by CVM Resolution No 30/21.

Failure to comply with the rules provided for in CVM Resolution No 30/21 subjects those responsible to the sanctions provided for by CVM. Additionally, CMN Resolution No 4,539, of November 24, 2016 (CMN Resolution No 439/16) provides for principles to be observed in the implementation of an institutional policy regarding customer relationships and the users of products and services by financial institutions.

The penalties for non-compliance with CVM and BACEN rules are the same as those listed in 4.4 Periodic Reporting.

Among the regulations applicable to banks in the securitisations of their financial assets, of particular note is CMN Resolution No 2,686/00, which authorises the assignment of credits arising from transactions carried out by multiple banks, commercial banks, investment banks, credit, financing and investment companies, real estate credit companies, leasing companies, mortgage companies, associations of savings and loans and by Caixa Econômica Federal to corporations whose exclusive purpose is to acquire such credits.

Types of Securitisation Vehicle and Their Regulation

Real estate CSCs are non-financial institutions incorporated as joint stock companies, whose main purpose is the acquisition and securitisation of real estate credits and the issuance and placement, in the financial market, of CRI. Real estate CSCs are regulated by Brazilian Law No 9,514/97, CVM Instruction No 600/08 and CVM Instruction No 480/09.

The aforementioned rule provides that, in the event of bankruptcy of the assigning debtor and if there has been no delivery of the securities representing the credits assigned in trust, a refund will be guaranteed to the trustee in accordance with the relevant legislation.

Agribusiness CSCs are non-financial institutions incorporated as joint stock companies with the purpose of acquiring and securitising agribusiness receivables, issuing and placing CRA. The agribusiness CSCs are regulated by Brazilian Law No 11,076/2004, CVM Instruction 600 and CVM Instruction 480 and may establish a fiduciary regime, by segregating the assets that back the CRA issuance, which will be governed, as applicable, by the provisions of Brazilian Law No 9,514/97.

Financial CSCs are responsible for the acquisition of financial credit through equity or debt instruments. Financial CSCs are regulated by CMN Resolution No 2,686/00.

FIDCs and FIDC NPs are investment funds for credit rights that are regulated by their by-laws and by CVM Instruction No 356/01 and CVM Instruction No 444/06, as applicable.

FIIs are real estate investment funds that are regulated by its regulations and by CVM Instruction 472/08, as applicable.

Choosing an Appropriate Securitisation Vehicle

Usually, the order of priority of the material facts when choosing the appropriate securitisation entity are the following.

  • Nature of the credit – this is the first variable considered, since except for the FIDC, all other vehicles are specific to credit derived from specific economic activities, as follows:
    1. real estate credit securitisations may be carried out through FIDCs, FIIs and CRIs (real estate CSCs);
    2. agribusiness credit securitisations may be carried out through FIDCs and CRAs (agribusiness CSCs);
    3. financial credit securitisation may be carried out through FIDCs and debentures of financial CSCs; and
    4. credits arisen from other activities may be securitised through FIDCs and debentures of non-specific CSCs (securitisation companies without specific regulation).
  • Taxation for the investor: CRIs (issued by real estate CSCs) and CRAs (issued by agribusiness CSCs) are exempt of taxes for investors who are natural persons, implying a material advantage in relation to the other possible alternatives for such kind of credit.
  • Form of securitisation: only FIDC,s FIIs and CRAs (issued by agribusiness CSCs) permit the carrying out of revolving securitisations; all other securitisation vehicles/securities are restricted to fixed pool securitisations.
  • Target audience: FIDCs, FIIs, CRIs and CRAs present different tax treatment and rules of concentration, which may make them more or less attractive depending on the kind of investor.
  • Bankruptcy remoteness: in this instance FIDCs and FIIs have a natural advantage, since they are not subject to bankruptcy, in the case of insufficiency of their assets to pay the investors in full, the product of the collection/sale of the assets is distributed among the investors accordingly to their participation, observing the priority of each class of shares.
  • Maintenance costs: usually FIDCs and FIIs have higher maintenance costs than CRAs, CRIs and debentures.

Brazilian Circular No 3,082 of BACEN establishes and consolidates criteria for recording and accounting valuations of derivative financial instruments. Complementing this, Resolution No 3,533, of 31 January 2008 establishes procedures for classification, accounting registration and disclosure of transactions for the sale or transfer of financial assets.

