Securitisation 2023

Last Updated December 14, 2022

Brazil

Law and Practice

Authors



Altit Advogados is a law firm with outstanding expertise in structured finance, capital markets and investment funds. It is also strong in corporate, corporate restructuring and M&A services. The team is composed of four experienced lawyers well known in Brazil for their skills in structuring complex and strategic deals. The firm is specifically sought after by clients who require hands-on partners that think about deals at both the macro and micro level. The team is frequently working on pre-IPOs, debtor in possession finance, distressed assets purchase, structured debt offerings and securitisation transactions of all sorts. The firm also has professionals with experience in the real estate, agribusiness, rural land, environmental law, and complex litigation fields. The firm’s portfolio encompasses international clients from the United States, Europe and the Middles East. The bulk of its workload comes from the capital markets, banking and finance and investment funds. Some of the firm’s most prominent clients are Quadra Capital, Fram Asset Management, TSEA, Stone, Ibiuna Investimentos, Impacto Bioenergy and Starbucks.

The bankruptcy of the originator (receivable’s seller) may result in the assignment of the securitised receivables being deemed unenforceable (ineficaz), under Article 130 of Brazilian Bankruptcy Law (Law No 11,101, dated 9 February 2005, as amended). In this case, the receivables may return to the originator and be attached by the originator’s creditors to guarantee the payment of their previous credits against the originator. In order to be successful, the plaintiff must prove that the receivable’s assignment resulted in actual loss to the bankrupt estate and that this was carried out with the intention to defraud its other creditors. The standard of proof to be shown by the aggrieved party under Article 130 is very high. Alternatively, if the transferred assets cannot be reconveyed, the bankrupt estate must be fully indemnified. Article 136, I, of the Brazilian Bankruptcy Law provides a safe harbour for securitisation transactions. In this case, the Law provides that the transfer of the securitised receivables shall remain in full force and effect for the benefit of the holders of the securitised securities. Case law as to the effectiveness of this legal safe harbour is still uncertain.

Putting aside the obvious risks associated with the credit (payment) risk of the assigned receivables’ debtor or even, in the case of an assignment of future receivables, their future existence, the major legal and structuring concerns in a securitisation transaction structured in Brazil, relates to the possibility of the receivable’s assignment being construed by a court of law as a fraudulent conveyance and/or as fraud against a pre-existing lawsuit (fraude à execução). If construed as a fraudulent conveyance and/or as fraud against a pre-existing lawsuit, the assignment may be declared as unenforceable (ineficaz) or void by a court of law. Throughout this questionnaire, the terms:

  • “originator”, “transferor”, “seller”, “assignor” or “sponsor” are used interchangeably to refer to the owner of the securitised receivables transferred to the securitisation vehicle;
  • “transferee”, “buyer” and “assignee” are used interchangeably to refer to the securitisation vehicle, regardless of its legal form;
  • “securitised assets” and “securitised receivables” refer to the credit receivables assigned by the originator to the securitisation vehicle;
  • “securitised securities” refer to the securities issued by the securitisation vehicle backed by securitised assets/receivables; and
  • “obligor” and “debtor” refer to the assigned receivables’ debtor.

Investment funds, such as receivables and real estate investment funds, denominated in Brazil as Fundo de Investimento em Direitos Creditórios (FIDC) and Fundos de Investimento Imobiliário (FII), respectively, and securitisation companies, are the standard securitisation vehicles in Brazil.

While a securitisation company is a legal entity organised as a regular corporation, an investment fund is not a legal entity. It is a pool of assets organised as a condominium that issues shares, which represent a pro-rata ownership stake over the fund’s net worth. Legally, holders of shares issued by a fund are de facto owners of the assets that constitute the fund’s net worth. Currently, FIDCs can be divided into two major groups:

  • FIDC charted under CVM Instruction 356, dated 17 December 2001, as amended, that purchase performed receivables, known today as “standard FIDC”; and
  • FIDC chartered under CVM Instruction 444, dated 8 December 2006, as amended (ICVM 444), that purchase performed and non-performed future receivables, credit rights of unsettled existence, legal claims against public or private parties, among others, known today as “non-standard FIDC”.

The Securities and Exchange Commission of Brazil (CVM) enacted, on 23 December 2022, Resolution 175 (RCVM 175), establishing a new legal framework for the fund industry in Brazil. RCVM 175 will come into effect as of 3 April 2023, and supersede the two above-mentioned CVM instructions. RCVM 175 provides for the charter, operation and disclosure of information about investment funds, in general, including FIDCs and FII.

Under Article 5 of RCVM 175, which regulates Article 1.368-D, item III and paragraph 3, of the Brazilian Civil Code, investment funds will be able to issue different classes of shares, with distinct rights and obligations. In this case, the administrator must establish a patrimônio segregado (isolated net worth). The moneys arising from a fund-related isolated net worth may only be used to redeem the obligations relating to the classes of shares issued by the fund and backed by it. The effectiveness of this kind of arrangement will need to be tested in the future.

The CVM enacted, on 23 December 2021, Resolution 60 (RCVM 60), which came into force on 2 May 2022. RCVM 60, together with Law 14,430, dated 3 August 2022, as amended (“Law 14,430”), represent a new consolidated regulatory framework for the securitisation industry in Brazil. RCVM 60 allows credit rights arising from “any economic segment” (Article 2, IV, RCVM 60) to back the issuance of securitised securities, such as receivables’ certificates, real estate (CRI) or agribusiness (CRA) certificates, debentures, promissory notes and “other securities” (Article 18, sole paragraph, Law 14,430). Previously, only receivables originated in the financial, agribusiness and real estate segments could be assigned to regulated securitisation companies for the purpose of being “securitised”.

An investment fund, including a FIDC or FII, is governed by its organisation charter denominated “Regulamento”. Ordinary activities of a fund are under the responsibility of an administrator (administrador). Investment and divestment decisions may be under the responsibility of a fund manager (gestor). As mentioned, a securitisation company is a regular legal entity organised as a corporation. Today, ownership and management of securitisation companies in Brazil is a business activity that resembles the rendering of a trust and similar services in Europe and the US.

From a structural point of view, RCVM 60 and Law 14,430 finally institutionalised in Brazil's capital markets the so-called “multi-seller conduits”, namely securitisation vehicles capable of issuing multi-series of CDOs, each series backed by receivables originated by multiple originators active in “any economic segment”, as provided by Article 2, IV, of RCVM 60. As per Law 14,430, securitisation companies that raise funds through public offering of securities may establish several patrimônios separados (isolated net worths), also a named a “fiduciary regime”. An isolated net worth is a pool of identified assets linked to a particular series of securities issued by a securitisation vehicle. Each isolated net worth is considered as an independent entity, with its own information reports and financial information, which must be audited by independent auditors registered with the CVM. The assets belonging to each isolated net worth are not considered as corporate assets of the securitisation company and any moneys arising thereto may only be used to redeem the obligations relating to the series of securities backed by it. Consequently, under this regime, the failure of the assets belonging to a specific isolated net worth will not adversely affect the payment of the securities issued by the securitisation company backed by other isolated net worth. This alternative will also be available for investment funds when RCVM 175 comes into effect. In other words, holders of securities issued by investment funds bear the risks associated with all the fund’s assets.

