The International Comparative Legal Guide to: A practical cross-border insight into lending and secured finance 7th Edition Lending & Secured Finance 2019 ICLG Allen & Overy LLP Anderson Mori & Tomotsune Asia Pacific Loan Market Association (APLMA) Astrea Baker & McKenzie LLP Bravo da Costa, Saraiva – Sociedade de Advogados Cadwalader, Wickersham & Taft LLP Carey Carey Olsen Jersey LLP Cordero & Cordero Abogados Criales & Urcullo Cuatrecasas Davis Polk & Wardwell LLP Debevoise & Plimpton LLP Dechert LLP Dillon Eustace Drew & Napier LLC E & G Economides LLC E. Schaffer & Co. Fellner Wratzfeld & Partners Freshfields Bruckhaus Deringer LLP Fried, Frank, Harris, Shriver & Jacobson LLP Gonzalez Calvillo, S.C. Haynes and Boone, LLP Hogan Lovells International LLP Holland & Knight HSBC IKT Law Firm Jadek & Pensa JPM Janković Popović Mitić Kelobang Godisang Attorneys King & Wood Mallesons Latham & Watkins LLP Lee and Li, Attorneys-at-Law Lloreda Camacho & Co. Loan Market Association Loan Syndications and Trading Association Loyens & Loeff Luxembourg S.à r.l. Macesic & Partners LLC Maples Group Marval, O’Farrell & Mairal McMillan LLP Milbank LLP Morgan, Lewis & Bockius LLP Morrison & Foerster LLP Nielsen Nørager Law Firm LLP Norton Rose Fulbright US LLP Orrick Herrington & Sutcliffe LLP Pestalozzi Attorneys at Law Ltd Pinheiro Neto Advogados PLMJ Advogados Ploum Proskauer Rose LLP Rodner, Martínez & Asociados Sardelas Liarikos Petsa Law Firm Seward & Kissel LLP Shearman & Sterling LLP Skadden, Arps, Slate, Meagher & Flom LLP Škubla & Partneri s. r. o. SZA Schilling, Zutt & Anschütz Rechtsanwaltsgesellschaft mbH Trofin & Asociații TTA – Sociedade de Advogados Wakefield Quin Limited Walalangi & Partners (in association with Nishimura & Asahi) Weil, Gotshal & Manges LLP White & Case LLP
Transcript
The International Comparative Legal Guide to:
A practical cross-border insight into lending and secured finance
7th Edition
Lending & Secured Finance 2019
ICLGAllen & Overy LLPAnderson Mori & TomotsuneAsia Pacific Loan Market Association (APLMA)AstreaBaker & McKenzie LLPBravo da Costa, Saraiva – Sociedade de AdvogadosCadwalader, Wickersham & Taft LLPCareyCarey Olsen Jersey LLPCordero & Cordero AbogadosCriales & UrculloCuatrecasasDavis Polk & Wardwell LLPDebevoise & Plimpton LLPDechert LLPDillon EustaceDrew & Napier LLCE & G Economides LLCE. Schaffer & Co.Fellner Wratzfeld & PartnersFreshfields Bruckhaus Deringer LLPFried, Frank, Harris, Shriver & Jacobson LLPGonzalez Calvillo, S.C.