Financial institutions are subject to the rules of risk management structure, capital management and the information disclosure policy, which established the calculation and disclosure of the amount of risk-weighted assets (RWA), the adequacy of the reference equity (PR), the liquidity indicators and the leverage ratio, among other risks. Failure to comply with the rules provided for subjects those responsible to the penalties applied by BACEN, which are the same as those listed in 4.4 Periodic Reporting.

Additionally, investment funds are also subject to specific rules regarding the possibility of using derivative instruments, the possibility of whose use will depend on the type of investment fund, target audience and applicable rules.

Without prejudice, CVM Instruction No 480/09 determines that issuers of securities must indicate the use of derivatives in their financial statements.

The main material forms of credit enhancement used in securitisation structures in Brazil are co-obligation of the assignor in credit assignments, subordination of assets, fiduciary assignments of receivables, fiduciary sale of real estate and/or of movable assets, personal guarantees, letters of guarantee, mortgages, pledges, among other types of guarantees.

Public entities and/or entities that have public participation in their capital stock may issue assets for securitisation purposes. In addition to the rules applicable to other entities, these public entities and/or entities that have public participation are subject to additional requirements.

Generally, the participation of public entities in securitisation transactions depends on the previous authorisation of their respective administrative entities. If the securitisation structure implies any form of risk retention by the assignor, the participation of the assignor in the transaction shall also be conditional on the prior approval of the Brazilian Senate.

Investors in securitisations vary according to the type of asset and its form of distribution.

Generally, public offerings of FIDCs, FIDC NPs, CRIs and CRAs are directed at qualified investors or professional investors.

Exceptionally, CRI offerings under CVM Instruction No 400/03, that meet the requirements provided in Article 6 of CVM Instruction No 414/04 and CRA offerings under CVM Instruction No 400/03, that meet requirements provided in Article 12 of CVM Instruction No 600/19, may be directed to general investors.

CVM Resolution No 30/21 provides for the classification of investors as follows.

  • Qualified investors:
    1. professional investors;
    2. natural persons or legal entities who have financial investments in an amount greater than BRL1 million;
    3. individuals who have been approved by technical qualification tests or who have certifications approved by the CVM as required for the registration of independent investment agents, investment portfolio managers, analysts and securities consultants, regarding their own investments; and
    4. investment clubs, provided that the investment portfolio is managed by one or more shareholders, who are qualified investors.
  • Professional investors:
    1. financial institutions and other institutions authorised to operate by BACEN;
    2. insurance and capitalisation companies;
    3. open and closed pension funds;
    4. natural persons or legal entities who have financial investments in an amount greater than BRL10 million;
    5. investment funds;
    6. investment clubs, provided that their investment portfolio is managed by a securities portfolio manager authorised by the CVM;
    7. independent investment agents, investment portfolio managers, analysts and securities consultants authorised by the CVM, regarding their own investments; and
    8. non-resident investors.

In general, the transferring of the credits to the securitisation vehicles is made through an assignment agreement, which sets forth the terms and conditions of the transaction and lists individually the credits object of the transferring.

The main provisions covered by the assignment agreement are:

  • the price and form of payment;
  • the mechanism of transference of the documents which represent the credits;
  • the responsibility of the assignor for the existence of the credit;
  • the conditions for the resolution of the assignment;
  • the conditions for credit repurchase by the assignor, voluntary or mandatory;
  • the covenants to which the assignor is subject; and
  • the representations and warranties stating, among other things, the regularity of the transaction and that the credits are free and clear of any kind of encumbrance.

The essential representations and warranties provided in securitisation transaction documents are as follows.

  • In relation to the assignor:
    1. being duly incorporated;
    2. having full, legal and unencumbered ownership of the receivables;
    3. being assignment liabilities;
    4. being solvent (ie, not subject to any insolvency proceedings); and
    5. being in compliance with applicable laws and regulations.
  • In relation to transaction documents:
    1. the parties must have the necessary powers and authorisations to enter into transaction documents; and
    2. the obligations must be valid and binding.
  • In relation to receivables:
    1. the receivables exist, are valid, free of any liens or encumbrances and were originated in accordance with all applicable legal provisions and regulations;
    2. consents and authorisations for credit assignment were published; and
    3. the receivables meet the eligibility criteria for the assignment.

