Structured finance and securitisation in Brazil: overview

A Q&A guide to structured finance and securitisation law in Brazil.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured lending and Securitisation Country Q&A tool.

This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.

Roberto Mario Amaral Lima Neto and Igor Rego, Souza, Cescon, Barrieu & Flesch Advogados
Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

The Brazilian securitisation market has surged in recent years. Regulatory developments have made securitisation much more feasible following international standards. Service providers have also developed their capacity to act in these types of transactions.

Securitisations have been carried out relating to mortgages, banks and services, and industry.

Recently, securitisation backed by real estate receivables has become a facilitating factor for commercial banks to comply with provisions imposed by the Central Bank (Banco Central do Brasil) (www.bcb.gov.br). These require referred banks to allocate a certain amount of their savings deposits to financing the real estate sector. Securitisations backed by real estate receivables are awarded with a multiple greater than for other sources of real estate financing in the compliance with this allocation requirement by commercial banks. Further, securitisation in the real estate sector provides tax benefits to certain investors. For these reasons, securitisation has been focusing recently on the real estate sector.

Securitisation has also emerged recently in the agri-business sector, mainly due to tax benefits provided to certain investors that invest in securitisation in the agri-business sector, and the need for more funds to finance this sector.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

There is no sole specific law governing securitisations in Brazil.

As securitisations are conducted through public offerings (see Question 9) of securities, such transactions fall under the regulatory framework applicable to public offerings. The regulator in charge of this is the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM) (www.cvm.gov.br). The Central Bank particularly oversees securitisation practices and participants regarding securitisations carried out by financial institutions.

Securitisations are structured through the issue of:

  • Shares of a receivables investment fund (fundo de investimento em direitos creditórios) (FIDC), governed by CVM Rules No 356 and 444 and Central Bank Rule 2907. An FIDC is a flexible vehicle able to structure any sort of securitisation.

  • Real estate receivables certificates (certificados de recebíveis imobiliários) (CRI), governed by CVM Rule No 414 and the Federal Act 9514/1997. A CRI has the sole purpose of structuring securitisations backed by credits originated in the real estate sector arising from the rent, purchase or financing of a real estate property.

  • Agri-business receivables certificates (certificados de recebíveis do agronegócio) (CRA), governed by CVM Rule No 414 and the Federal Act 11076/2004. A CRA has the sole purpose of structuring securitisations backed by credits originated in the agribusiness sector.

 

Reasons for doing a securitisation

3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

The main reasons for doing a securitisation are:

  • Having an off-balance sheet alternative to raise funds.

  • Accessing the capital markets without being necessarily listed.

  • Cheaper financing, mainly for companies in the real estate and agribusiness sector, due to the tax benefits provided to certain investors to invest in securities backed by credits originated from these sectors.

  • Providing investors with an alternative exposure to credit risk.

  • Adjusting operations to regulatory capital requirements (applicable to financial institutions).

International accounting practices only affect local securitisations when the originator of the receivables is a foreign company subject to them (for example, subsidiaries of foreign companies). This impact increased when the CVM issued rules effective as of 1 January 2008, requiring the adoption of international accounting standards by Brazilian companies by 2010, observing the adjustment required by Federal Act 11638/2007 amending the Brazilian Corporate Law.

Brazilian law does not provide any risk retention requirements, although certain institutional investors particularly pension funds must observe certain exposure limits to securitisations.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

For tax and insolvency remoteness reasons, securitisations in Brazil are currently structured using investment funds (FIDCs) and securitisation companies (Companhia Securitizadora) as the SPVs.

Brazilian tax rules do not provide special treatment for pass-through companies such as SPVs. However, as an investment fund FIDCs are neutral from a tax perspective, and special tax treatment is granted to securitisation companies.

FIDCs can issue different classes of shares (senior and subordinated).

Securitisation companies can issue series of CRI and CRA. The underlying receivables of each series of CRI and CRA are separated from the estate of the securitisation company. The issue of CRI and CRA can also be structured so that a certain series of CRI/CRA is subordinated to another.

A FIDC is owned by its shareholders and formed as a condominium (that is, a structure in which each shareholder has a partial interest in its assets). Therefore, the shareholders of a FIDC are also the investors that hold the classes of its shares.

The shareholders of a securitisation company are usually capital market players that set up a securitisation company with the sole purpose of structuring the issue of series of CRIs and CRAs. Thereafter, the investors in the CRIs and CRAs are not shareholders of the securitisation companies.

Both FIDCs and securitisation companies must be registered with the CVM. Registering an FIDC with the CVM can be automatic or subject to review by the CVM, depending on the assets to be acquired by the FIDC. A securitisation company must be registered with CVM as a public company, so is subject to the same procedure followed by any company in Brazil to gain the status of a public company.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

FIDCs and securitisation companies can only be structured in Brazil. There have been a few securitisation transactions using offshore SPVs in recent years, but most transactions are structured using FIDCs or securitisation companies.