Under the current legal regime, the securitisation company is a conduit and, as such, investors may decide to transfer their isolated net worth to another securitisation company. Substantive consolidation and true sale, as understood under US law, are not legal concepts found in Brazilian law. Also, Brazilian courts, including bankruptcy courts, do not have the power to recharacterise a receivables’ assignment as a secured loan, as in the USA. However, under special circumstances, the Central Bank of Brazil has the authority to recharacterise an assignment of receivables as a secured loan.

From a financial and legal structuring perspective, the major attention point in a securitisation transaction in Brazil relates to the possibility of the receivable’s assignment being construed by a court of law as a fraudulent conveyance and/or as fraud against pre-existing lawsuit (fraude à execução) and, therefore, being declared as unenforceable (ineficaz) or void, thus resulting in the return of the disposed assets to the debtor’s property.

A transfer of receivables under Brazilian law must comply with the applicable rules set forth by the Brazilian Civil Code, which are straightforward. The assignment of certain types of specific asset, such as credit card receivables, legal claims against the federal government, etc, may require compliance with additional specific legal requirements. Sometimes it is recommended that the assignment agreement be executed as a public deed (instrumento público).

Most assignments in the context of securitisation transactions in Brazil are contracted without recourse to the seller. If the underlying documentation related to the assigned receivables does not require otherwise, prior consent and notice to the obligor are not required under Brazil law for transferring title (“ownership”) over the securitised receivables from the originator to the buyer’s estate. Assuming that the assigned receivables are free and clear, title is transferred automatically with the execution and delivery of the assignment agreement. Brazilian law allows the assignment of present and future receivables, in so far as they are carefully identified. However, assignment notice is necessary for the assignment to be perfected against the obligor. Perfection in this case means that, after notice, to be discharged of its obligations, the obligor must pay its debt only to the assignee. To be considered as perfected before third parties other than the obligor, the agreement shall be filed for registration before a Public Registry of Deeds and Documents located at the buyer’s and seller’s principal place of business or executed as a public deed (instrumento público). It is advisable that such filing be done within 20 days of the execution and delivery of the assignment agreement.

A true sale, as understood under US law, is not a legal concept found in Brazilian law. In Brazil, from a financial and legal structuring perspective, the major point of attention in a securitisation transaction relates to the receivable’s assignment being construed as a fraudulent conveyance and/or a fraud against pre-existing lawsuit (fraude à execução) and, therefore, being declared as unenforceable (ineficaz) or void by a court of law.

Fraudulent Conveyance ‒ Actio Pauliana

Even if the assignor is not subject to a bankruptcy proceeding, its creditors may under the Brazilian Civil Code bring a civil fraud action (action pauliana) to void the assignment, claiming that the assignment has resulted (i) in a loss to the debtor’s creditor evidenced by a reduction of its estate and (ii) was carried out with the intention to defraud creditors. Similarly, where the assignor is subject to a bankruptcy proceeding, its creditors, the bankruptcy trustee or the Public Prosecutor's Office may under Article 130 of Brazilian Bankruptcy Law bring a legal action seeking the annulment of the assignment (ação revocatório), claiming that it has resulted in a loss to the debtor’s creditor evidenced by a reduction of its estate and was carried out with the intention to defraud creditors. In both cases, the assets in question shall be returned to the debtors’ estate with all accessories. The standard of proof in both cases is high.

Fraud Against Pre-existing Lawsuits (Fraude à Execução)

Holders of existing legal claims against the seller may under Brazilian law dispute the receivable’s assignment, claiming that the assignment may adversely affect their capacity to collect their debt if successful on their legal claim against the defendant obligor. Fraud against pre-existing lawsuit is certainly the most important legal risk in any transaction, including a securitisation, that results in the transfer or encumbrance of an asset. Special attention should be given to Article 185 of the Brazilian Tax Code (Código Tributário Nacional), which creates a rebuttable presumption that a sale or encumbrance of an asset by a taxpayer in arrears with the Public Treasury for a liquid, certain and duly registered tax claim, is fraudulent. This presumption is rebuttable if it can be shown that enough assets were set apart in order the ensure the payment of the relevant tax claim (Article 185, sole paragraph, Brazilian Tax Code).

Economic Substance Rather Than Legal Form

Financial institutions traditionally assign their receivables to mitigate capital constraints. The Brazilian Central Bank is responsible for their monitoring and control and, thus, defines risk retention guidelines that determine when a financial institution that assigns an asset:

  • may remove it from its balance sheet and account the consideration received by it as profit; or
  • should maintain the assigned asset on its balance sheet and account the consideration received as a liability.

If the Brazilian Central Bank intervenes in a financial institution or declares its liquidation, the trustee appointed by the Brazilian Central Bank, taking into consideration the economic substance rather than the legal form of the transaction, has the power and authority to recharacterise the “assignment” as a liability instead of a sale. In this case, the buyer of the receivables originally “assigned” may be treated by the Central Bank trustee as a clean, unguaranteed creditor of the assignor. The power to recharacterise an assignment as described above is a feature of Brazilian legislation applicable to financial institutions. Courts of law do not, unlike in the USA, have such prerogative.

A securitisation vehicle is traditionally organised in Brazil as an investment fund (FIDC, FII, etc) or a securitisation company for the exclusive purpose of acquiring the securitised receivables from its originator. Regardless of its form, securitisation vehicles’ incorporation documents limit the powers of their managers. They are not allowed, for instance, to hire employees and carry out any action that is alien to their corporate purpose or unrelated to the securitisation transaction. If the underlying securitised assets do not perform, the assets are transferred to the holders of the securities to which they are linked. The securitisation vehicle may or may not be wound up. Insolvency situations affecting securitisation vehicles are very rare in Brazil. This risk is further mitigated if an “isolated net worth” is established. From this perspective, a securitisation vehicle may be regarded as “bankruptcy remote” for the purposes of Brazilian law.

As already highlighted, isolation from the risks associated with the originator’s insolvency may be achieved if the financial and other factual considerations as to the originator at the time of the assignment may not allow the assignment of the receivables to be construed as a fraudulent conveyance and/or as fraud against pre-existing lawsuit (fraude à execução) and, therefore, be declared unenforceable (ineficaz) or void by a court of law. Careful due diligence of the seller’s economic and financial condition, particularly from a labour and tax perspectives, and of the targeted assets, is the golden rule for assessing the intensity of this risk.

Taxes on receivable’s transfers are a straightforward issue.

IOF Tax

If the assignee remains responsible for the payment of the assigned credit (assignment with recourse), the assignment may be subject to the tax on financial operations (imposto sobre operações de crédito, câmbio e seguro, ou relativas a títulos ou valores mobiliários – “IOF/Credit”). Up to 1.5% per day on the total amount of the credit transaction may be levied for IOF/Credit purposes. The effective rate applied on the principal amount of the facility is now 0.0041% per day for legal entities (or 0.0082% per day for individuals), plus an extra 0.38% rate, up to a maximum total of 1.88% (for legal entities) or 3.37% (for individuals). IOF/Credit does not apply if the assignee is a non-Brazilian resident. The Federal Executive Branch may raise/lower IOF rates at any time up to its maximum chargeable amount, without prior Congressional consent. Any such increases are effective right away but cannot be retroactively applied.