Haynes and Boone, LLPHogan Lovells International LLPHolland & KnightHSBCIKT Law FirmJadek & PensaJPM Janković Popović MitićKelobang Godisang AttorneysKing & Wood MallesonsLatham & Watkins LLPLee and Li, Attorneys-at-LawLloreda Camacho & Co.Loan Market AssociationLoan Syndications and Trading AssociationLoyens & Loeff Luxembourg S.à r.l.Macesic & Partners LLCMaples GroupMarval, O’Farrell & MairalMcMillan LLPMilbank LLPMorgan, Lewis & Bockius LLPMorrison & Foerster LLPNielsen Nørager Law Firm LLP
Norton Rose Fulbright US LLPOrrick Herrington & Sutcliffe LLPPestalozzi Attorneys at Law LtdPinheiro Neto AdvogadosPLMJ AdvogadosPloumProskauer Rose LLPRodner, Martínez & AsociadosSardelas Liarikos Petsa Law FirmSeward & Kissel LLPShearman & Sterling LLPSkadden, Arps, Slate, Meagher & Flom LLPŠkubla & Partneri s. r. o.SZA Schilling, Zutt & Anschütz Rechtsanwaltsgesellschaft mbH Trofin & AsociațiiTTA – Sociedade de AdvogadosWakefield Quin LimitedWalalangi & Partners (in association with Nishimura & Asahi)Weil, Gotshal & Manges LLPWhite & Case LLP
Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720
DisclaimerThis publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice.Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication.This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.
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General Chapters:
Continued Overleaf
The International Comparative Legal Guide to: Lending & Secured Finance 2019
Contributing EditorThomas Mellor, Morgan, Lewis & Bockius LLP
PublisherRory Smith
Sales DirectorFlorjan Osmani
Account DirectorOliver Smith
Senior EditorsCaroline Collingwood Rachel Williams
4 An Introduction to Legal Risk and Structuring Cross-Border Lending Transactions – Thomas Mellor & Marcus Marsh, Morgan, Lewis & Bockius LLP 15
5 Global Trends in the Leveraged Loan Market in 2018 – Joshua W. Thompson & Korey Fevzi, Shearman & Sterling LLP 20
6 Developments in Delayed Draw Term Loans – Meyer C. Dworkin & Samantha Hait, Davis Polk & Wardwell LLP 26
7 Commercial Lending in a Changing Regulatory Environment, 2019 and Beyond – Bill Satchell & Elizabeth Leckie, Allen & Overy LLP 30
8 Acquisition Financing in the United States: Will the Boom Continue? – Geoffrey R. Peck & Mark S. Wojciechowski, Morrison & Foerster LLP 34
9 A Comparative Overview of Transatlantic Intercreditor Agreements – Lauren Hanrahan & Suhrud Mehta, Milbank LLP 39
10 A Comparison of Key Provisions in U.S. and European Leveraged Loan Agreements – Sarah M. Ward & Mark L. Darley, Skadden, Arps, Slate, Meagher & Flom LLP 46
11 The Global Subscription Credit Facility and Fund Finance Markets – Key Trends and Forecasts – Michael C. Mascia & Wesley A. Misson, Cadwalader, Wickersham & Taft LLP 59
12 Recent Developments in U.S. Term Loan B – Denise Ryan & Kyle Lakin, Freshfields Bruckhaus Deringer LLP 63
13 The Continued Growth of European Covenant Lite – James Chesterman & Jane Summers, Latham & Watkins LLP 70
14 Cross-Border Loans – What You Need to Know – Judah Frogel & Jonathan Homer, Allen & Overy LLP 73
15 Debt Retirement in Leveraged Financings – Scott B. Selinger & Ryan T. Rafferty, Debevoise & Plimpton LLP 82
16 Analysis and Update on the Continuing Evolution of Terms in Private Credit Transactions – Sandra Lee Montgomery & Michelle Lee Iodice, Proskauer Rose LLP 88
17 Secondments as a Periscope into the Client and How to Leverage the Secondment Experience – Alanna Chang, HSBC 95
18 Trade Finance on the Blockchain: 2019 Update – Josias Dewey, Holland & Knight 98
19 The Global Private Credit Market: 2019 Update – Jeff Norton & Ben J. Leese, Dechert LLP 104
62 Mexico Gonzalez Calvillo, S.C.: José Ignacio Rivero Andere & Jacinto Avalos Capin 422
63 Mozambique TTA – Sociedade de Advogados / PLMJ: Gonçalo dos Reis Martins & Nuno Morgado Pereira 430
General Chapters:
26 Developments in the Syndicated Term Loan Market: Will Historical Distinctions from the High-Yield Bond Market Be Restored? – Joseph F. Giannini & Adrienne Sebring, Norton Rose Fulbright US LLP 141
27 Green Finance – Alex Harrison & Andrew Carey, Hogan Lovells International LLP 144
28 U.S.TaxReformandEffectsonCross-BorderFinancing – Patrick M. Cox, Baker & McKenzie LLP 149