Misrepresentation is commonly considered an event of default and can lead to an early termination of the transaction.

Despite it being possible to adopt arbitration through its express provision in the assignment agreement, the most common form of enforcement in securitisation transactions is through a court of law.

The main perfection provisions in securitisation transaction documents are:

  • representation that the signatories are entitled and may legitimately execute the documents;
  • delivery of the documents which represents the credits, as applicable;
  • payment of the price (eg, purchase price or subscription price);
  • accomplishing of suspensive conditions, if any;
  • execution of the documents by the parties’ representatives;
  • execution of the documents by two witnesses, in order to assure the condition of judicial execution instrument; and
  • a notification of the debtor (in an assignment agreement).

The commitments assumed in transaction documents may vary according to the transaction. The commitments assumed by the parties in the documents of the securitisation transaction are generally as follows.

  • In relation to the assignor:
    1. to be in compliance with applicable laws and regulations;
    2. transfer of asset charges pursuant to the collection agreement and other transaction documents;
    3. providing all reasonably necessary information in relation to the transferred assets;
    4. maintenance of any and all approvals and records; and
    5. no other liens on the assigned assets.
  • In relation to guarantors, if any:
    1. comply with applicable legislation and regulations;
    2. providing all reasonably necessary information;
    3. maintenance of any and all approvals and records; and
    4. no other liens on the assets covered by the guarantee.

Securitisation companies are responsible for controlling, monitoring and collecting the credit rights linked to the transaction. Nevertheless, it is possible to subcontract to service providers for the determined activities without a securitisation company being exempted from its responsibilities.

Service agreements include a schedule with detailed service provisions specific to each securitisation process.

The securitisation documents are not standardised, considering that each transaction, whether a CRI, CRA or FIDC, occurs in a specific way designed to meet the particularities of each process.

In CRI, CRA and debentures issuances the main events of default regarding the assignor are:

  • failure to pay any amount set forth the transaction documents;
  • cross default and cross acceleration of other debts;
  • if the transaction documents are deemed void, illegal or non-enforceable;
  • failure to comply with the obligations provided in the transaction documents;
  • failure to comply with the financial covenants;
  • bankruptcy; and
  • misrepresentation.

Usually, the events of default are divided into (i) defaults that automatically lead to early termination of the transaction and (ii) defaults that are subject to a general meeting of the investors in order to resolve on early termination of the transaction.

The events of default regarding CRI, CRA and debenture transactions are controlled and monitored by the trustee, if duly hired in the transaction, or by the securitisation company.

In the case of investment funds, the events of default are structured in the form of events of evaluation and events of winding up. The main events of evaluation or winding up are non-compliance with concentration indices and limits; non-compliance with cash reserves, amortisation reserves and reserves for charges and expenses; non-compliance with the constitution of guarantees, among others.

The events of default regarding investment funds are monitored by the administration and the fund manager, as set forth in the investment fund’s by-laws.

In relation to indemnities, Brazilian law determines in cases involving credit assignment that the assignor becomes responsible for the existence of the credit. The assignor is also responsible for the correct constitution and existence of the assigned credit in several cases, and the failure to comply with this responsibility is considered as indemnity matter.

The obligation to indemnify securitisation companies against claims, obligations, losses and damages usually arises from (i) misrepresentation, (ii) actions or omissions arising from intent or gross negligence on the part of the assignor, and (iii) legal or administrative claims or claims filed by the issuer or third parties in relation to the transaction. The indemnification is enforceable by a jurisdictional provision.

In synthesis, the role and responsibilities of issuers consist of:

  • acquiring the underlying credit;
  • issuing the securitisation securities based on the underlying credit;
  • collecting the underlying credit;
  • repaying the investors;
  • issuing reports on the underlying credit; and
  • complying with the rules applicable to them and the provisions set forth in the securitisation documents.

The sponsors can originate, directly or indirectly, the securitisation assets or have a relevant participation in the transaction and their responsibilities are linked to the activities they perform in the transaction.