Capital Gains

If the market value of the consideration received by the originator is greater than the historical or book value of the assigned asset, the originator may be subject to capital gains tax. An assignment of receivables is generally not subject to withholding tax. Given that the originator may be an individual or a legal entity, the tax burden will vary according to the tax regime of the assignor. If the originator is a legal entity subject to the real profit (lucro real) tax regime, losses may be deducted for the purpose of determining the tax base subject to the Corporate Income Tax (IRPJ) and Social Contribution Tax (CSLL). For IRPJ/CSLL purposes, if the originator is subject to the presumed profit regime (lucro presumido), the total sale price will be accordingly taxed as part of the originator’s gross revenues.

With the enactment of Law 14,430, and considering the changes introduced by it on item VII of Article 14 of Law 9,718, all securitisation companies are subject to the real profit (lucro real) tax regime. Under this regime, the taxable income of a legal entity is calculated considering their gross income less deductions and expenses allowed by the legislation. Thus, as per Law 9,718, as amended by Law 14,430, for the purpose of determining the tax base subject to the IRPJ/CSLL, the securitisation company may deduct from its gross income the amount of financial expenses associated with interest paid to security holders and other financial liabilities owed by it. Therefore, securitisation companies are taxed only on the spread of their operations. The current tax regime unfortunately does not eliminate all tax friction. For example, there are certain tax inefficiencies arising from gains earned by securitisation companies on investments on surplus cash held by it. Such minor inefficiencies are not present when the securitising vehicle is a FIDC. Nevertheless, the advantages associated with using a securitisation company as a securitisation vehicle of choice usually outweigh the disadvantage.

Under Article 744 of Decree No 9,580, dated 22 November 2018, as amended, gains earned by the assignee arising from a discount on the acquisition of a receivable originated in Brazil will be subject to Brazilian withholding tax at a rate of 15% levied on the amounts gained. The buyer’s attorney-in-fact located in Brazil is responsible for withholding and collecting such tax. Practitioners deal with such taxes by not incorporating the securitisation vehicle in a “tax haven”, which could result in an increase of the capital gain tax from 15% to 25%, as determined by Article 744, Section 4 of the Decree No 9,580. As per Decree No 6,385, dated 14 December 2007, as amended, a foreign exchange tax (IOF/Câmbio), at a rate of 0.38%, will also be due on foreign exchange transactions involving the remittance of funds abroad.

Taxes applicable to securitisation transactions consist essentially of capital gain tax, corporate income tax (IRPJ), social contribution tax (CSLL) and financial operations/foreign exchange tax (IOF); the rate and incidence will depend on the nature of the relevant party (whether a legal entity or an individual) and jurisdiction (whether Brazilian or foreign). Due to the complex tax system in Brazil, each transaction usually requires a careful tax assessment.

Normally, legal opinions are requested for the purpose of confirming the following legal aspects:

  • good standing and enforceability of the assigned receivables;
  • good order and sufficiency of approvals obtained in lieu of the transaction;
  • signatories of the transaction documents have powers to represent the contracting parties; and
  • that the agreements signed in lieu of the transaction represent valid, effective and enforceable obligations of the contracting parties in accordance with their terms.

Additionally, structurers currently require legal opinions dealing with legal risks associated with the solvency of the assignor from a fraudulent conveyance perspective.

Under CVM Resolution 155, dated 23 June 2022, as amended, publicly traded companies must present their consolidated financial statements following the guidelines issued by the International Accounting Standards Board (IASB). To comply with this, the consolidated financial statements of publicly held companies must be prepared based on pronouncements that are fully in line with the international standards, issued by the Accounting Pronouncements Committee (CPC) and approved by the CVM.

Article 177 subsections 3 and 5 of the Brazilian Corporation Act (Law No 6,404, dated 15 December 1976, as amended) are also relevant, establishing that the financial statements of publicly held companies shall be audited by independent auditors registered with the CVM and prepared in accordance with the international accounting standards. CVM Resolution 76, dated 22 March 2022, as amended, approved CPC 48, which, among other issues, defines risk retention criteria for recognising the transfer of a specific asset and the consideration received as a sale or a liability. The Central Bank of Brazil and the National Monetary Council define risk retention guidelines, such as Brazilian Monetary Council Resolution 3,533, dated 31 December 2008, as amended, defining criteria for determining when a financial institution that assigns an asset:

  • may remove it from its balance sheet and account the consideration received by it as a profit; or
  • should maintain the assigned asset on its balance sheet and account the consideration received as a liability.

If the Brazilian Central Bank intervenes in a financial institution or declares its liquidation, the trustee appointed by the Central Bank, taking into consideration the economic substance rather than the legal form of the transaction, has the power and authority to recharacterise the “assignment” as a liability instead of a sale. In this case, the buyer of the receivables originally “assigned” may be treated by the Central Bank trustee as a clean, unguaranteed creditor of the assignor. The power to recharacterise an assignment as described above is a feature of Brazilian legislation applicable only to financial institutions. Courts of law do not, unlike in the USA, have such prerogative. Always bearing in mind that financial institutions are subject to inspection and monitoring by the Central Bank of Brazil, including in the event of their bankruptcy, the simple fact that an assignment of a right is not treated as a sale under CPC 48 does not necessarily imply a weakness or risk for the purchaser of the credit.

A true sale, as understood under US law, is not a legal concept found in Brazilian law and Brazilian courts, including bankruptcy courts, do not originally have the power to recharacterise a receivables' assignment as a secured loan. The transfer of an asset may be jeopardised if construed by a court of law as fraudulent. Fraud should always be the main point of attention in a securitisation transaction. Local subsidiaries of foreign companies may also be obliged to follow international standards to which their controlling shareholders are subject.

The issuance of non-consolidation opinions by law firms in the context of a securitisation transaction is not a common practice in Brazil. Lawyers’ guidance in this field normally relates to the responsibility regime applicable to the originator and its managers as to disclosure duties and adherence of the originator’s financial information to applicable law.

Securitisation companies that publicly offer their securities must comply with the disclosure and financial reporting rules set forth in RCVM 60 and other applicable regulations. As per Law 14,430, securitisation companies that raise funds through public offering of securities may establish several patrimônios separados (isolated net worths), also named a “fiduciary regime”. An isolated net worth is a pool of identified assets linked to a particular series of securities issued by a securitisation vehicle. The assets belonging to each isolated net worth are not considered as corporate assets of the securitisation company and any moneys related thereto may only be used to redeem the obligations relating to the series of securities backed by it.

