Long-term financing in Brazil has been traditionally granted to Brazilian companies by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES) and the domestic banks have limited their activities to short-term and medium-term loans. Now, this situation is about to change because, by means of Provisional Measure (Medida Provisória) No. 472 of December 15, 20091 (MP 472/2009), the Brazilian Executive Branch authorized the Brazilian financial institutions to issue a new financial instrument known as Financial Bill (Letra Financeira – LF)2, which will also be governed by the legislation applied to the other Brazilian credit instruments3 to the extent that such legislation does not conflict with the provisions of MP 472/2009.
Pursuant to MP 472/2009, the LF is a credit document that constitutes a promise of payment in cash, issued in the registered form, which may be transferred to third parties and it is freely negotiable. It must be exclusively issued in book-entry form, through the registration in a registry and financial settlement of assets system authorized by the Central Bank of Brazil (Banco Central do Brasil – Bacen).
The LF must contain the following characteristics: (i) the title "Letra Financeira"; (ii) the name of the financial institution, which is the issuer; (iii) the number of order, the place and the date of issuance; (iv) the par value; (v) the applicable interest rate, which may fixed or floating, being admitted the capitalization of interest; (vi) the exchange correction clause (if any); (viii) other forms of remuneration, including those based on an index or a rate of public knowledge (if any); (ix) the subordination clause (if any); (ix) the maturity date; (x) the place of payment; (xi) the name of the person to whom it should be paid; (xii) the description of the in rem or personal guarantee (if any) and (xiii) the periodical payment of earnings clause (if any).
Furthermore, the LF is an extrajudicial executive instrument, which may be executed regardless of protest based on a certificate containing all the informational data registration, issued by the entity authorized by Bacen to administrate the above-mentioned registry and financial settlement of assets system. Depending on the remuneration criteria, the LP may generate a redemption value inferior to its issuance value. Its transfer of ownership is made by through the above-mentioned registry and financial settlement of assets system and the entity authorized to administrate such system will have to keep in its registries all the historical sequence of trading of the LF.
Under the terms of the applicable legislation, the public distribution of LF must comply with all the requirements set forth by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM). These requirements have not yet been issued by CVM.
The LF may be issued with subordination clause in relation to the unsecured creditors, with right of preference solely over the issuers´ shareholders to the remaining assets, if any, in the event of liquidation or bankruptcy of the issuer entity. This type of LF may be used as a debt instrument or as a hybrid instrument of capital and debt for the purposes of capital formation of the issuer entity, according to the conditions to be defined by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) in specific regulations.
The CMN has been empowered to regulate the conditions for issuance of the LF, specially the following aspects: (i) the type of financial institution authorized to issue it; (ii) the use of index, rate or methodology of remuneration; (iii) the maturity term, which cannot be less than one year; (iv) the anticipated redemption conditions of the instrument, which can only occur in an environment of competitive trading, with due observance of the minimum maturity term; and (v) the issuance limits, to be determined in accordance with the type of financial institution.
CMN Resolution No. 3836, of February 25, 2010, authorized the following financial institutions to issue LFs: multiservice, commercial and investment banks (bancos múltiplos, comerciais e de investimentos); savings banks (caixas econômicas); loan, finance and investment companies (sociedades de crédito, financiamento e investimento); mortgage companies (companhias hipotecárias) and real estate loan companies (sociedades de crédito imobiliário). Such entities can acquire LFs of their own issuance, at any time, provided that the transaction is made at the exchanges or organized over-the-counter markets4, to be kept in treasury and to be subsequently sold. The amount of LFs kept in treasury by each financial institution cannot exceed 5% of the total issued without subordination clause. This percentage comprises also the LFs kept in treasury by all the entities which form the same economic-financial conglomerate5.
The same financial institutions can also use the LFs to perform linked credit transactions (operações ativas vinculadas) funded with resources delivered or placed at their disposal by third parties, as permitted by the current regulations6.
The minimum maturity term of the LF is 24 months. The partial or total redemption before the agreed maturity date is expressly prohibited. The LF cannot be issued with a par value by unit lower than R$ 300 thousand. The public offer of LF with subordination clause is not allowed. The remuneration may be a prefixed interest rate, combined or not with floating rates7, or price indices. The exchange variation clause is not admitted. Payments shall have a minimum interval of 180 days.
