Brazil: Brazilian Companies Can Now Issue Real-Denominated Securities for Placement in the International Market

Resolution nº 3221, of July 29, 2004, of the National Monetary Council addresses an old claim of the financial market and expressly authorizes Brazilian companies to raise funds abroad by issuing real-denominated securities.

Stakeholders of qualifying for that modality of transaction are: (i) foreign investors, lenders willing to acquire real-denominated securities in the international market because they believe in the depreciation of the US dollar and appreciation of the Brazilian real in the Brazilian FX market and therefore, seek a higher remuneration, established based on the interest rates found in Brazil (which have been historically higher than those found in the international market); and (ii) Brazilian companies, borrowers with resources in reals and would rather not face the risk of a FX variance that would result from raising funds in a foreign currency.

The Resolution 3221/2004 lays down the procedures to register funds raised abroad by the issuance of real-denominated securities and placement thereof in the international market, by legal entities domiciled or headquartered in the Brazilian territory. Funds raised abroad and entering the country, under this Resolution, must be registered with the Central Bank of Brazil (Bacen) in the currency that effectively enters Brazil (US dollars, Euros, Yens, or any other foreign currency). Prior to Resolution 3221/2004, registration with Bacen was only possible for transactions with securities denominated in foreign currency, being that issuance of real-denominated securities was connected solely to the domestic public and private debt.

Pursuant to Bacen Circular nº 3250, of July 30, 2004, these transactions must be registered with Bacen as per instructions contained in the Regulation attached to Bacen Circular nº 3027, of February 22, 2001, which regulates the registration of foreign currency loans. It is an Electronic Informational Registration (Registro Declaratório Eletrônico - RDE) made with the Bacen’s Information System – SISBACEN, known as Financial Transaction Registration Module (Módulo de Registro de Operação Financeira - ROF) created by Resolution nº 2337 of CMN, dated November 28, 1996. After registration of the loan with the ROF, the transaction repayment schedule will be generated automatically, in national currency, within the term and financial conditions agreed between the parties.

In the case of real-denominated securities, irrespective of the registration currency, the amount in foreign currency remittable abroad is the amount, in national currency, corresponding to the payment of interest and ancillary charges accruing on the transaction and repayment of the securities principal. Repayment of the principal of those securities and charges may, alternatively, be made in national currency via bank account in the country opened in the name of the foreign creditor or designated payment agent abroad, being that said bank account must be opened and operated pursuant to the laws and regulations in force. Procedures and conditions to open, operate and register with the SISBACEN of accounts kept in national currency by individuals or legal entities domiciled or headquartered abroad (the so-called non-resident accounts, or "CC5 accounts") and the provisions on the international transfers of reals were established by the Bacen’s Collegiate Board of Governors via Circular nº 2677, of April 10, 1996, and subsequently amended by Circular nº 3187, of April 16, 2003.

We can, therefore, conclude that Resolution 3221/2004 is intended to increase the raising of funds abroad without increasing the need for FX hedge. Additionally, acknowledgement on the part of foreign investors that there has been progress in the Brazilian economy stabilization process is called for. If there is effectively demand for real-denominated securities in the international market and more Brazilian companies raise funds abroad, the entry of foreign currency in the country will increase and Bacen may again have capital to restore the Brazilian international reserves. All stakeholders will benefit from that: domestic companies that need resources to fund their operations, foreign investors willing to offer those resources and the country, which may restore its international reserves.

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