The securitisation company must forward to the CVM, on the date they are made available to the public, financial statements for each isolated net worth, which must be prepared in accordance with Brazilian Corporation Act and the CVM regulations. Each isolated net worth is considered as an independent entity that reports its information for purposes of preparing its individual financial statements and, as such, they must be audited by independent auditors registered at the CVM. The notes to each audited report must contain, at least, information relating to the operational context of the assets belonging to the isolated net worth in question, such as date of issuance of the securities linked to the isolated net worth, summary of its operations, criteria for revolving the portfolio (if applicable), use of derivatives (if applicable), risk retention mechanism and related guarantees, applicable accounting practices, criteria for loss recognition, description of the securitised credits (and its maturity and aging) and procedures for collection of defaulted credit rights.

If the securitisation vehicle is charted as an FIDC, it shall observe CVM Instruction 489, dated 14 January 2011, as amended (“Instruction 489”), which provides that the fund’s assets must be registered in the following groups:

  • operations with substantial acquisition of the risks and benefits in favour of the fund; or
  • operations without substantial acquisition of risks and benefits in favour of the fund.

The fund’s administrator is responsible for determining which of these groups the fund’s assets fall under. Instruction 489 also provides accounting guidelines for recognition of gain and losses by an FIDC.

Please see 4.1 Specific Disclosure Laws or Regulations for discussion on the disclosure rules.

Please see 3.1 Legal Issues with Securitisation Accounting Rules for comment on the regulation of credit risk retention rules.

Please see 4.1 Specific Disclosure Laws or Regulations.

The CVM controls the activities of rating companies in Brazil. There is no specific legislation that regulates their activities when assessing a securitisation transaction.

Please see 1.3 Transfer of Financial Assets.

Securitisation vehicles may use derivatives solely for protection purposes. However, the use of derivatives in the context of a securitisation transaction is not common in Brazil.

Investor protection is provided by the disclosure requirements, liability regime, fiduciary duties, etc, that make up Brazil’s banking and securities markets regulations, enforced by the Central Bank of Brazil and the CVM. Issuers of securities, including securitisation vehicles, underwriters and other placement agents of securities are responsible for ensuring that the information contained in offering materials are not incomplete, inaccurate, or misleading. These agents, including their managers, may be held responsible for the losses suffered by investors if they fail to fulfil their legal obligations in this regard, as well as being subject to administrative fines and sanctions imposed by the CVM and other regulatory bodies to which they may be subject.

A transfer of receivables by a financial institution must also comply with the applicable rules set forth by the Brazilian Civil Code, which are straightforward. The assignment of certain types of specific asset, such as credit card receivables, legal claims against the federal government, etc, may require compliance with additional specific legal requirements. Neither obligor’s consent nor assignment notice to the obligor is required under Brazil law for transferring title (“ownership”) over the securitised receivables from the originator to the buyer’s estate, unless the underlying transaction that gives rise to the assigned receivables requires otherwise.

Assuming that the assigned receivables are free and clear, title is transferred automatically with the execution and delivery of the assignment agreement. Brazilian law allows the assignment of present and future receivables, in so far as the same are carefully identified. However, assignment notice is necessary for the assignment to perfected against the obligor. Perfection in this case means that, after notice, to be discharged of its obligations, the obligor must pay its debt only to the assignee. To be perfected before third parties other than the obligor, the agreement shall be filed for registration before a Public Registry of Deeds and Documents located at the buyer’s and seller’s principal place of business or executed as a public deed (escritura pública). It is advisable that such filing is completed within 20 days of the execution and delivery of the assignment agreement. Please see 3.1 Legal Issues with Securitisation Accounting Rules for comment on the regulation of credit risk retention rules.

Receivables and real estate investment funds, denominated in Brazil as FIDC and FII respectively, and securitisation companies are the standard securitisation vehicles in Brazil. Issuers of securitised securities are pass-through vehicles and, in addition to extensive regulatory requirements imposed by the CVM and autoregulatory bodies such as the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais - ANBIMA), are subject to specific fiduciary duties towards the holders of their securitised securities.

Given that an investment fund is not a legal entity, but a pool of assets organised as a condominium that issues shares and, thus, the quota holders are the de facto owners of the assets that constitute the fund’s net worth. Ordinary activities of a fund are under the responsibility of an administrator (administrador), while the investment and divestment decision may be under the responsibility of a fund manager (gestor). Holders of securities issued by investment funds bear the risks associated with all the fund’s assets.

A securitisation company is a legal entity organised as a regular corporation and, subject to Law 14,430, may establish several patrimônios separados (isolated net worths), also named “fiduciary regimes”, which link a given pool of identified assets to a particular series of securities issued by the securitisation vehicle. Each isolated net worth is considered as an independent entity that reports its information for purposes of preparing individual financial statements and is, thus, subject to audit by independent auditors registered with the CVM. The failure of the assets belonging to a specific isolated net worth will not adversely affect the payment of the securities issued by the securitisation company backed by other duly designated isolated net worths.

Regardless of whether the securitisation transaction is structured through an investment fund or a securitisation company, the major attention point for all parties involved relates to the possibility of the receivable’s assignment being construed by a court of law as a fraudulent conveyance and/or as fraud against pre-existing lawsuit (fraude à execução) and, therefore, being declared as unenforceable (ineficaz) or void, thus resulting in the return of the disposed assets to the debtor’s property.

The taxes applicable to securitisation transactions consist essentially of capital gains tax, corporate income tax (IRPJ), social contribution tax (CSLL) and financial operations/foreign exchange tax (IOF). The rate and incidence of these will depend on the nature of the relevant party (whether it is a legal entity or an individual) and jurisdiction (whether Brazilian or foreign). Due to the complex tax system in Brazil, each transaction usually requires a careful tax assessment. Transaction cost considerations and investor appetite for a specific class of securities or regulatory constraints are the major factors in choosing which kind of securitisation vehicle will be used.

There are no such activities in Brazil.

The following are the principal forms of credit enhancement used in the Brazilian securitisation market:

  • subordination;
  • over-collateralisation; and
  • granting of real and personal guarantees to ensure the payment of the assigned receivables.

Credit insurance is also used as a credit enhancement strategy specially in connection with factor-like securitisation of commercial receivables.

Brazil’s Federal Development Bank (BNDES) has considered granting complementary portfolio credit risk guarantees to FIDCs that acquire performed and non-performed commercial receivables originated by micro, small and medium-sized enterprises.

Shares issued by standard FIDC are purchased by “Qualified Investors”, defined by Article 12 of CVM Resolution 30, dated 11 May 2021, as amended, (RCVM 30) as:

  • Professional Investors;
  • individuals or legal entities, holders of financial investments in an amount greater than BRL1 million and that, additionally, as per applicable legislation, evidence in writing their condition as a Qualified Investor;
  • individuals that have been approved in technical qualification exams or hold technical qualification certificates recognised by the CVM as a requirement for their registration as an autonomous investment agent, portfolio managers, analysts and securities’ consultants, as to their own funds; and
  • an investment club, provided its portfolio is managed by one or more quota holders who are Qualified Investors.