Finally, MP 472/20098 also authorized the financial institutions to issue another instrument named Structured Transactions Certificate (Certificado de Operações Estruturadas), representing transactions made with derivatives financial instruments, in accordance with the terms and conditions to be set forth by the CMN. This new type of instrument, however, has not yet been regulated.
Footnotes
1 Provisional Measures have force of law and become effective after publication. MP 472/2009 was published in the Official Gazette of the Union (Diário Oficial da União – DOU) of December 16. 2009.
2 The applicable provisions are articles 38 to 43 of MP 472/2009.
3 The legislation relating to credit documents in Brazil is basically contained in the Civil Code. Supplementary material is also contained in the Bills of Exchange Law. This legislation has been amended in relation to certain credit documents as a result of the Uniform Law adopted by the international conventions at Geneva which was promulgated in Brazil by Decree No. 57595 of January 7, 1996 (checks) and Decree No. 57663 of January 24, 1966 (bills of exchange and promissory notes). On September 2, 1985, Law No. 7357 was enacted dealing with checks, based on the Uniform Law of Geneva.
4 Pursuant to CVM Instruction No. 461, of October 23, 2007, the Brazilian regulated markets comprise organized markets of securities, meaning the physical space or electronic system designed for the negotiation or registration of operations with securities by a certain number of people authorized to trade, whether they are acting on their own account or on behalf of a third party. Organized markets of securities are the Stock Exchanges, Commodities and Futures markets and the organized over-the counter (OTC) markets. These markets shall be administrated by managing entities authorized by CVM.
5 The concept of same economic-financial conglomerate used herein has the same meaning adopted by Bacen for the purposes of defining "consolidated financial statements of entities of the same group", which comprises the equity participations in companies located in Brazil and abroad which hold, directly or indirectly, solely or jointly with other partners, including by force of voting agreements, rights of partner which grant: (a) prevalence on the corporate decisions; (b) power to elect or dismiss the majority of the administrators; (c) effective operational control, by means of the common administration or management; (d) corporate control, represented by the aggregated sum of all the equity participations held by the institution, regardless of the percentage, with those held by its administrators, controllers and related companies, as well as those acquired, directly or indirectly, through investment funds. It is also necessary to consider and include in the same category all the financial institutions and other entities accredited by Bacen linked by effective operation control or acting in the market under the same trademark or trade name, even when there is no equity participation whatsoever. This definition is expressly set forth by article 3 of CMN Resolution No. 2723, of May 31, 2000, with the wording of CMN Resolution 2743, of June 28, 2000.
6 The linked credit operations are governed by CMN Resolution No. 2921, of January 17, 2002, and must comply at least the following conditions: (i) the funding provided by the third party acting as creditor will have to be linked to the credit transaction made by the financial institution which is the debtor; (ii) the funds so raised will be subordinated to the flow of payments (interest and other charges) of the credit transaction; (iii) the remuneration of the linked credit transaction must be sufficient to cover the costs of the funding; (iv) the cash flow of both operations (credit transaction and funding) must be compatible; (v) the term of the funding must be equal to or exceeds the term of the credit transaction; (vi) any payment to the creditor, including interest or other charges or repayment of principal, will be postponed, in the event of default of the linked credit transaction; (vii) partial or total non-payment of principal and interest or other charges due to the creditor, in the event that the enforced guarantees are insufficient to settle the linked credit transaction, or in other situations whereby the transaction is not financially liquidated. Furthermore, the funding cannot be guaranteed by the financial institution which will receive the funds so raised to perform the linked credit transaction, or by any related person, i.e. any individual or legal entity who/which forms the same consolidated economic-financial group as defined by Bacen. In this regard, please see note 5 above.
7 CMN Resolution No. 1143, of June 26, 1986, authorized the financial institutions to perform transactions at floating rates, which may be adjusted for fixed periods, provided that the term of the transaction is equal to or exceeds 180 days.
8 The matter is regulated by article 44 of MP 472/2009.
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.
