This page updated regularly deals with securitization developments in Brazil. If you have any news or development to contribute to this, please write to me.
Year in review of Brazilian Structured Finance: http://uqbar.com.br/
State of the Market: (by Nidhi Bothra)
May 23, 2009:
From $715 million of rated transactions in 1996; from issuances of US$ 25 million in 2002 the industry has grown manifolds and has increased consistently to US$ 5.5 billion in 2006. As per the Latin American Structured Finance Review and outlook, 2009, surprisingly when the global recession was having an adverse impact on the securitization markets world over, domestic issuances volumes in 2008 were higher than that of 2007 levels, nearing USD 5.3 billion. Moreover in the second quarter of 2008 the sovereign rating was also upgraded to investment grade giving the country another boost (Fitch ratings)
In the recent times Brazilian laws have also gone through several reforms and a lot of bureaucratic intervention has been shed away. The bankruptcy laws have also undergone considerable changes. In 2006 the Brazilian Securitisation Commission (CVM) came with new regulations on the securitization of receivables. The traditional structures was a cob-web various complexities and involved huge costs, the new regulations provided a valuable alternative to the traditional means and helped to get rid of the onerous and burdensome traditional structuring. An FIDC (Fundo de Investimento em Direitos Creditórios) structure is more preferred in Brazil for securitization transactions of late.
A predominant portion of the FIDC’s portfolio must comprise of credit rights or receivables. The new regulations allow the use of commercial, financial, industrial, real estate, leasing or rendering services credits to be included in the portfolio. Securitizing through an FIDC is attractive as the revenues of FIDC are not taxable and are also cost effective as compared to the traditional method as these need not be registered with CVM. In the event of the bankruptcy of the (credit) originating company the credits are separated from the originator company’s assets. FIDCs follow sequential payments and the senior quota is paid off completely before the subordinated quota gets any payment. The subordinated quota is retained by the originator himself.
The Brazilian Real Estate Market has also undergone significant improvement. Historically where the Brazilian real estate developers used equity funding and loans from commercial banks for finances are now doing so through FII financing (fundo de investimento imobiliario) which is similar to the US real estate investment trusts (REITs) and through securitization. Real estate receivables are securitised through CRIs (Certificados de receibiveis imobiliarios). CRI are securities that are backed by receivables originating in real estate financing and are issued by real estate credit securitization companies (companhias securitzadoras) – publicly owned companies with the sole purpose of acquiring receivables and issuing CRIs. CCIs or Cedula de credito imobiliario) are issued with the underlying asset as the real estate credit certificates. Unlike the CRIs which are issued by the public owned companies, CCIs are issued by private companies and are also backed by the personal/ corporate guarantee of the issuer but from the regulatory aspect CRIs are easier to issue than CCIs.
An interesting case of securitization transaction backed by ‘renegotiated deals’ was carried out in 2008 where the originator, Brazil's Construtora Andrade Gutierrez (AG), a construction company had securitized it receivables which have been due for decades from municipality of Belo Horizonte. The debt originated through an infrastructure work that was carried out by AG for the Belo Horizonte in 1979 and 1987, these debts were renegotiated in 2004 and 2005. There was a legal suit launched in the interim period which was dismissed by the lower appellate courts. Each annual payment is for R$16.3 million, corrected upward by the wholesale inflation index IGPM and a 9% yearly interest rate.
What is interesting is that there is a concept of precatorios (court ordered payments) which means that if any government body questions an alleged debt and after a legal battle loses the case in court it would be a ‘precatorios.’ In the present case precatorios would act as collateral, if the obligor refused to pay the debt, the court would order payments. Banco do Brasil, Deutsche Bank and Standard Bank were among the few who led precatorio-backed deals in the market since early 2007.
July 19, 2000: Brazilian securitisation market is still developing. Not too many transactions have been reported to date, even though the government has taken legal initiatives to permit and promote securitisation transactions.
Securitisation in Brazil started sometime around 1993: Standard and Poor in a report [Securitization in Latin America 1998] note that the volumes were $715 million of rated transactions in 1996, $190 million in 1995, and $180 million in 1993. In recent times, a notable transaction in Brazil was the securitisation of $ 100 million export receivables in 1997 by a chemical company Trikem Overseas.
One of the first securitisation transaction in real estate segment, where receivables out of real estate transactions were sold to cross-border investors was a Feb., 1998 deal by Cidadela, which used to the proceeds to promote installment sales of real estate developed by it.
Brazil has developed its own model of Fannie Mae: Cibrasec is a privately owned entity similar to the Fannie Mae. It completed its first purchase of mortgage loans in September 1998.
Market in 1999:
Securitization market in 1999 remained basically a future flow market. The following transactions were notable in 1999:
- Ceval, through the Bunge Trade Ltd. Trust, securitized future revenues from commodity exports, and
- Companhia Petrolífera Marlim issued two securitizations backed by future income revenues derived from oil produc-tion, with both transactions originally rated ‘brA-2’ on the Brazilian national rating scale (outstanding notes are rated ‘brA-1’).
