On August 13, 2020, the Superintendence of Private Insurance (SUSEP) opened for public consultation Notice No. 17/2020, presenting a draft of a new Circular that will establish the rules for issuing subordinated debt by insurance companies, capitalization companies and public supplementary pension entities incorporated in the form of local corporations and reinsurers.
The Resolution defines “subordinated debt” as debentures or any other debt instrument that is issued by the supervised companies, whose guarantee is subordinated to the payment of the other liabilities, giving preference only to the shareholders in the remaining assets, if any, in the event of liquidation of the supervised company.
The issuance of subordinated debt must meet certain requirements, including: advance notice to SUSEP; information to SUSEP on the book value of the debt and the amounts of disbursements to creditors, with the frequency and protocol defined; and that the registration of its operations be recorded in a registration system previously approved by SUSEP and managed by accredited registries. Also, supervised companies classified as S4 will not have the prerogative to issue debts in the manner defined by the Resolution.
The issuance of subordinated debt shall be decided by the general meeting of shareholders, which shall set its conditions and criteria, or by the board of directors, in the event of subordinated debt not being convertible into shares and when the statutory provisions so authorize.
Also, the deed supporting the operation must contain a specific chapter called “Subordination Nucleus”, which must provide at least the following:
(i) Settlement of the debt shall be subordinated to payment of other liabilities;
(ii) Summary of the Transaction containing the nature of the funding, term of effectiveness, amount raised and structure of the flow of disbursements related to the payment of amortizations and charges;
(iii) Automatic prohibition of any payments to creditors, including the principal as a result of the maturity of the debt, when the issuer has insufficient liquidity, solvency or coverage of technical provisions, including in the event that such insufficiency is the result of these disbursements;
(iv) SUSEP may suspend, for a determined period, any payments to creditors, including the principal as a result of the maturity of the debt, in order to preserve the rights of insured parties, guaranteed parties, borrowers, beneficiaries, assisted parties, holders and subscribers of capitalization securities, and participants in the issuer’s pension plans, by means of a justified technical analysis;
(v) The debt is redeemable only at the initiative of the issuer;
(vi) Early redemption or repurchase must be authorized by SUSEP;
(vii) The existence or not of repurchase and early redemption options;
(viii) Prohibition of changes in terms or conditions of remuneration between the issuance and the maturity of the instrument, including as a result of fluctuations in the credit quality of the issuer; and
(ix) The nullity of any other clause that impairs compliance with the requirements of the Subordination Nucleus.
In other respects, there is an express need for the subordinated debt to possess certain characteristics, such as its payment in kind, which is nominative when issued in Brazil, as well as to provide for a minimum interval of five years between the issue date and the maturity date, and that it cannot provide for the payment of amortizations before this interval has elapsed.
The debt may also not be obtained through a purchase financed, directly or indirectly, by the supervised issuer, nor may it be the object of a guarantee or any other similar mechanism that compromises the subordination condition of the instrument.
In cases where the issuance is made abroad, it must be registered in a centralized system of registration and deposit by institutions authorized by the competent body of the country where the issuance will take place.
Therefore, in cases of non-compliance with the requirements of the Subordination Nucleus, especially regarding the automatic prohibition of any payments to creditors when the issuer shows insufficiencies, SUSEP may suspend the issuance of subordinated debts for a maximum period of 3 years.
Interested parties may send their suggestions to SUSEP by the deadline of September 12, 2020, through the e-mail address firstname.lastname@example.org, using the specific standardized framework.
The new Resolution will come into force on October 1, 2020.
This is another step taken by SUSEP towards bringing the insurance and reinsurance markets closer to the capital market, enabling these markets to raise resources from alternative sources (which are not essentially their shareholders, as the rule today dictates), which can be used to cover a need for capital, either to ensure solvency or to leverage investments.
Demarest’s Insurance and Reinsurance team is available to provide any additional clarifications that may be necessary.