Volume 5, Number 21, Page 3

Securitization of Credits in Brazil

by Levy & Salomão Advogados

Introduction

The National Monetary Council’s (CMN) Resolution nº 2.493, of May 7, 1998, authorized the securitization of bank credits. The resolution allows banks to sell their loans to organizations that do not belong to the National Financial System (SFN). Prior to the resolution, such sales were generally allowed only in exceptional situations and required previous approval by the Central Bank. Under the new rules, bank loans may be acquired by the so-called securitization companies: special purpose corporations (S.A.s) regulated by Resolution nº 2.493.

Securitization

Securitization permitted under the new rules consists of the acquisition of bank loans by a securitization company (“underlying credits”) and the issuance by such company of securities. Redemption and other payments under such securities are necessarily conditioned upon the realization, in cash, of the underlying credits, without prejudice to the establishment of additional guarantees (Art. 4 of the Resolution).

Securitization companies may obtain funds in Brazil only by issuing shares or bonds for public distribution, or abroad, by issuing securities (Art. 1, § 1, II).

The securities in question must provide for (i) the possibility of partial or total redemption by delivery of underlying credits which were not realized on their expiration dates; (ii) the procedures applicable in case the securitization company accepts payment of non-performing credits in assets other than cash; and (iii) the procedures applicable in cases of bankruptcy, insolvency or non-judicial liquidation of debtors of underlying credits (Art. 4, Sole Paragraph).

Instruction nº 281, of June 4, 1998, issued by the Brazilian Securities Commission (CVM), sets forth special procedures for registering the issuance of bonds by securitization companies for public distribution. Accordingly, only bonds with a minimum nominal value of R$300.000,00 may be registered (Art. 2 of the Instruction). The prospectus of the issue must make it clear that all payments under the bonds are conditioned (Art.6, III of the Instruction) and must also contain certain information regarding the underlying credits, such as their origin and the identity of the respective assignor (Art. 6, II, of the instruction).

Securitization Companies

Resolution nº 2.493 imposes restrictions on securitization companies, from the wording of their names - which must include the expression “companhia securitizadora de créditos financeiros” (“financial credits securitization company”) (Art. 1, § 1, I of the Resolution) - to operational limitations that must be included in their by-laws.

The by-laws must state that until the securities have been fully surrendered, there may be no transfers of control, capital decreases, mergers, spin-offs or winding-up of the issuer. Similarly, no assignments of credits or attribution of any right over same credits to a controlling shareholder or any affiliated party, may be effected under conditions different from those specified in the securities (Art. 1, § 1, I and II, of the Resolution), unless they are effected for a value equal to or greater than the face value of the credits, less interest not yet incurred, calculated proportionally to the number of days to maturity (Art. 1, § 3 of the Resolution).

However, the limited acts described in the previous paragraph may be carried out if previously authorized by holders of at least 50% of the outstanding securities (votes of controlling shareholders or their affiliated parties not being considered for the purpose of that calculation) (Art. 1, § 2 of the Resolution).

Assignment of Credits

Assignments of credits to securitization companies regulated under Resolution nº 2.493 are not subject to the general rules concerning assignment of credits by financial institutions, contained in Resolution nº 1.962, of August 27, 1992.

Resolution nº 2.493 establishes specific rules provided the following: (i) assignments may only be made without recourse against the assignor or any institution affiliated to it (Art. 2, II); (ii) the sale of credits to an affiliated securitization company (as defined in Art. 34 of Law nº 4.595, of December 31, 1964 and Art. 17 of Law nº 7.492 of June 16, 1986) must be contracted for immediate payment only (Art. 2, § 1, I); (iii) in other cases, if term payments are called for, the provisioning of the assigned credits must be kept by the assigning institution until the price, or the underlying credit, has been fully paid (Art. 2 § 2); (iv) if the assigned credits are subject to a restriction in relation to public financing (pursuant to limits provided in Resolutions Nºs. 2.443, of November 14, 1997, and 2.461, of December, 1997), their respective values must remain computed by the assigning institution until repayment (Art. 2, § 3); and (v) credits subject to fluctuating foreign exchange rates may only be acquired with funds raised abroad (Art. 1, § 1, IV).

Resolution nº 2.493 also prohibits repurchase of credits assigned to securitization companies, the purchase of securities issued with basis on these credits, and any other operation which entails the return to the assigning institution of risks represented by assigned credits (Art. 2, § 1, Section II).

The law firm of Levy & Salomão Advogados is located in São Paulo, Brazil. Its practice areas include international banking, contracts, taxes, litigation and corporations.