Standard and Poor's in its report in Structured Finance July 2000 comments as under: "The prospects for the securitization of existing assets in Brazil are favorable, despite the fact that present volume of eligible assets is relatively low. Two securitization laws enacted in Brazil in the late 1990s have served as catalysts for change, since they have helped spawn the right environment for credit-originating institutions. Mortgage foreclosures or auctions are now allowed in Brazil, and banks are authorized to transfer assets to non-financial institutions. Investors are now likely to be more interested in investing in MBS and ABS in Brazil than in the past."
However, according to Standard and Poor's, the demand for securitized products in Brazil is stymied by the fact that the regulatory environment has been changing so very frequently.
Legal initiatives to promote securitisation:
In May 1998, the National Monetary Authority took the initiative to enact a law on securitisation transactions. The purpose of the law was to enable the transfer of receivables originated by banks, investment banks, leasing companies, mortgage companies, etc.
There is apparently another Ordinance (Resolution 2.686, dated January 26, 2000) which regulates the securitization of credits arising from financial institutions designed to provide an interesting and efficient mechanism for banks assets management through the sale of loans. It defines the possibility of "transfer of credits, through assignment of credits, arising from loan, financing and lease operations contracted by universal banks, commercial banks, investment banks, credit, financing and investment companies, real estate credit companies, lease companies and mortgages companies to corporations whose sole purpose is the acquisition of such credits."
For full text of the law, refer to our Securitisation laws page – click here.
Practitioners feel that the new law left a lot of loopholes: e.g., one of its provisions is that the originator will not accept subordinated notes in exchange for the assets, which curtails one of the often accepted means of credit enhancements. The 1998 law was supplemental to the law already passed in Nov. 1997 allowing banks to sell of their mortgage receivables to non-financial entities.
It may be noted that the Brazilian legal system is also not conducive to the trust concept: hence, in absence of an enabling law, securitisation deals in Brazil were prone to a number of legal impediments.
The new law permits the transfer of receivables to special purpose corporations, called "Companhia Securitizadora de Créditos Financeiros (Financial Credits Securitization Company)"; again, the insistence on the corporate form is due to absence of a pass through trust in Brazilian law. The SPC, in turn, may either domestically issue shares or debentures, or internationally issue such securities are permitted under the relevant law.
The Instruction nº 281, of June 4, 1998, issued by the Brazilian Securities Commission (CVM), provides for special procedures for registering the issuance of debentures by securitization companies for public distribution. Accordingly, only debentures 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 debentures 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).
Repurchase of receivables transferred to the SPC is not permitted.
Another notable legal initiative taken by the Government is to make foreclosures of mortgages legal. This is expected to give boost to the real estate securitisation market which has so far been not very active.
Future flows and Brazlian bankruptcy laws:
Duff and Phelps in Dec., 1999 put up a report titled Brazilian Bankruptcy Laws and Future flow securitisation. The report discusses impact of bankruptcy proceedings on future flows transactions, and is significant as future flow securitizations are not bankruptcy remote.
According to the report, there are three types of distress situations a Brazilian company may pass through – insolvência, falencia or concordata. Concardata is similar to a potential bankruptcy, like Chap 11 of the US Bankruptcy code.
Future flows are not immune from these proceedings, as the amount of existing receivables in a future flows transaction would never fully liquidate the investors' total receivables. A future flows, by very nature, would retire the investors' receivables by the originator's claims to arise in future. Thus, to the extent the receivables exist, the investors will have a senior or ownership claim thereon, but to the extent of the deficiency, that is, the difference between the total amount payable to the investors and the existing assets, it will only be an unsecured claim against the company. [Vinod Kothari comments: Any future flow transaction is always marked by certain existing framework from which the flows will arise in future. For example, oil exports will arise from oil wells, which the originator might be owning. It is always advisable that the investors be given an ownership over the receivables that exist at the time of transfer, and a security interest in the framework from which the receivables arise. This would also greatly take care of the performance risk, since if the originator goes out of business, the framework would still exist, and whoever operates it would be liable to pay the investors.]
Rating agencies would suggest the following further mitigants against bankruptcy risk in future flows:
- First, one important structural enhancement in all future-flow securitizations is the inclusion of early amortization triggers, which, upon breach thereof, cause the trustee to trap all offshore cash flows for the repayment of the future-flow debt. Early amortization triggers monitor, among others, the performance of the company’s ex-port levels to designated customers, the over-all debt burden of the originating company and certain other financial covenants. These triggers are designed to detect potential negative performance by the underlying company and afford investors an “escape” before the company’s situation deteriorated to the point of bankruptcy.
- Rating agencies normally insist that originators in future flows are strong companies with good track record. For example, Duff and Phelps in their report above state that "these large com-panies are more likely to work through the concordata successfully. Furthermore, the company would be allowed to maintain its core operations, thereby generating the export receivables and offshore cash flows needed to repay the investors."
Taxation of securitisation:
Around end-1998, the Brazilian government has imposed a new tax on financial transactions – this is supposed to hit securitisation transactions.
Other useful links on Brazil:
Laws of Brazil: http://www.dpr.mre.gov.br/e/db000-e.htm
Late breaking additions:
August 29, 2000:
See news on our news page for news on Brazil's first rated securitization of existing assets.
August 3, 2000:
See news on our news page for an export receivables deal by Samarco Mineracao.
August 3, 2000:
See news on our news page for an export receivables deal by Samarco Mineracao.