Brazilian Executive Branch Provisional measure promotes agribusiness financing

On October 1, 2019, the Brazilian Executive Branch issued Provisional Measure No. 897 (“Agribusiness Provisional Measure”), which updates certain provisions on instruments designated to the promotion of agribusiness, created new instruments, made others more flexible and withdrew provisions that were no longer necessary in the current economic and legal context.

1. New Instruments

i. Fraternal Guarantee Background (Fundo de Aval Fraterno – “FAF”)

The first innovation brought by the Provisional Agribusiness Measure is the possibility of up to 10 debtors (rural producers) forming a FAF, with the objective of consolidating, in an instrument, resources to be offered as collateral for credit operations with financial institutions.

In addition to the producers, the FAF includes the creditor financial institution or, in the event of debt consolidation, the original creditors, including the non-financial ones, as well as the guaranteeing institution, if any.

The FAF will be accessed if the default persists after the real or personal debtor’s guarantees of the credit transaction have been exhausted. This access is based on the premise of degrees of subordination among the quotas. These degrees are represented by tertiary, secondary and primary quotas, respectively. In short, the quotas with greater seniority take precedence over the others in return on the investments made. Therefore, once the default is verified, the first resources to be used will be those of the primary quota and so on.

ii. Rural Property Allocation Regime and Rural Property Banknote (Cédula Imobiliária Rural – “CIR”)

Another innovation of the new rule is the possibility that the owner of a rural property establishes an allocation regime on the property, or its fraction, by means of registration in the real estate registry, in guarantee of credit operations agreed with financial institutions.

This regime has the following major objectives:

a. to enable the constitution of a guarantee on a fraction of a property, and not necessarily on its totality;

b. to segregate the assets comprising the affected equity from other equity items, including goods, rights and obligations of the debtor’s general equity, in line with the real estate segregation equity; and

c. to enable the encumbrance of segregated estate assets only through the CIR, thus avoiding the multiplicity of creditors guaranteed by the same goods, without a unification of the registries. This segregation, however, is not enforceable against creditors of labor, social security and tax obligations.

The requirement for the constitution of the segregated estate assets is its linking to the new credit title introduced by the aforementioned Agribusiness Provisional Measure, the Rural Property Banknote (“CIR”).

There are two interesting points in the “CIR”:

a. it represents both the promise to pay the amount arising from the credit operation as well as the obligation to deliver the rural real estate property (or its fraction) to the creditor, in the case of default; and

 b. the allocation equity may be used in its entirety or in part to guarantee the CIR.

The attachment of the CIR to the allocation equity (or part thereof) depends on its registration or deposit at B3 or any other entity authorized by the Central Bank or the CVM to carry out the registration or centralized deposit of financial assets and securities (“Registration or Deposit Environment”).

iii. Equalization of interest rates for private financial institutions

The Provisional Agribusiness Measure also makes it possible for private institutions that operate with rural credit to grant economic subsidies, in the form of equalization of interest rates, through the amendment of Law No. 8,427.

Under the old wording of the rule, only federal public banks, cooperative banks and confederations of credit unions could receive subsidies. The equalization of interest rates aims to stimulate competitiveness between financial agents and, consequently, offer better conditions to rural producers.

2. New rules for existing instruments

i. Bank Credit Note issued in book-entry form (“Electronic CCB”)

The Agribusiness Provisional Measure has also introduced significant changes in comparison to existing and widely-used credit instruments in the financial market.

In this regard, it is worth highlighting the updating of the legal practices regarding the bank credit note, provided through Law 10,931/2004, with the admission of the issuance of this credit note in book-entry form, by means of an entry in an electronic book-keeping system.

Without any amendments concerning the basic characteristics of bank credit representation and the promise of payment issued by the borrower of the note, the new method transcends the scope of the agricultural financing market and increases the level that digital banks and online credit platforms can facilitate access to credit granted in electronic mode.

The Provisional Agribusiness Measure confers to the Central Bank the competence to establish the conditions under which the issuance, signing, trading and settlement of the Electronic CCB must be carried out. As a result, the issuance becomes legally admissible by affixing signatures of both the issuer and the third party guarantor of the obligation, in electronic form, ensuring the unequivocal identification of the signatories.