Under the terms of item “v” of Article 115 of Circular No 3648/13 of the BACEN, the sponsor may be a natural or legal person, who must perform one of the following activities:

  • direct or indirect origination of the underlying asset;
  • administration or advising of the issuing counterparty for the underwriting of securitisation bonds;
  • participation in the public placement of securitisation bonds;
  • provision of credit or liquidity enhancement to securitisation bonds issued by the issuing counterparty or credit risk retention in any other form; and
  • assumption, through implicit support of any non-contractual obligation, to cover losses of investors in securitisation.

Underwriters are institutions authorised by BACEN and the CVM to co-ordinate, carry on and organise public offerings of securities.

The principal activities of underwriters under the applicable regulation are:

  • taking all precautions and acting with high standards of diligence to ensure that the information provided in the transaction documents and to the market during the entire offering period, including any occasional or periodic information, are true, consistent, correct and sufficient, allowing investors to make a reasoned decision regarding the offer;
  • disclosure to the investors of any conflict of interest;
  • ensuring that the offering is suited to the level of sophistication and risk profile of the investors; and
  • suspending the offering and immediately notifying the CVM if any irregularity is found.

The underwriter shall keep, for five years, at the disposal of the CVM, the supporting documentation of their diligence to comply with the provisions of the paragraph above, under the terms of the CVM Instruction No 400/03.

The financial institutions authorised to act as underwriters are investment banks, securities dealerships firms (DTVMs), securities broker firms (CCTVMs), and in the case of FIDCs and FIIs, their own asset managers. Real estate CSCs and agribusiness CSCs can be the underwriters of their own issuances in an amount up to BRL100,000, provided they comply with the provisions of Article 9 of CVM Instruction 414 and Article 13 of CVM Instruction 600.

The role and responsibilities of servicers varies depending on the function of the securitisation vehicle used; their main functions may include:

  • supporting the analysis and selection of credit rights to be assigned;
  • providing support activities to the custodian, if any;
  • monitoring of credit rights; and
  • collection of credit rights.

Investors in securitisation vary according to the type of asset and its form of distribution.

Generally, public offerings of FIDCs, FIDC NPs, CRIs and CRAs are directed at qualified investors or professional investors (see 4.14 Entities Investing in Securitisation for further details).

Exceptionally, CRI offerings under CVM Instruction No 400/03, that meet the requirements provided in Article 6 of CVM Instruction No 414/04 and CRA offerings under CVM Instruction No 400/03, that meet the requirements provided in Article 12 of CVM Instruction No 600/19, may be directed to general investors.

In relation to FIDCs, the role of trustee is performed by the custodian, which is a legal entity duly registered at the CVM to exercise its activities. The custodian is responsible for:

  • validating the credit rights in relation to the eligibility criteria established in the fund by-laws;
  • receiving and verifying the documentation that evidences the backing of the credit rights;
  • checking the documentation that evidences the credit rights;
  • carrying out the physical and financial settlement of credit rights;
  • custody of documentation relating to credit rights and other assets comprising the fund's portfolio;
  • ensure that the credit rights documentation is kept up-to-date and in duly executed; and
  • collecting and receiving, on behalf of the fund, payments, redemption of securities or any other income related to the securities in custody.

Regarding CRI and CRA transactions, securitisation companies are responsible for controlling, monitoring and collecting the credit rights linked to the transaction. Nevertheless, it is possible to subcontract service providers for the determined activities without exemption of its responsibilities. Pursuant to CVM Resolution 17, of 9 February 2021, the mains responsibilities of the trustee in such cases are to:

  • protect the rights and interests of the investors, monitoring the compliance with the terms and conditions provided in the transaction documents and calling general meetings, when applicable;
  • resign in the event of a conflict of interest or any other form of inability;
  • keep all documentation relating to the exercise of their functions in good custody;
  • monitor the securitisation companies' periodic information provision and alert the holders of the securities regarding inconsistencies or omissions of which they are aware;
  • monitor the performance of the securitisation companies in the management of separate assets;
  • request, when deemed necessary, an external audit of the issuer or of the separate equity;
  • keep the list of the investors and their addresses updated;
  • notify the holders of the securities of any default by the issuer;
  • verify the procedures adopted by the issuer to ensure the existence and integrity of securities, financial assets or instruments that back securitisation transactions; and
  • verify the procedures adopted by the issuer to ensure the rights levied on securities, financial assets, or contractual instruments that back securitisation transactions.

