Brazil: Increase Of Domestic Debenture Issues In Brazil

Last Updated: 19 March 2001
Article by Walter Stuber

There is a general consensus that the Brazilian capital market is gradually becoming more attractive as a result of the reduction of the local interest rates. In the past, it was easier and less expensive to raise funds abroad by contracting foreign currency loans. Now the economic growth is opening the doors of the country mainly for projects in the energy, telecommunications and civil construction fields.

One of the main financial instruments that is being used by the Brazilian publicly-held corporations to raise funds locally is the issue of debentures. Publicly-held corporations are those companies whose securities may be bought and sold on the stock exchange or on the over-the-counter market. For this purpose, both the company and the securities issued by it must be registered with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários), known as "CVM". The securities of a closely-held company are not available to the general public, unless such company decides to be registered as a publicly-held corporation with the CVM before making any public placement of debentures.

The debentures are securities that represent an indebtedness assumed by the company, i.e. a loan granted to the issuer by the holders of the debentures (the debentureholders) and are used in Brazil in a similar manner to the bonds negotiated in the international capital markets.

The debenture is a very flexible security that may be adapted to any type of project finance transaction. This flexibility is given by the possibility of having issues of different series, several types of debentures (which may be issued with or without guarantee), the option of convertibility of the debentures into shares (which may exist or not), the selection of the best form of remuneration and the negotiation of all kinds of maturity terms according to the needs of each issuer.

The issue of debentures by a company gives their holders certain rights against the company, in accordance with the terms and conditions contained in the deed and the debenture certificates. A company may float more than one issue, and each issue may be divided into series, provided that all the debentures of a particular series have an equal par value and confer equal rights on their holders.

Debentures may be guaranteed by a guarantee in rem or by a floating charge and may or may not enjoy preference or be subordinated to other creditors of the company, in conformity with the provisions of the deed of issue. The guarantees may be cumulative. This means that one series of debentures may be guaranteed by a floating charge and at the same time by a guarantee in rem affecting a particular asset or assets. The rights of any particular series of debentureholders may be greater or less than those of other creditors or of debentureholders of a different series.

Therefore, under Brazilian corporation law there are four types of debentures, namely: (i) debentures guaranteed by a guarantee in rem, involving for example the pledge of a certain asset or assets (goods in the sense of movable property), the escrow of receivables or the mortgage of real estate (plots of land, buildings, etc.); (ii) debentures guaranteed by a floating charge, which will entitle the debentureholders to a general right to all the company’s assets, but shall not prevent transactions relating to the property composing such assets; (iii) unsubordinated debentures which have no specific guarantee, but will have the same rights attributed to the general creditors of the company; and (iv) subordinated debentures, which rank after the general creditors and have only priority over the shareholders of the company.

In other words, a debenture which has no guarantee may contain a clause which subordinates it to general creditors, in which case it shall only have priority over the shareholders with regard to the residual assets, if any, in the event of liquidation of the company.

Newly-issued debentures with a floating charge shall be subordinated to those of an earlier issue or issues and the priority will be established according to the date of inscription of the deed of issue. However, all the debentures of one series shall be treated equally.

A commitment not to alienate or to encumber real or other property subject to registration of ownership assumed by the company in the deed of issue may be enforced against third parties, provided it is registered with the appropriate registry.

Regardless of the guarantees outlined above, usually the debentures may also have the personal guarantee (fiança) of the controlling shareholders of the company or of third parties. Under a personal guarantee, all the assets of the guarantor without distinction represent the security. The contract of fiança is created by one person undertaking on behalf of another (in this case the company which will issue the debentures) to perform an obligation to his creditor (the debentureholders), if the the debtor (the issuer) fails to do so. The fiança is an accessory to the principal obligation (represented by the deed of issue).

Debentures may be convertible into shares and the company’s shareholders have a right of first refusal to subscribe for an issue of convertible debentures.

Debentures may have different levels of remuneration, such as a fixed interest rate or a monetary adjustment clause.

The term of maturity of the debentures may also vary depending on the specific circumstances of each transaction and pursuant to the strategic planning of the company. It is possible, for instance, to issue debentures with a short, medium or long-term maturity or even the so-called perpetual debentures.

Walter Douglas Stuber is a founding partner of Amaro, Stuber e Advogados Associados

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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