Likewise, the Central Bank shall be responsible for regulating the electronic book-keeping activity carried out by financial institutions or specifically authorized entities, under the supervision of the Central Bank, for which these entities and their managers are subject to the sanctions provided for by Law 13.506/17, in the event of legal and regulatory infractions.

The bookkeeping of the Electronic CCB shall include in its registration all the essential requirements for issuing a bank credit note, in addition to the endorsement that identifies the payee, when applicable, all the additions, readjustments and information regarding the constitution of encumbrances and liens.

The credit represented by the Electronic CCB may be enforced, as an extrajudicial enforcement instrument, upon use of the respective certificate of full content also issued in electronic form, with due consideration for the security requirements that ensured the authenticity and integrity of the document.

ii. Electronic Bank Deposit Certificate (“Electronic CDB”)

The issuance of an Electronic Bank Deposit Certificate (CDB) was authorized, allowing for the ownership of the security issued in book-entry form to be exclusively conferred by means of input into the electronic system of the issuing institution. The creation of the electronic CDB makes conditions more favorable for the creation of a more competitive environment between the traditional banks and those that offer the public a fully digitalized experience through this facility.

The Provisional Agribusiness Measure has assigned to the National Monetary Council the responsibility for regulating the remaining aspects of the electronic CDB, including the types of institutions authorized to issue a CDB and the specific requirements for its issuance.

iii. Rural Product Note (“CPR”)

Provisional Measure No. 897 amended Law No. 8,929 to create a book-entry CPR and make obligatory, as of July 2020, the registration or deposit of any CPR, in the Registration or Deposit Environment. Therefore, within this period, the registration at a real estate notary office – which was previously required for the effectiveness of any CPR – becomes necessary when a mortgage, rural pledge or fiduciary alienation on real estate occurs.

In addition, the law now expressly permits the issuance of a CPR with a monetary correction clause for exchange rate variation, as long as:

 a. it is issued in the form of financial settlement;

 b. the rural products are referenced or traded in organized markets; and

 c. complies with any of the following requirements:

— issuance in favor of non-resident investors;

— issuance for its use as backing for the issuance of securities abroad; or

— for its use as backing for Agribusiness Receivables Certificate (“CRA”), or Agribusiness Credit Rights Certificate (“CDCA”), with an equivalent exchange rate variation clause; and

— other requirements that may be required by CMN regulation are met.

iv. CDCA

The regime for issuance of the CDCA with exchange rate variation clause was significantly amended. Since 2016, when Federal Law No. 11,076/04 was modified to enable the variation of the nominal value of the security by the exchange rate, the following was necessary:

a. the backing is also linked to exchange variation;

b. trading only between non-resident investors; and

c. the issuance of regulations by the CMN, which had not been done until the Provisional Measure.

With the new rule, the holder of the CDCA can also potentially be the securitization company that will issue a CRA backed by CDCA. The CMN regulation, on the other hand, is no longer an essential requirement for the issuance of this type of CDCA to become a way of creating new conditions.

v. CRA

The main change regarding the CRA with an exchange rate variation clause refers to the delegation of powers to the CMN to authorize acquisition of such CRA by resident investors, since there are no pending regulations for non-residents. Before the Agribusiness Provisional Measure, the CRA had to be titled only to non-residents, and its issuance depended on CMN regulation, which until then had not been approved.

vi. Activities of registration and deposit of financial assets

Finally, the Agribusiness Provisional Measure clarifies, in Law No. 11,076, the distinction between the activities of registration and deposit of financial assets, in line with Federal Law No. 12,810, of 2013, as well as CVM regulation on the matter.

vii. Regulation by the CMN

Pursuant to the Agribusiness Provisional Measure, the CMN was charged with establishing additional rules for:

 a. the issuance of CDCA and CRA with an exchange rate variation clause, despite the fact that this regulation is not a requirement for the issuance of these securities; and

 b. the deposit of CDA (Agricultural Deposit Certificate) and WA (Agricultural Warrant).

Although the Agribusiness Provisional Measure is already in force, its text has been forwarded to the National Congress and must be converted into law within 120 days.

Otherwise, the proposed changes will lose effectiveness. Even so, the Agribusiness Provisional Measure may suffer alterations during the legislative process.

In view of all the new rules set forth by the Agribusiness Provisional Measure, our specialists at Demarest’s Capital Markets and Banking & Finance areas are available to provide our clients with additional information or clarification on the matter.