The Circular No 3,648 /13 present a definition of "securitisation", which considers:

  • "traditional" securitisation, a process in which the flow of receipts associated with a set of underlying assets is used for the remuneration of structured securitisation bonds and, at least two payment prioritisation classes, with transfer of the underlying assets to the issuing counterparty; and
  • "synthetic" in which the flow of receipts associated with a set of underlying assets, such as credit rights, bonds or securities and credit derivatives that serve as backing for securitisation bonds, is used for the remuneration of structured securitisation in at least two payment prioritisation classes, in which credit risk is transferred through a credit derivative or any other instrument that allows such transfer.

As a general rule, any payment flow may be subject to a securitisation transaction provided that (i) it has arisen from a lawful activity, (ii) does not result from unavailable rights, (iii) there is no prohibition of securitisation/assignment in their representative documents.

Therefore, it is important to highlight the following issues.

Real estate CSCs are responsible for issuing CRIs backed by real estate credit rights (such as lease, purchase and sale of real estate, among others), pursuant to Article 6 of Law No 9,514/97.

Agribusiness CSCs are responsible for issuing CRAs backed by credit rights originating from business carried out between producers, or their co-operatives, and third parties, including financing or loans, related to production, marketing, processing or the industrialisation of: (i) agricultural products, (ii) agricultural inputs, or (iii) machines and implements used in agricultural activities, which constitute a promise of payment in cash, pursuant to Article 3 of CVM Instruction No 600/18.

Financial CSCs are responsible for the acquisition of financial credit backed by transactions carried out by multiple banks, commercial banks, investment banks, credit, financing and investment companies, real estate credit companies, leasing companies, mortgage companies, savings and loan associations and to corporations whose exclusive purpose is the acquisition of such credit, pursuant to Article 1 of CMN Resolution No 2.686/00.

FIDCs are responsible for the acquisition of rights and securities representing credit, originating from transactions carried out in the financial, commercial, industrial, real estate, mortgage, leasing and service provision sectors, and the warrants, pursuant to item i of Article 2 of CVM Instruction No 356/01.

FIDC NPs are responsible for the acquisition of credit rights:

  • arising from past due and/or pending payment when they are assigned to the FIDC NP;
  • arising from the union, states, the Federal District and the municipalities, as well as their foundations and autarchies or arising from public revenues originating therein;
  • arising from ongoing legal actions and the credit rights that are the subject of litigation, which (i) is pledged as collateral or (ii) have been judicially pledged;
  • whose origination or legal validity of the assignment to the FIDC NP is considered a relevant risk factor;
  • arising from business companies undergoing judicial or extrajudicial reorganisation;
  • of future existence and uncertain amount, as long as they arise from already existing relationships; and
  • of a nature that is not possible to be acquired by “standard” FIDCs (regulated under the terms of CVM Instruction No 356/01), pursuant to Article 1 of CVM Instruction No 444/06.

Securitisation activities may require additional procedures as a result of specific legislation applicable to the issuer, assignor, debtor and/or in relation to the assets subject to the securitisation transaction. Such specific rules are not an impediment to carrying out securitisation transactions, but must be fully complied with for the transaction to be regular.

The main securitisation structures in Brazil are carried out through real estate CSCs, agribusiness CSCs, financial CSCs, FIDCs, FIDC NPs and FIIs.

CSC Real Estate

The securitisations carried out by real estate CSCs are carried out through the issuance of CRIs, pursuant to Law No 9,514/97 and CVM Instruction No 414/04. In execution, transactions are carried out using the following procedures.

  • Acquisition of real estate credit rights by real estate CSC.
  • The issuance of a credit securitisation term, drawn up by a real estate CSC, which will contain the following elements:
    1. the identification of the debtor and the nominal value of each credit supporting the issuance, with the identification of the property with which it is linked and the indication of the real estate registry office in which it is registered, as well as the indication of the act by which the credit was assigned;
    2. an identification of the securities issued; and
    3. the constitution of other guarantees for the redemption of the securities of the issued series, if applicable.
  • Issuance of CRIs and their distribution to investors through public offering or public offering of restricted efforts and/or public offering.
  • Collection of credit rights on the due dates.
  • Amortisation of CRIs.

Transaction documents may provide for one or more classes of CRIs, noting that each class may have different interest rates, amortisation schedules, and priority levels in their amortisation.