 

Ensuring the SPV is insolvency remote

6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

FIDCs are insolvency remote entities by definition. Brazilian regulations restrict FIDCs to borrowing money or leveraging their portfolios. Additionally, investment funds do not have taxes and employees to pay, making an insolvency situation very unlikely. If an FIDC's portfolio does not perform, it can deliver the receivables itself to the shareholders and be wound up.

By law the receivables underlying each series of CRI and CRA are separated from the securitisation company's estate.

The Bankruptcy Act ensures immunity from bankruptcy to investors in securitisations. For this reason, the ability to achieve insolvency remoteness has not been eroded in recent years.

 

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

Because of its legal nature as a condominium (see Question 4), investment funds (including FIDCs) are viewed by Brazilian law as separate pools of assets. Further, the underlying assets of each series of CRI and CRA are separated from the securitisation company's estate. Other than in a fraud situation, there is no risk of the assets of an FIDC, a CRA and a CRI being regarded as assets of the originator.

 

The securities

Issuing the securities

8. What factors will determine whether to issue the SPV's securities publicly or privately?

Typically, senior shares of FIDCs must be issued publicly and junior shares can be issued publicly or privately.

CRIs and CRAs issued by securitisation companies are publicly issued.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

Shares of FIDCs, CRIs and CRAs are usually listed for trading on:

These securities are usually traded in the internal market and are therefore not usually listed for trading in foreign jurisdictions.

FIDC shares can be listed by applying the bye-laws and offering memorandum of the FIDC.

Series of CRIs and CRAs can be listed by applying the indenture and offering memorandum of CRIs and CRAs.

Although listed in some cases, FIDC shares, CRIs and CRAs are illiquid securities in terms of trading volumes.

 

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

The most important types of securities issued for securitisations in Brazil are shares in FIDCs, CRIs and CRAs.

Shares in FIDCs have their rights regulated in the bye-laws of the FIDC.

CRIs and CRAs are regulated by an indenture, containing all its terms. The most relevant terms commonly regulated are:

  • Maturity.

  • Interest.

  • Subordination.

  • Collateral.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

Receivables originated from services rendered in sale of goods transactions (that is, trade receivables) are commonly used for securitisation.

Receivables originated by utility companies and by banks are also an important type of underlying asset for securitisations. Distressed and future receivables can also be used to back securitisations. In the last few years, with the expansion of the securitisation markets and due to tax incentives, underlying assets arising from real estate and agri-business have become a relevant class of assets that supports securitisations.

 

Transferring the receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

The transfer of receivables is made by an assignment agreement. The transfer is perfected by the execution of the agreement. A notice of sale must be given to the debtors of the receivables. This aims to ensure that the debtor will pay the receivables to the SPV, and that the SPV is the original assignee with the right to receive any payments from the debtor if the originator fraudulently assigns the receivables to another entity.

Although not needed, to strengthen the securitisation structure the assignment agreement is usually registered with the Titles and Public Registry, to give notice of the receivables assignment to third parties.

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

Regulations applicable to FIDCs allow the use of virtually all types of asset in securitisations. FIDCs targeting more plain vanilla receivables can obtain automatic registration with the CVM and, for more structured types of receivable, following a review by the CVM.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

Security underlying the receivables is generally established to the direct benefit of the FIDCs, CRIs and CRAs. Receivables represented by certain types of notes, for example the Credit Real Estate Note (Cédula de Crédito Imobiliária), have the ability to automatically transfer the underlying security to their holders, and therefore are commonly used to structure a securitisation when the direct creation of security is not possible or financially expensive.

 

Prohibitions or restrictions on transfer

15. Are there any prohibitions on transferring the receivables or other issues restricting the transfer? For example, is a negative pledge enforceable, or are there any legislative provisions that affect the transfer of receivables (such as consumer or data protection rules)?

There is no general prohibition on transfer, although similarly to other jurisdictions the assignment of receivables may be affected by fraudulent conveyance transactions. There may be contractual restrictions on transfer (see Question 12).

 

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

There is no risk that a transfer of title to the receivables (that is, a true sale) will be re-characterised as a loan with security. Legal opinions are often issued in relation to the issue of FIDC shares and series of CRIs and CRAs, and they include a section concerning the true sale of the underlying assets.

 

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

Transactions cannot be unwound at a later date. The Bankruptcy Act has specific provisions prohibiting the unwinding of transfers of receivables for the purposes of securitisation.

 

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

Brazilian law does recognise and enforce choice of law clauses.

However, as securitisations are currently conducted locally, with the issuer and originator being in Brazil, in most cases the transaction documents are governed by Brazilian law. On the other hand, the choice of arbitration to settle any claims arising out of a securitisation has become more usual in recent years.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

Security over an FIDC's assets is not required because, as a fund and a condominium (see Question 4), all the assets are collectively owned by the FIDC's shareholders. Further, CRI and CRA are separated by law from the estate of a securitisation company (SPV), therefore taking security over a CRI or CRA's assets is not required.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

For SPVs issuing CRIs and CRAs, security interests on the assets are structured using the fiduciary regime. This allows separation and allocation of different assets to different series of CRI and CRA issues. If the CRIs or the CRAs default, the holders can access the respective assets and sell them. There must be a fiduciary agent to look after the investors' interests in these cases.

