Securitization in Brazil

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.

More on securitization in Brazil

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.

July 19, 2000:
This page was comprehensively revised and enhanced.

State of the Market:

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 instalment 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 Petrol�fera 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�).

Future prospects:

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 inter-ested 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 n� 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 - insolv�ncia, 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

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