Shares issued by non-standard FIDC are purchased by “Professional Investors”, defined by Article 11 of RCVM 30, as:

  • financial institutions and other institutions authorised to operate by the Central Bank of Brazil;
  • insurance and capitalisation companies;
  • pension funds;
  • individuals or legal entities that have financial investments in an amount greater than BRL10 million and that, additionally, as per applicable legislation, evidence in writing their condition as a Professional Investor;
  • investment funds;
  • an investment club, provided it is managed by a securities’ portfolio manager authorised by the CVM;
  • autonomous investment agents, portfolio managers, analysts and consultants as to their own funds;
  • non-resident investors;
  • endowment funds.

Conversely, considering the distribution regime (eg, registered offer, limited registered offer and private placement), securities issued by securitisation companies may be acquired by Professional, Qualified, or even retail investors.

The new regulatory framework provided for by Law 14,430, RCVM 60 and RCVM 175 will expand the investor base allowed to invest in securitised securities.

Under the scope of Law 14,430 and RCVM 60 and considering the distribution regime, securities issued by a securitisation company, even those backed by non-standard receivables, may be purchased by retail investors, while shares issued by am FIDC and linked by the same non-standard receivables may only be offered to, and acquired by Professional Investors. This limitation has been preserved by RCVM 175.

Under Article 13 of Exhibit II of RCVM 175 and taking into account the distribution regime, shares issued by a FIDC, backed by standard credit rights, may now be offered to and purchased by retail investors, provided that the criteria established in the referred rule are complied with.

A transfer of receivables under Brazilian law must comply with the applicable rules set forth by the Brazilian Civil Code, which are straightforward. The assignment of certain types of specific assets, such as credit card receivables, legal claims against the federal government, etc, may require compliance with additional specific legal requirements. Sometimes, the signing of the assignment agreement as a public deed (instrumento público) is recommended.

Most assignments in the context of securitisation transactions in Brazil are contracted without recourse to the seller. If the underlying documentation related to the assigned receivables does not require otherwise, prior consent and notice to the obligor are not required under Brazil law for transferring title (“ownership”) over the securitised receivables from the originator to the buyer’s estate. Assuming that the assigned receivables are free and clear, title is transferred automatically with the execution and delivery of the assignment agreement. Brazilian law allows the assignment of present and future receivables, insofar as the same are carefully identified. However, assignment notice is necessary for the assignment to be perfected against the obligor. Perfection in this case means that, after notice, to be discharged of its obligations, the obligor must pay its debt only to the assignee. To be perfected before third parties other than the obligor, the agreement shall be filed for registration before a Public Registry of Deeds and Documents located at the buyer’s and seller’s principal place of business. It is advisable that such filing is completed within 20 days of the execution and delivery of the assignment agreement. For warranties, covenants, servicing, defaults, and indemnities in an assignment agreement, as discussed throughout the rest of 5. Documentation.

The principal representations and warranties made by receivable’s assignors are the following.

  • The assigned receivables are of the assignor’s legitimate and sole ownership, existing, valid, effective, free and clear of any liens, encumbrances or restrictions or impeding facts of any nature, which, in any way, may hinder or restrict the assignment and/or the full benefit, by the assignee, of all rights, guarantees and prerogatives arising from the ownership of the assigned receivables, including in relation to third parties, not being the object of any other sale, assignment or transfer, assignment option and/or encumbrance.
  • Only receivables that cumulatively meet certain eligibility criteria defined in the assignment are being offered by the assignor to the assignee.
  • The assignor has no knowledge, on the relevant  date, of any personal or real actions of a civil, commercial, tax or labour nature, instituted against the assignor in any court in Brazil or abroad that may involve or have as its subject matter the assigned receivables that may hinder the assignment and the full exercise, by the assignee, of the prerogatives resulting from the ownership of the assigned receivables under the terms of the assignment agreement.
  • The assignor is not insolvent and the assignment of the receivables to the assignee will neither:
    1. cause the assignor to become insolvent; nor
    2. constitute fraud to creditors or execution.
  • The assignment and the transfer of receivables, pursuant to the assignment agreement, do not establish, directly or indirectly, any consumer or commercial relationship between the assignor and the assignee.
  • The assigned receivables were not originated by fraud or in any other way or under any other circumstance that may hinder its existence, validity, or collection under the terms of Brazilian law.
  • If the obligor is a financial institution, the obligors of the assigned receivables are not, at the time of acquisition of the relevant Eligible Receivable, with their bankruptcy decreed, in judicial or extrajudicial liquidation, under a Special Temporary Administration Regime (RAET) decreed by Central Bank of Brazil, or any equivalent regime.
  • The assignor is not, at the time of acquisition of eligible receivables by the assignee, in default in respect of any of its material obligations before the assignee.
  • The assignor will destine the resources arising out of the assignment of the receivables according to the terms of the assignment agreement and other relevant documents.
  • Other standard warranties, such as powers/authorisations/valid incorporation and organisation and that the execution and delivery of the assignment agreement do not violate any other agreements/applicable regulations.

In case of a misrepresentation by the assignor, assignment agreements normally provide that:

  • the assignor may be held responsible for losses suffered by the securitisation vehicle on account of the misrepresentation;
  • the assignee may have the right to require the originator to compulsorily repurchase the assigned receivables not in compliance with the eligibility criteria;
  • terminate the assignment; or
  • a combination of the above.

Especially in the context of revolving asset securitisations, it is customary to include a provision in the agreement allowing the securitisation vehicle to require the originator to compulsorily repurchase the assigned receivables not in compliance with the eligibility criteria. To enforce its rights, certain set-off rights are traditionally granted to the securitisation vehicle allowing it to set-off any payment obligations owed to the originator, if the seller refuses to indemnify or acquire the credit rights assigned to the securitisation vehicle that do not meet the eligibility criteria. If the assignor defaults on its obligations, the assignee may have to start legal proceedings against it to enforce its rights.

Assuming that the assigned receivables are free and clear, title is transferred automatically with the execution and delivery of the assignment agreement. However, assignment notice is necessary for the assignment to be perfected against the obligor. Perfection in this case means that, after notice, to be discharged of its obligations, the obligor must pay its debt only to the assignee. To be perfected before third parties other than the obligor, the agreement shall be filed for registration before a Public Registry of Deeds and Documents located at the buyer’s and seller’s principal place of business or executed as a public deed (instrumento público). It is advisable that such filing is completed within 20 days of the execution and delivery of the assignment agreement. The assignment of certain types of specific asset, such as credit card receivables, legal claims against the federal government, etc, may require compliance with additional specific legal perfection requirements.

The main covenants in a securitisation transaction traditionally refer to specific obligations assumed by the originator in the assignment agreement in favour of the securitisation vehicle, such as:

  • obligation to perform all acts necessary to perfect the assignment as per applicable legislation;
  • not to give any kind of counter order to the debtors of the assigned receivables that may affect the rights of the securitisation vehicle;
  • not to amend, without the prior and written authorisation of the securitisation vehicle, the terms and conditions of the underlying documentation relating to the assigned receivables; and
  • to immediately transfer to the securitisation vehicle any and all amounts received in connection with the assigned receivables, even if received in error.

