Brazil: The New Legal Regime of Debentures in Brazil

Debentures are debt instruments issued by a corporation (sociedade anônima) that will confer upon its holders (debentureholders) credit rights against the issuer, under the conditions specified in the respective indenture (deed of issue) and certificates, if any. In Brazil debentures are governed by Law No. 6.404, of December 15, 1976, as amended (the Brazilian Corporation Law - BCL).

Provisional Measure No. 517, of December 30, 2010 (MP 517/2010), introduced important changes in the BCL, with the aim of improving and adapting the system to which the debentures are subject in order to bring more flexibility to the process of issuing debentures and to facilitate the formation of a dynamic secondary market for the negotiation of these securities.

The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) decided to refer to public hearing MP 517/2010 by means of the Public Hearing Notice SDM No. 01/11, dated January 3, 2011. This is very unusual but CVM decided to adopt this procedure in this case because CVM believes that it is paramount to collect comments and suggestions of the market participants and convey them to the rapporteur of the proceedings in the National Congress that will convert the provisional measure into law. Comments and suggestions may be submitted to CVM until February 3, 2011.

These changes are outlined below.

1. The terms for repurchase of the debentures by the issuer are now more flexible, allowing a better management of its market exposure and its indebtedness degree (new wording of paragraphs 1 and 2 of article 55 of the BCL).

Under the former system, the BCL required that the amortization of debentures of the same series which do not have different maturity dates, as well as partial redemption, be effected: (i) by drawing lots (sorteio) or (ii) by acquisition on stock exchange if the debentures are quoted at a price below their par value. MP 517/2010 permits that in the case of (ii), the acquisition be made in the securities market in accordance with the rules enacted by CVM.

The issuer could only acquire its own debentures at a price equal to or below the par value, mentioning the acquisition in its management report and financial statements. MP 517/2010 establishes that such acquisition can be made with due observance of the rules enacted by CVM and the fact will be disclosed in the issuer´s management report and financial statements.

2. The Board of Directors (Conselho de Administração) of the corporation is now authorized to decide on the issuance of debentures of any kind, including convertible debentures (debentures convertible into shares), which will be subject to the rules applied to authorized capital companies (new wording of paragraph 1 of article 59 and inclusion of a new paragraph 2 in the same article 59 of the BCL).

Originally, the BCL provided that in publicly-held corporations, the Board of Directors was "authorized to decide on the issuance of non-convertible debentures and unsecured debentures". According to MP 517/2010, the Board of Directors may decide on the issuance of non-convertible debentures, regardless of any provision contained in the company´s bylaws on this subject, and the publicly-held corporation´s bylaws may authorize the Board of Directors to decide on the issuance of convertible debentures, specifying the limit for the capital increase resulting from the conversion of the debentures into shares, in terms of the amount of the capital stock or number of shares, and the kinds and classes of shares that may be issued upon such conversion.

Upon delegation of the Shareholders´ General Meeting, the Board of Directors was and continues to be empowered to decide on: (i) the time and conditions of maturity, amortization or redemption of the debentures; (ii) the time and conditions of payment of interest, participation in profits and refund premiums, if any; (iii) the method of subscription or placement and the type of debentures; and (iv) on the time of issuance. This possibility already exists in the BCL and was maintained by MP 517/2010.

3. Simultaneous issues of debentures are also allowed and this will give the issuer a most efficient way to use any available window of opportunity to launch securities with different characteristics (new wording of paragraph 3 of article 59 of the BCL, which corresponds to the former paragraph 2 of the same article 59).

The BCL contained a restriction, according to which "a corporation may not issue new debentures before placing all the debentures of previously issued series or cancelling the unplaced series, and may not negotiate a new series of the same issue before placing the previous series or cancelling the unplaced balance". This restriction was completely eliminated by MP 51/2010.

MP 51/2010 simply states that a Shareholders´ General Meeting may determine that the amount and number of series of an issue will be indeterminate, within the limits established in it.

4. There is no limit to the issuance of unsecured debentures. Therefore, unsecured debentures are equal in this aspect to subordinated debentures, which have been more adopted in the market. Consequently, the choice of the issuer between the two different instruments for fund raising (i.e. the option between unsecured debentures and subordinated debentures) will take into account the criteria of convenience and will no more result from legal inducement (article 60 of the BCL was revoked by article 21 of MP 517/2010).

Former article 60 established limitations on the issue of unsecured debentures, which were not applicable to subordinated debentures1. These limitations are no longer applicable.

5. From now on, it will be possible to hire the same fiduciary agent (trustee) for different issues of the same corporation, pursuant to the terms of the regulations to be issued by CVM. Today the market demand is greater than the real offer of fiduciary agency services and CVM intends to regulate this situation in due course to comply with the existing demand (new wording of item "a" of paragraph 3 of article 66 of the BCL).

As a general rule, the BLC prohibits any person already performing such a task for another issue of the same corporation to be appointed as a fiduciary agent in the indenture. MP 517/2010 adds an exception to this general rule and expressly permits such designation in the cases authorized pursuant to the rules to be enacted by CVM.

6. MP 517/2010 contains a specific provision dealing with the period of adjustment (monetary correction) of the face value of debentures and financial bills (letras financeiras), in an attempt to resolve a distortion that has already been identified by the market. The Brazilian Government intends to foster the use of debentures and financial bills as long-term financing instruments and the monetary correction directly affects the remuneration offered by these instruments to the investors.

Pursuant to article 7 of MP 517/2010, debentures and financial bills may be adjusted (monetarily corrected) following the same periodicity attributed to the interest payments, even if the applicable period is less than one year.

The amendments to the Brazilian legal regime of debentures edited by MPE 517/2010 are very important to increase the use of this modality of instrument by all the companies interested in raising funds in the domestic securities market and may be perfected in due course when CVM will enact the rules that are necessary to implement several of these modifications.

Footnote

1. The revoked article reads as follows:

"Article 60. Except as provided by special legislation, the total amount of debenture issues may not exceed the corporation's capital.

Paragraph 1. This limit may be exceeded until it reaches:

(a) in the case of debentures with guarantees in rem, eighty per cent of the value of the encumbered property of either the corporation itself or of third parties;

(b) in the case of debentures with a floating charge, seventy per cent of the book value of the corporation's assets reduced by the sum of its debts guaranteed by rights in rem.

Paragraph 2. The limit prescribed in paragraph 1 (a), above, may be established by reference to the corporation's assets after the income from the issue has been invested; in such a case, the funds shall be kept under the control of the trustee of the debentureholders and shall be delivered to the corporation , according to the limits laid down in paragraph 1, above, in proportion to the increases in the amount of the guarantees.

Paragraph 3. The Comissão de Valores Mobiliários may establish other limits for issues of debentures to be traded on a stock exchange or in the over-the-counter market, or to be distributed in the market.

Paragraph 4. The limits prescribed in this article shall not be applicable to the issue of subordinated debentures."

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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Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
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