Long-term investments in Brazil
Roberto Quiroga Mosquera and Marina Procknor
Mattos Filho Veiga Filho Marrey Jr e Quiroga
São Paulo
Roberto Quiroga Mosquera (Bio)
Marina Procknor (Bio)
In recent years Brazil has successfully implemented effective monetary and investment policies, which have made it possible for the country to survive the recent financial crisis. With new investment opportunities, as a result of the discovery of oil deposits in the pre-salt layer and the upcoming 2014 FIFA World Cup Brazil and Rio 2016 Olympics Games, the Brazilian government has increasingly implemented mechanisms to provide incentives for long-term investments. The government actions include the creation of new legal tools for banks and companies to fund themselves more adequately as well as the implementation of other benefits encouraging long-term investments.
On the bank financing side, the creation of the financial bonds (Letra Financeira - LF) has been an important measure taken by the Brazilian government to enable financial institutions to raise long-term capital and manage liquidity more effectively. Historically, banks in Brazil have used local legal instruments, such as the domestic certificate of deposit (Certificado de Depósito Bancário - CDB), to raise capital in the domestic market. The CDB is, in essence, a short-term debt instrument, which traditionally includes put options or other mechanisms that give daily liquidity to investors. The LF, on the other hand, is a long-term debt instrument, which may be used by certain financial institutions to raise capital in the domestic market, including as tier II subordinated debt. The LF was created in mid-2010, pursuant to Law 12,249 and National Monetary Council Resolution 3,836. The LF (i) must have a minimum denomination of R$300,000 and a minimum term of 24 months; (ii) must be traded on a stock market or organised over-the-counter market; and (ii) may have fixed or floating interest rates or interest rates indexed to prices, payable on a minimum basis of 180 days. The LF may be offered (i) publicly, pursuant to the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários - CVM) Instruction CVM 400; (ii) through private placements, pursuant to Instruction CVM 476; or (ii) through programs of continuing distribution pursuant to Instruction CVM 488.
On the capital market side, new steps have been taken to promote a long-term private capital market, not only with the view towards promoting more issuances and lowering costs, but also developing the domestic secondary market. Provisional Measure (Medida Provisória - MP) 517 (MP 517 must be converted into law in order to be in full force and effect after June 2011), which went into effect in early 2011, introduced new benefits for foreign investors investing in local debt instruments, the proceeds of which be used for long-term infrastructure investments.
Pursuant to article 1 of MP 517, such debt instruments shall:
(i) have an average term of more than four years;
(ii) prevent the issuer to repurchase the debt instrument within the first two years from the issue date;
(iii) have no reselling rights for the benefit of the purchasers;
(iv) have interest payments on a minimum basis of 180 days;
(v) be mandatorily traded on an organised over-the-counter market; and
(vi) have a simplified proceeding which demonstrates that the proceeds are used for infrastructure projects.
Additionally, Article 2 of MP 517 created benefits for Brazilian investments in debentures issued by Brazilian special purpose vehicles (SPV), which use the proceeds for infrastructure projects deemed by the Brazilian government to have priority.
With respect to investment funds, article 3 of MP 517provides for additional benefits for investment funds whose portfolio is comprised of at least 85% in debentures issued by SPVs, the proceeds of which are used for infrastructure projects deemed by the Brazilian government to have priority. Such benefits may only be used by investors who have at least 95% of their investment portfolio allocated to the funds mentioned in article 3 of MP 517. A recent change was made to the regulation applicable to private equity funds in Brazil, pursuant to Instruction CVM 496, providing for a 90%-minimum investment requirement of the fund's portfolio in shares and other exchangeable and convertible securities. Instruction CVM 496 is further evidence of the Brazilian government's intention of promoting long-term investments.
Lastly, in the securitisation market, investments funds whose portfolio is comprised of credits and receivables continue to be frequently used by investors seeking long-term investments. Pursuant to Instruction CVM 356, the investments funds (Fundos de Investimentos em Direitos Creditórios – FIDC) remain an efficient tool for investors to acquire credit rights. Other investment tools used in the securitisation market are the real estate bonds (Certificado de Recebíveis Imobiliários – CRI), used for real estate financing, and the agribusiness bonds (Certificado de Recebíveis do Agronegócio – CRA), used for interest in agribusiness. CRI and CRA are both securities traded in the Brazilian over-the-counter market and may be invested in by local and international investors.
With a more creative and sophisticated legal framework and a long-term investment environment in Brazil, Brazilian companies and banks and the services industry are optimistic and seek to increase business and resources for the near future.