FIDCs do not create security interests over their assets, since its shares already represent an interest in them (see Question 19).

 

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in Guide to a standard securitisation (Guide)?

Over-collateralisation and subordinated participants are the most common mechanisms of credit enhancement currently used in Brazil.

 

Risk management and liquidity support

22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

The method for liquidity support most commonly used in securitisations in Brazil is the obligation of the originator to repurchase or replace defaulting receivables. The method of cash reservation is widely used in the securitisation structures of CRIs and CRAs, as a source to readily provide funds for the investor's repayment in case of any default.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

There are generally no applicable material variations to the cash flow index accompanying Diagram 9 in the Guide (see Guide, Diagram 9 and box, Cash flow index). Securitisation securities with synthetic structures are not issued in Brazil and therefore flip clauses have not been tested in the courts.

 

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

The most common methods by which an originator extracts profit from an FIDC are through ownership of a subordinated class of its shares and from receiving a fee for servicing the receivables.

CRIs and CRAs are not usually designed to have profit extraction. Although unusual, CRIs and CRAs can be structured so that the originator holds a class of certificates that is subordinated to the class held by the investors, and this may serve as credit enhancement and profit extraction (see Guide, Profit extraction).

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

Ratings are strongly influenced by issues involving the legal certainty for enforcement of the structure and the mechanisms for providing additional collateral and liquidity.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

There are no transfer taxes applicable to the transfer of receivables.

If there is a gain on the transfer of the receivables to the securitisation structure, the originator must include this amount for the purposes of its corporate taxation (which may include taxes on profits and on revenues). This is not subject to withholding tax but is calculated and paid directly by the originator.

A relevant tax issue that may be associated with securitisation structures is the payment of tax on credit transactions (IOF tax). This tax may apply if the transfer of the receivables is considered as a loan transaction, in case payment of the receivables by a debtor is guaranteed by the originator.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.

The Brazilian government recently enacted a federal act creating the Collateralized Real Estate Letter (Letra Imobiliária Garantida). This will be a sort of covered bond to bring more funds into the financing of the real estate sector. Although already enacted, the federal act that created the Collateralized Real Estate Letter sets out that the issue of this type of security depends on further regulation by CVM and the Central Bank that is not enacted yet.

 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

Other securitisation structures apart from FIDCs, CRIs and CRAs are not common in Brazil. Synthetic structures are also not common in Brazil.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

There are currently no expected reforms relating to the securitisation regime in Brazil.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

Securitisation is mainly driven by the internal market in Brazil. Therefore, global reforms only affect securitisation in Brazil to the extent they may broadly enhance the reliance on securitisations by investors.

 

Online resources

Brazilian Central Bank

W www.bcb.gov.br

Description. Website of the Brazilian Central Bank, where official up-to-date information and rules regarding the regulation of financial institutions can be obtained. There is an English version of this website although most of its content is only available in Portuguese, including the rules enacted by the Brazilian Central Bank.

Brazilian House of Representatives (Câmara dos Deputados Federal)

W www.camara.leg.br

Description. Website of the Brazilian House of Representatives where official up-to-date federal acts can be obtained. There is an English version of this website although most of its content is only available in Portuguese, including the federal acts enacted.

Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários)

W www.cvm.gov.br

Description. Website of the Brazilian Securities and Exchange Commission (CVM) where official up-to-date information and rules regarding the regulation of capital markets in Brazil can be obtained. There is an English version of this website although most of its content is only available in Portuguese including the rules enacted by CVM. The main rules regarding the regulation of capital markets enacted by CVM are available in English in potentially out-of-date versions, including the CVM Rule 356 and the CVM Rule 400.



Contributor profiles

Roberto Mario Amaral Lima Neto

Souza, Cescon, Barrieu & Flesch Advogados

T +55 11 3089 6548
F +55 11 3089 6565
E roberto.lima@scbf.com.br
W www.scbf.com.br

Professional qualifications. Brazil, 1998

Areas of practice. Banking; structured finance; infrastructure and project finance; corporate; M&A.

Recent transactions

  • Assisting investors (including multilaterals), financiers and corporates with domestic and cross-border debt transactions, structured finance alternatives, equity and hybrid instruments.
  • Advising investors and managers in fund formation and use of funds to implement structured finance transactions.
  • Representing trading houses in the development of derivative structures to tap arbitrage opportunities in regulated markets such as electric power and commodities.

Igor Rego

Souza, Cescon, Barrieu & Flesch Advogados

T +55 11 3089 6716
F +55 11 3147 6565
E igor.rego@scbf.com.br
W www.scbf.com.br

Professional qualifications. Brazil, 2004

Areas of practice. Debt capital markets; banking; structured finance; corporate; investment funds.

Recent transactions

  • Assisting investors (including multilaterals), financiers and corporates with domestic and cross-border debt transactions, structured finance alternatives, equity and hybrid instruments.
  • Advising investors and managers in fund formation and use of funds to implement structured finance transactions.

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