In some situations, the originator may act as collection agent acting on behalf of the securitisation vehicle. This role, in principle, especially in the absence of fraud, should not adversely affect the receivable’s transfer. Considering the characteristics and nature of the underlying transaction giving rise to the assigned receivables:

  • the originator may assume an obligation to immediately transfer the amounts collected to the securitisation vehicle; or
  • the receivables’ proceeds, eventually and erroneously received by the seller, shall be immediately transferred to the securitisation vehicle.

Specially under the first scenario, the securitisation runs related risks of “comingling” and needs to identify and segregate moneys belonging to the originator or the securitisation vehicle. If the assignor fails to perform its contractual obligations, the securitising vehicle may need to take legal action to protect and enforce its rights against the originator. Specific performance may not be available in some circumstances.

Servicing provisions refer mainly to the following activities:

  • procedures related to the collection and receipt of moneys arising out of the assigned receivables;
  • account receivables’ reconciliation;
  • management of escrow accounts, if any exist;
  • safekeeping of credit supporting documents; and
  • extrajudicial and judicial collection and, as the case may be, foreclosure and execution of guarantees for default of obligations by the debtor of the securitised credits or, as applicable, by any guarantors.

If the securitisation vehicle is a securitisation company and considering the nature of the underlying commercial relationship between the obligor of the assigned receivables and the originator and transaction costs considerations, activities under the first four items above are sometimes assigned to the originator. FIDC regulations, on account of conflict-of-interest concerns, are more restrictive in terms of allowing the originator to perform the above-described services.

The securitisation vehicle directly or specialised service providers hired by it may perform the servicing activities under all the items above. If the party responsible for the service activities default on its respective contractual obligations, the securitising vehicle may need to take legal action to protect and enforce its rights against the originator. Specific performance may not be available.

Because the settlement of the securities issued by the securitisation vehicle is linked to the settlement of the assigned receivables, the failure of the obligor to pay the assigned receivables on time is certainly the most important default event in a securitisation transaction. Cross-default rules have an extremely restricted application in the context of single-asset securitisation transactions. Cross-default is relevant if the transaction in question is revolving. In this case, default by the obligor of the assigned receivables, the originator and, as the case may be, the guarantor and/or even a relevant service provider, of their obligations set forth in the transaction documents, financial or otherwise, may result in the interruption of the assignment of new receivables (revolving) to the securitisation vehicle, thus resulting in the early redemption of the securitised securities. Again, the securitising vehicle may need to take legal action to protect and enforce its rights against the originator. Specific performance may not be available.

A transfer of receivables under Brazilian law must comply with the applicable rules set forth by the Brazilian Civil Code, which are straightforward. Most assignments in the context of securitisation transactions in Brazil are contracted without recourse to the seller. However, under the Brazilian Civil Code, the assignor is responsible for the existence of the assigned credit and/or the underlying relationship at the time of its assignment. Especially in the context of revolving asset securitisations, the seller traditionally represents to the buyer that it will only offer to the securitisation vehicle receivables that meet certain “eligibility criteria” defined in the assignment agreement. In this case, it is customary to include a provision in the agreement allowing the securitisation vehicle to require the originator to compulsorily repurchase the assigned receivables not in compliance with the eligibility criteria. To enforce its rights, certain set-off rights are traditionally granted to the securitisation vehicle allowing it to set-off any payment obligations owed to the originator, if it refuses to indemnify or acquire the credit rights assigned to the securitisation vehicle that do not meet the eligibility criteria. If the assignor defaults on its obligations, the assignee may have to start legal proceedings against it to enforce its rights.

FIDC and securitisation companies are the standard securitisation vehicles in Brazil. Managers of the securitisation vehicle are responsible for its day-to-day operations. Issuers of securitised securities are pass-through vehicles and, in addition to extensive regulatory requirements imposed by the CVM and autoregulatory bodies such as the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais - ANBIMA), are subject to specific fiduciary duties towards the holders of their securitised securities. Relevant day-to-day services, as outlined in the section relating to principal servicing provisions, may be under the responsibility of the securitisation vehicle or third-party service providers, including the originator.

Sponsors originate assigned receivables. Current regulations set forth that standard FIDCs may acquire performed receivables and non-standard FIDCs may acquire non-performed future receivables, credit rights of unsettled existence, legal claims against public or private parties. The RCVM 175, which will come into effect as of 3 April 2023 and supersede the CVM instructions currently in force provides investment funds will be able to issue different classes of shares, with distinct rights and obligations, including the thresholds of performed and non-performed receivables that may be purchased by FIDCs. Under the Brazilian Civil Code, sponsors, as assignors, are responsible for the existence of the assigned receivables at the time of the assignment. Unless contracted otherwise, sponsors are not responsible for the settlement (payment) of the assigned receivables by their respective obligors. Today, as per Article 2, IV of the RCVM 60, credit rights arising from “any economic segment” may be assigned to a securitisation to back the issuance of securitised securities, such as receivables’ certificates, real state (CRI) or agrobusiness (CRA) certificates, debentures, promissory notes and “other securities” (Law 14.430, Article 18, Sole Paragraph). Previously, only receivables originating in the financial, agribusiness and real estate segments could be assigned to regulated securitisation companies for the purpose of being “securitised”.

Lead-managers, underwriters, and other placement agents of securities, including securitised securities, are responsible for ensuring that the information contend in the offering materials are not incomplete, inaccurate, or misleading. These agents, including their managers, may be held responsible for the losses suffered by investors if they fail to fulfil their fiduciary and legal obligations in this regard, as well as being subject of administrative fines and other sanctions imposed by the CVM and other regulatory bodies to which they may be subject.

Service providers in the context of a securitisation transactions are traditionally responsible for the following activities:

(i) procedures related to the collection and receipt of moneys arising out of the assigned receivables;

(ii) account receivables’ reconciliation;

(iii) management of escrow accounts (if any exist);

(iv) safekeeping of credit supporting documents; and

(v) extrajudicial and judicial collection and, as the case may be, foreclosure and execution of guarantees where there has been a default of obligations by the debtor of the securitised credits or, as applicable, by the guarantors.

If the securitisation vehicle is a securitisation company and depending on the nature of the underlying commercial relationship between the obligor of the assigned receivables and the originator and transaction costs considerations, activities under items (i) and (iv) are sometimes assigned to the originator. FIDC regulations, on account of conflict-of-interest concerns, are more restrictive in terms of allowing the originator to perform the above-described services. Taking this into account, the securitisation vehicle itself, or specialised service providers hired by it, perform the servicing activities under items (i) to (v) above. If the party responsible for the service activities defaults on its respective contractual obligations, the securitising vehicle may need to take legal action to protect and enforce its rights against the originator. Specific performance may not be available. In Brazil, there are service providers for the securitisation industry of various sizes. Sometimes they are institutions subject to monitoring by the CVM (eg, fund managers) and/or the Central Bank of Brazil (eg, investment fund managers), but other times they are not.