Agribusiness CSC

The securitisations carried out by agribusiness CSCs are carried out through the issuance of CRAs, pursuant to Law No 11,076/04, Law No 13,986/20 and CVM Instruction No 600/18.

In summary, the transactions are carried out using procedures similar to the CRI mentioned above, except for the backing of credit rights that are related to agribusiness.

Financial CSC

The securitisations carried out by financial CSCs are carried out through the acquisition of financial credits backed by transactions carried out by financial institutions, real estate credit companies, leasing companies, mortgage companies and others, implemented to Article 1 of CMN Resolution No 2,686/00.

In summary, the transactions are carried out using the following procedures:

  • the assignor of credit rights enters into an agreement for the assignment of credit rights to the financial CSC; and
  • the financial CSC pays the credit rights.

FIDC and FIDC NP

The securitisations carried out by FIDCs and FIDC NPs are regulated, respectively, by CVM Instruction No 356/01 and CVM Instruction No 444/06, and are carried out through:

  • the constitution of an FIDC or FIDC NP, as well as the execution of an assignment agreement to formalise the assignment of credit rights to that FIDC or FIDC NP;
  • the issuance and distribution of FIDC or FIDC NP shares, which may be carried out by a financial institution hired to act as co-ordinator and distributor of FIDC or FIDC NP shares;
  • the collection of credit rights on the respective due dates; and
  • the amortisation of FIDC or FIDC NP shares.

Transaction documents may provide for one or more classes of shares in the FIDC or FIDC NP, noting that each class may have different interest rates, amortisation schedules and priority levels in their amortisation.

Although the pandemic caused by COVID-19 did not prevent securitisation transactions from being carried out, it generated several impacts and consequences in those securitisation transactions.

In this sense, it should be emphasised that the parties were forced to adopt valid electronic/digital procedures for signing, formalising and registering transaction documents, as well as the fact that meetings had to be carried out virtually, in compliance with the new rules provided for below.

The pandemic did not generate new assets to securitise, but it forced the parties to adopt electronic and virtual procedures to enable the continuity of the securitisation transactions.

The pandemic led to the issuance of several new CVM and BACEN regulations/legislations, which were intended to provide for the possibility of signing and formalising documents by electronic and virtual means, as well as for regulating meetings virtually. Among the new regulation/legislation, the following should be noted:

  • CVM Instruction No 625, of 14 May 2020, which aimed to regulate the participation and voting at a distance in debenture holders’ meetings;
  • Decree No 10,543, of 13 November 2020, which aimed to classify the types of electronic signatures and the acceptance or not of certain types of electronic signatures by the federal public administration/public entities;
  • Resolution No 4,810, of 30 April 2020, which aimed to establish emergency measures for the procedures related to the concession, control and inspection of rural credit operations as a result of the social distancing measures adopted to mitigate the impacts the pandemic caused by COVID-19; and
  • Resolution No 4,803, of 9 April 2020, which aimed to provide the criteria for measuring the allowance for loan losses for operations renegotiated by financial institutions and other institutions authorised to operate by BACEN due to the pandemic.
Monteiro, Rusu, Cameirão e Bercht Advogados

Rua Hungria, No 1.240
Conjunto 31
CEP 01455-000
São Paulo – SP
Brazil

+55 11 3018 4212

daniel.monteiro@monteirorusu.com.br www.monteirorusu.com.br
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Law and Practice

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Monteiro, Rusu, Cameirão e Bercht Advogados is a law firm that specialises in structuring highly complex capital market, financial and commercial transactions. Its partners have a high level of specialisation and experience in structuring securitisations, public issues of debentures, promissory notes, real estate receivables certificates, agribusiness receivables certificates and investment funds. The firm, which is headquartered in São Paulo and works with clients from all over Brazil, has nine partners and, approximately, 25 lawyers working in the areas of capital markets, M&A, advisory and civil litigation, and advisory and tax litigation. Recent relevant work includes the public offering with restricted placement efforts of: (i) receivables investment fund quotas (MadeiraMadeira I and Keycash Home Equity), (ii) the 61st issuance of agribusiness receivables certificates by Vert Companhia de Securitização, and (iii) the 346th series of the fourth issuance of receivables certificates of Virgo Companhia de Securitização. The firm has also worked on the public offering of investment funds quotas (Sparta Infra).

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