Brazil: Standardization Of Debentures In Brazil

Last Updated: 16 November 2015
Article by Walter Stuber

To encourage the issuing and trading of debentures in the domestic market, the Brazilian Association of Entities of the Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais - ANBIMA) developed a proposal for standardization of the deeds of these assets.

The initiative sets parameters for the order and the drafting of the provisions, in addition to suggesting some calculation patterns.

The set of suggestions are described in the form of guidance and a model of deed, whose membership is voluntary. The guidance contains the guidelines for the preparation of the deed of debenture. The model of deed reproduces the features and sequence of information that the document should contain to follow the recommendations of good practice. The idea is to induce the issuers and coordinators of offers to use the proposed model, which does not interfere in the negotiation features of the assets, as term and profitability, for example.

The standardization is an effective way to promote the increase of transparency and liquidity of the assets in the secondary market, strengthening the domestic fixed income segment and providing direct benefits for issuers and investors.

The benefits of standardization are: (i) more agility to develop and analyze the deeds; (ii) reduction of time and costs for structuring and distribution of supply, market exposure and placement; (iii) make it easier to access information, comparing assets and provide for early redemption and prepayment clauses; and (iv) improvement in asset pricing process through unified calculation criteria.

The standardization process is voluntary, and should be stimulated by the institutions associated to ANBIMA as a model of best practice.

In practice minimum parameters are defined for deeds to offers of debentures distributed with ample or restricted efforts, pursuant to the provisions of ICVM 400 and ICVM 476, respectively[1]. These parameters refer to forms of writing and homogenization of the ordering of clauses, the standardization of calculation and consolidation of amendments to the original deed.

ANBIMA proposes a common ordering of the clauses of the deeds and with predefined sequence for easy access and comparability of information for investors.

In the case of assets with total optional early redemption or partial special depreciation minimum time limits are defined: 18 months or 40% of the total term of the asset, whichever is greater.

There is forecast for the premium payment with standardized calculation and expressed in a fixed annual fee (% p.a.) for debentures linked to DI[2] and a vertex of NTN-B[3] for debentures linked to the National Consumer Price Index - Broad (Índice Nacional de Preços ao Consumidor Amplo – IPCA)[4].

The partial optional early redemption is forbidden. The issuer has the option to provide early redemption offer and optional acquisition clauses but both mechanisms require the investors´ agreement.

Minimum items to be included in the non-automatic and automatic accelerated maturity clauses are defined. The non-automatic accelerated maturity depends on the call of a general meeting by the trustee (agente fiduciário) and the approval of the debenture holders. The automatic accelerated maturity does not depend on any such conditions.

The incorporation of the events suggested in the guidance of ANBIMA as triggers to the "accelerated maturity" is mandatory but not exhaustive. At the discretion of the parties involved in the structuring of the asset, other items of risk regarding the ongoing operation or the segment of the issuer can be added. The minimum items that must be provided on the accelerated maturity clause of the deed of issue of debentures are: (1) default of any pecuniary obligation in respect of the debentures; (2) accelerated maturity of any debt of the issuer; (3) request or declaration of bankruptcy, judicial or extrajudicial recovery or similar events involving the issuer; (4) application for liquidation, dissolution or extinction of the issuer; (5) amendment of the corporate purpose of the issuer; (6) transformation of the issuer into other type of company; (7) default of any non-pecuniary obligation in respect of the debentures; (8) change of control of the issuer; (9) default of other debts of the issuer; (10) corporate restructuring; (11) transfer to third parties of the obligations of the issuer arising from the deed; (12) lack of constitution of guarantees of the debentures (if there are guarantees in the transaction); (13) sale or encumbrance of assets of the issuer (as applicable); (14) reduction of capital of the issuer, observed the Brazilian Corporation Law; (15) protest of securities against the issuer (as applicable); (16) non-compliance with a court, administrative and/or arbitral decision by the issuer; (17) failure to obtain, non-renewal, cancellation, revocation or suspension of authorizations, concessions, permits and/or licenses necessary for the activity of the issuer (as applicable); (18) if the issuer is in default in relation to any financial obligation provided for in the deed, and payment of dividends or interest on net equity distribution above the minimum mandatory dividend (as the case may be); (19) falsehood or inaccuracy of the representations or warranties provided by the issuer in the offering documents (as applicable); (20) resource allocation of the issue of debentures differently to that provided for in the deed; (21) non-observance of financial ratios (as the case may be, and in the event of non-inclusion of this event, the deed should contain a provision stating that there is no requirement for compliance with financial ratios by the issuer); and (22) acting without complying the provisions of Law No. 12,846 of August 1, 2013 (the Brazilian Anti-Corruption Law)[5] or any other applicable legislation.

For non-declaration of the prepayment the minimum quorum in the general meetings must be equivalent to the total number of debenture holders who own 75% of the total volume of debentures in circulation. The quorum of 90% of the debentures is required at the general meeting to change the features of the debentures. There is flexibility in the requirements mentioned herein, in the case of ICVM 400 debentures directed to retail and assets subject to Law No. 12,431, of June 24, 2011 (Law 12,431/2011)[6], with high sprayed potential.

These are additional obligations of the issuer: (i) disclosure of the calls for general meetings in the site of ANBIMA; (ii) consolidation of the deed after any amendments and disclosure in the site of ANBIMA; (iii) inclusion of a legal notice (disclaimer) in the deed of assets that do not have financial ratios; and (iv) self-declaration that the issuer follows voluntarily the standard proposed Guidance for deeds of ANBIMA.

There are also guidelines for criteria of calculations, in order to make the pricing of assets and expand the trading on the secondary market, as follows: (a) unit price of R$ 1 thousand; (b) adoption of the standard rates based on 252 business days; (c) use the ANBIMA projection for price indices; (d) standardization of compensation dates of IPCA assets to increase the comparability of the debentures with government securities; and (e) disincentive to escalation or re-pricing of interest and incorporation of interest to principal. There is a relaxation of such incorporation, however, in the case of project debentures subject to Law 12,431/2011 regarding issues related to the Coverage Index (Índice de Cobertura)[7].

With the standardization of the deeds, ANBIMA consolidates best practices guidelines for debentures, expanding access to information and encouraging the increased liquidity of the securities. This is a process that aims at constant improvement to incorporate the evolution of the features of the transactions over time.

[1] ICVM 400 and ICVM 476 refer to Instructions Nos. 400 and 476, of December 29, 2003 and January 16, 2009, respectively, both issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários –CVM).

[2] The term DI comes from CDI, which means interbank deposit certificate (Certificado de Depósito Interfinanceiro), which is the interest rate used in transactions between banks.

[3] The National Treasury Note B (Nota do Tesouro Nacional B - NTN-B) is a federal public title, with a post fixed revenue, offered by the Brazilian Treasury, whose profitability is composed of an annual fee agreed at the time of the purchase plus the variation of the IPCA.

[4] The IPCA is an official Federal Government index for measurement of inflationary goals released by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística – IBGE).

[5] This law contains the rules on the administrative and civil liability of legal entities for the practice of acts against the public administration, Brazilian or foreign.

[6] These assets are the debentures issued by a special purpose company, constituted in the form of joint-stock company (sociedade por ações), related to fundraising with views to implement investment projects in the infrastructure area, or economic intensive production in research, development and innovation, considered as priorities in the manner regulated by the Brazilian federal executive branch.

[7] The Coverage Index measures how much the operating income may decrease before the company becomes unable to cover its annual costs.

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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Walter Stuber
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