Apart from general lock-up restrictions and adequacy rules as to which kind of investment an investor may hold, there are no regulations that impose special duties and responsibilities on investors of securitised securities investors. Their main duties and obligations as investors vis-à-vis the issuer and their other co-investors are defined in the contractual terms and conditions of their respective indentures. The securitisation vehicle is responsible for carrying out the extrajudicial or judicial actions to protect its rights as holder of the securitised receivables and their related guarantees on behalf of the holders of the securitised securities backed by them. If, for any reason, the securitisation vehicle does not have the financial resources necessary to implement such procedures, investors may be required to transfer such funds to the securitisation vehicle.

Please see 4.14 Entities Investing in Securitisation for further discussion on investors.

Brazilian law does not provide for a trust institution as understood in Anglo-American law. The agents involved in a securitisation transaction, however, such as fund administrators, fund managers, custodians, fiduciary agents of securitised securities, securitisation companies, securities distributors (banks, broker-dealers, etc) and their respective controlling entities and managers may have their activities regulated and monitored by the Central Bank of Brazil and/or the CVM. Depending on the nature of the unlawful conduct (ie, legal or tort), they may be subject to subjective or strict liability rules.

Brazil has no rules for the structuring of synthetic securitisation. In Brazil, some of the benefits of a securitisation transaction may be “derivatively” achieved when a borrower guarantees its debt obligations (eg, debenture or banking loan) by means of a fiduciary lien over real estate assets, movable assets and/or rights over moveable assets.

A fiduciary lien is structurally like a “chattel mortgage”. It is a form of security interest widely used in Brazil’s banking and capital markets’ sectors. A fiduciary lien entails the provisional ownership transfer over the assets offered as collateral to the lender until the payment of the underlying obligation. After repayment of the debt, the assets are returned to the borrower. If the borrower defaults, the lender can consolidate the ownership over the asset, sell it at auction or, in case of a credit receivable, use the proceeds arising out of its payment to pay off its credit against the borrower. Assuming that the lien in favour of the lender cannot be construed by a court of law as a fraudulent conveyance and/or as fraud against pre-existing lawsuit (fraude à execução), fiduciary liens are not in principle affected by the reorganisation or bankruptcy of the borrower. Often the credit transaction (debenture, loan, promissory note, etc), together with its guarantees, are transferred, in a “classic” securitisation, to a securitisation company or FIDC. The securitisation vehicle, in turn, issues securities backed by them. The above-described structure has been one of the most popular securitisation structures lately.

The most common financial assets securitised are:

  • corporate loans backed a fiduciary lien;
  • consumer credit;
  • credit card receivables; and
  • auto and student loans.

Please see 5. Documentation, 6. Roles and Responsibilities of the Parties and 7. Synthetic Securitisation.

Altit Sociedade de Advogados

Av. São Gabriel, 477
13th Floor
Suite 131. 01435-001
São Paulo SP
Brazil

+55 (11) 4550 3150

michael.altit@altitadvogados.com.br altitadvogados.com.br
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Trends and Developments


Authors



Altit Advogados is a law firm with outstanding expertise in structured finance, capital markets and investment funds. It is also strong in corporate, corporate restructuring and M&A services. The team is composed of four experienced lawyers well known in Brazil for their skills in structuring complex and strategic deals. The firm is specifically sought after by clients who require hands-on partners that think about deals at both the macro and micro level. The team is frequently working on pre-IPOs, debtor in possession finance, distressed assets purchase, structured debt offerings and securitisation transactions of all sorts. The firm also has professionals with experience in the real estate, agribusiness, rural land, environmental law, and complex litigation fields. The firm’s portfolio encompasses international clients from the United States, Europe and the Middles East. The bulk of its workload comes from the capital markets, banking and finance and investment funds. Some of the firm’s most prominent clients are Quadra Capital, Fram Asset Management, TSEA, Stone, Ibiuna Investimentos, Impacto Bioenergy and Starbucks.

Brazil's CDO Market ‒ The Next Frontier

2022 was a particularly important year for the development of the securitisation market in Brazil. Three major developments will be highlighted, namely:

  • the coming into force of Law 14,430, dated 3 August 2022, as amended (“Law 14,430”);
  • the coming into force, on 2 May 2022, of Resolution 60 of the Brazilian Securities and Exchange Commission (CVM), dated 23 December 2021 (RCVM 60); and
  • Resolution 175 of the CVM, dated 23 December 2022 (RCVM 175), which will come into effect on 3 April 2023.

Among other innovations, RCVM 60 consolidated and defined a single regulatory framework for securitisation companies registered with the CVM, allowing credit rights arising from “any economic segment” (Article 2, IV, RCVM 60) to back the issuance of securitised securities, such as receivables’ certificates, debentures, promissory notes and “other securities” (Article 18, Law 14,430). Previously, only receivables originating in the financial, agribusiness and real estate segments could be assigned to regulated securitisation companies for the purpose of being “securitised”.

In other words, securitisation companies are no longer distinguished by the kind of assets they may acquire for securitisation purposes. It is important to highlight that the rules applicable to financial securitisation companies, regulated by the Central Bank of Brazil Resolution 2,686, dated 26 January 2000 as amended, (“Resolution 2,686”) and by RCVM 60, remain in full force and effect. This type of securitisation company can only acquire credit rights originating in the financial market. Normally, financial securitisation companies raise funds to acquire receivables by issuing debentures and other debt instruments. It is worth noting that there are no restrictions for a non-financial securitisation company incorporated under RCVM 60, to acquire and securitise credits originating in the financial market.

Today, “securitisation companies” registered with the CVM must register under categories denominated S1 or S2 (Article 3, RCVM 60). The registration of a company in the S1 and S2 categories before the CVM is not an essential requirement for the constitution of a securitisation company. They may be charted as a closely, privately held corporation that only raises funds through unregistered private placements (ofertas privadas) of securities. The S1 category consists of securitisation companies that issue securities exclusively through the constitution of a fiduciary regime, while the S2 category does not have such restriction, although it is subject to more strict information and document disclosure requirements before the CVM.

One of the main advances fostered by the new regulatory framework is the reduction of transaction costs associated with the issuance of securities by regulated securitisation companies and the widening of the investor base that may acquire securities issued by them.

Before the issuance of RCVM 60, the main alternative for the securitisation of credit rights in Brazil, not classified as financial, agribusiness or real estate receivables was their assignment to receivables’ investment funds, denominated as Brazil Fundo de Investimento em Direitos Creditório (FIDC) or “atypical” securitisation companies, functionally equivalent to factoring companies. Today, FIDCs are divided into two classes of funds, namely standard or non-standard receivables’ funds. Regulated by CVM Instruction 356, dated 17 December 2001, as amended, a standard receivables’ fund may only acquire performed receivables. Regulated by CVM Instruction 444, dated 8 December 2006, as amended, a non-standard receivables’ fund may acquire performed receivables and non-performed future receivables, credit rights of unsettled existence, legal claims against public or private parties, etc. This will also change in 2023. As of 3 April 2023, receivables and other funds will be regulated by RCVM 175, which will come into effect on 3 April 2023, and establishes a new legal framework for the fund industry in Brazil and supersedes, among others, the two abovementioned CVM instructions. We will discuss the impact of this new rule shortly. First let us deal with RCVM 60 and Law 14,430.

