Bank Credit Bonds Instituted in Brazil

By Levy and Salomão Advogados

Provisional Measure No. 1.925, issued on October 14, 1999, instituted Bank Credit Bonds. Financial institutions now have an additional instrument available to avoid lawsuits filed by delinquent debtors under the allegation of capitalization of interest. Such suits have generally been based on Article 4 of Decree 22.626, of April 7, 1933 and on Abridgment 121 of the Federal Supreme Court.

Article 3, § 1, I, of this provisional measure expressly authorizes capitalized interest to be provided in agreements. In this respect, bank credit bonds are similar to rural, industrial and commercial credit bonds; the courts have already recognized that such securities may provide for capitalization of interest (see Abridgment 93 of the Superior Court of Justice). The provisional measure also determines that such credit bonds must be issued in favor of an institution either accredited by the National Financial System or domiciled abroad (in this latter case, the obligation must be exclusively subject to Brazilian law and jurisdiction). In any case, the bonds may be assigned to any person or entity, and not necessarily to a financial institution (Article 1, Caption, and § 1). Another innovation is that creditors are now responsible for calculating the exact amount of the obligation (Article 3, § 2). In practice, such a responsibility benefits the creditors, in that it provides certainty and liquidity to the amounts so calculated.

Even though Abridgment 11 of the First Civil Court of Appeals in São Paulo admitted agreements for opening credit in checking accounts accompanied by extracts of bank operations as non-judicial executive titles, the Superior Court of justice has been overruling this standing. With the institution of bank credit bonds, this resistance by the Superior Court of Justice is no longer an issue.

Another important aspect pertaining to the disciplining of bank credit bonds refers to protests. Protests may now be filed with a mere copy of the bond if the creditor institution declares that it is in possession of the negotiable original (Article 17).

Possessory agreements are also allowed, by which property given in pledge may remain in the direct possession of the issuer of the bond or of third-party guarantors. The argument over the effectiveness of the symbolic tradition in guarantee clauses is no longer relevant. (Article 10)
Under conditions yet to be determined by the National Monetary Council, the Central Bank may authorize financial institutions to issue bank credit bond certificates (CCBs). Among other characteristics, the CCBs can be broken down and regrouped, thus constituting an additional tool for the securitization of bank credits (Article 19).

Finally, beyond the previously mentioned advances, Provisional Measure 1.925/99 improves the efficiency of the discipline of collateral. Accordingly, the granting of collateral, encompassing the relevant asset's accessories and improvements, may be formalized in the bond itself or in a separate instrument, provided that the provisions clearly identify the pledged goods. The creditor may also demand that an insurance policy be taken out on the goods with the creditor as sole beneficiary (Article 12).

For all these reasons, and also because bank credit bonds are non-judicial executive titles (Article 3), they may advantageously replace promissory notes or even contracts for opening credit in checking accounts, currently the instruments most often used in bank credit operations.

 

Editorial Board member Levy & Salomão Advogados is a São Paulo based law firm, founded in 1989 with a focus on banking and tax law.