From a structural point of view, RCVM 60 and Law 14,430 finally institutionalised in Brazil's capital markets the so-called “multi-seller conduits”, namely securitisation vehicles capable of issuing multi-series of CDOs, each series backed by receivables originated by multiple originators active in “any economic segment”, as provided by Article 2, IV of RCVM 60.

As per Law 14,430, securitisation companies that raise funds through public offering of securities may establish several patrimônios separados (isolated net worths), also a named “fiduciary regime”. An isolated net worth is a pool of identified assets linked to a particular series of securities issued by a securitisation vehicle.

Allegorically, each isolated net worth is an “individual legal entity” within the securitisation company, subject to independent accounting, auditing, and reporting obligations. As such, the assets belonging to one specific isolated net worth are not considered as corporate assets of the securitisation company and any moneys arising from them may only be used to redeem the obligations relating to the series of securities backed by it. Consequently, under this regime, the failure of the assets belonging to one specific isolated net worth will not adversely affect the payment of the securities issued by the securitisation company backed by other duly designated isolated net worths.

Even under the current legal regime, structuring a securitisation transaction through a securitisation company is significantly lighter compared to the setup and recurrent operational costs associated with an FIDC. For example, a securitisation company is not subject to compulsory rating or required to hire an extensive and expensive group of service providers, such as a fund administrator (administrador), fund manager (gestor), custodian responsible for the safe keeping of the fund’s underlying documentation, collection agents or other professionals responsible for performing certain complex and costly monitoring procedures measuring the default ratios of the assets backing the securities issued by the fund. It is expected that the new regulatory framework offered by Law 14,430 and RCVM 60 will foster competition among securitisation companies, economies of scale and reduction of transaction costs, especially because of its multi-seller character.

Today, shares issued by:

  • “standard FIDC” may be offered to and purchased by “Qualified Investors”, as defined by Article 12 of CVM Resolution 30, dated 11 May 2021 (RCVM 30); and
  • ”non-standard FIDC” may be offered to and purchased by “Professional Investors”, as defined by Article 11 of RCVM 30.

Today, considering the distribution regime (eg, registered offer, limited registered offer and private placement), securities issued by securitisation companies may be acquired by Professional, Qualified, or even retail investors.

The new regulatory framework provided for by Law 14,430, RCVM 60 and RCVM 175 will expand the investor base allowed to invest in securitised securities.

Under the scope of Law 14,430 and RCVM 60 and considering the distribution regime, securities issued by a securitisation company, even those backed by non-standard receivables, may be purchased by retail investors, while shares issued by an FIDC and linked by the same non-standard receivables may only be offered to, and acquired by Professional Investors. This limitation has been preserved by RCVM 175.

Under Article 13 of Exhibit II of RCVM 175 and considering the distribution regime, shares issued by an FIDC, backed by standard credit rights, may now be offered to, and purchased by retail investors, provided that the criteria established in the referred rule are complied with.

Law 14,430 also brought important changes in relation to the tax treatment applicable to securitisation companies. Thus, as per item VII of Article 14 of Law 9,718, dated 27 November 1998, partially amended by Law 14,430 (“Law 9,718”), securitisation companies are subject to the real profit (lucro real) tax regime. Under this regime, the taxable income of a legal entity is calculated considering their gross income less deductions and expenses allowed by the legislation. Thus, considering the changes introduced by Law 14,430 to Law 9,718, for the purpose of determining the tax base subject to the Corporate Tax on Legal Persons (IRPJ)/Social Contribution on Net Profits (CSLL) and Programme of Social Integration (PIS)/Contribution for the Financing of Social Security (COFINS), a securitisation company may deduct from its gross income the amount of financial expenses associated with interest paid to security holders and other financial liabilities owed by it. As can be seen, securitisation companies are taxed only on the spread of their operations. The current tax regime unfortunately does not eliminate all tax friction. For example, there are certain tax inefficiencies arising from gains earned by securitisation companies on investments on surplus cash held by them. Such minor inefficiencies are not present when the securitising vehicle is an FIDC. Nevertheless, the advantages associated with using a securitisation company as the securitisation vehicle of choice outweigh such disadvantages.

As a further development, under article 5 of RCVM 175, which regulates Article 1.368-D, item III and paragraph 3, of the Brazilian Civil Code, investment funds will be able to issue different classes of shares, with distinct rights and obligations. In this case, the administrator must establish a patrimônio segregado (isolated net worth). The moneys arising from a fund-related isolated net worth may only be used to redeem the obligations relating to the classes of shares issued by the fund and backed by it. The effectiveness of this kind of arrangement will need to be tested in the future.

As a final remark, a modern and stable regulatory framework that finally institutionalises the issuance of CDOs in Brazil will certainly attract the attention of international investors used to evaluating the risks and benefits associated with collateralised debt obligations.

Altit Sociedade de Advogados

Av. São Gabriel, 477
13th Floor
Suite 131. 01435-001
São Paulo SP
Brazil

+55 (11) 4550 3150

michael.altit@altitadvogados.com.br altitadvogados.com.br
Author Business Card

Law and Practice

Authors



Altit Advogados is a law firm with outstanding expertise in structured finance, capital markets and investment funds. It is also strong in corporate, corporate restructuring and M&A services. The team is composed of four experienced lawyers well known in Brazil for their skills in structuring complex and strategic deals. The firm is specifically sought after by clients who require hands-on partners that think about deals at both the macro and micro level. The team is frequently working on pre-IPOs, debtor in possession finance, distressed assets purchase, structured debt offerings and securitisation transactions of all sorts. The firm also has professionals with experience in the real estate, agribusiness, rural land, environmental law, and complex litigation fields. The firm’s portfolio encompasses international clients from the United States, Europe and the Middles East. The bulk of its workload comes from the capital markets, banking and finance and investment funds. Some of the firm’s most prominent clients are Quadra Capital, Fram Asset Management, TSEA, Stone, Ibiuna Investimentos, Impacto Bioenergy and Starbucks.

Trends and Development

Authors



Altit Advogados is a law firm with outstanding expertise in structured finance, capital markets and investment funds. It is also strong in corporate, corporate restructuring and M&A services. The team is composed of four experienced lawyers well known in Brazil for their skills in structuring complex and strategic deals. The firm is specifically sought after by clients who require hands-on partners that think about deals at both the macro and micro level. The team is frequently working on pre-IPOs, debtor in possession finance, distressed assets purchase, structured debt offerings and securitisation transactions of all sorts. The firm also has professionals with experience in the real estate, agribusiness, rural land, environmental law, and complex litigation fields. The firm’s portfolio encompasses international clients from the United States, Europe and the Middles East. The bulk of its workload comes from the capital markets, banking and finance and investment funds. Some of the firm’s most prominent clients are Quadra Capital, Fram Asset Management, TSEA, Stone, Ibiuna Investimentos, Impacto Bioenergy and Starbucks.

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