Continued Overleaf
EDITORIAL
Welcome to the seventh edition of The International Comparative Legal Guide to: Lending & Secured Finance.This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of lending and secured finance.It is divided into three main sections:Three editorial chapters. These are overview chapters and have been contributed by the LSTA, the LMA and the APLMA.Twenty-five general chapters. These chapters are designed to provide readers with an overview of key issues affecting lending and secured finance, particularly from the perspective of a multi-jurisdictional transaction.Country question and answer chapters. These provide a broad overview of common issues in lending and secured finance laws and regulations in 51 jurisdictions.All chapters are written by leading lending and secured finance lawyers and industry specialists and we are extremely grateful for their excellent contributions.Special thanks are reserved for the contributing editor Thomas Mellor of Morgan, Lewis & Bockius LLP for his invaluable assistance.Global Legal Group hopes that you find this guide practical and interesting.The International Comparative Legal Guide series is also available online at www.iclg.com.
Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected]
Country Question and Answer Chapters:
The International Comparative Legal Guide to: Lending & Secured Finance 2019
64 Netherlands Ploum: Tom Ensink & Alette Brehm 437
65 Portugal PLMJ Advogados: Gonçalo dos Reis Martins 445
regard, a specific debt instrument was created by the government in 2011 – infrastructure debentures – which granted tax exemptions to local and foreign investors).As from 2013, the crisis affecting emerging markets globally had a relevant impact on the Brazilian economy which was evidenced in a decrease in lending transactions and a rise in interest rates, promoting a scenario in which lenders became more selective and companies began to try to renegotiate previous transactions (as opposed to entering into new debt).Until December 2016, given the economic scenario, local lending markets were: implementing structures aimed at providing credit transactions with more attractive interest rates (such as capital markets transactions, with comprehensive collateral packages); renegotiating or exchanging lending transactions that will mature within a short-/medium-term period; and using mechanisms or implementing structured transactions that may have a lower impact in the debt obligations of local companies (such as securitisation transactions). The Brazilian economy has been recovering since the latest political events and the local lending market is becoming even more attractive to foreign and local investors. Some Brazilian companies started looking offshore for lending opportunities, followed by several debt issuances by Petrobras throughout 2016 and 2017.As an indication of the recent recovery of the Brazilian economy, it is worth mentioning the several equity and debt capital market transactions which occurred throughout 2017 (e.g., IPOs of Carrefour (Atacadão), Movida, Biotoscana and the follow-on of Azul and many other that are currently in the pipeline of investment banks to be launched in 2018).
1.2 What are some significant lending transactions that have taken place in your jurisdiction in recent years?
Recently, certain relevant lending transactions were completed in the local markets, such as: the issuance of US$ 6.75bn five- and 10-year dollar-denominated bonds by Petrobras (May 2016) and US$ 2bn (January 2018); the switch made by USJ of bonds in April, replacing US$ 246 million of its 9.875% 2019 bond with a US$ 197 million 9.875%/12% payment-in-kind toggle note due in 2021; the issuance by Marfrig Holdings (Europe) BV, a European subsidiary of Marfrig Global Foods S.A., of a seven-year single-tranche bond, raising US$ 750 million at a yield of 8.25%; the R$ 5bn issuance of Tier I perpetual bonds by Banco Itaú Unibanco; JSL Europe issuance of bonds in the amount of US$ 300 million; the US$ 1 billion issuance of notes by Cemig; US$ 400 million issuance of bonds by Azul; and US$ 1bn issuance of notes by BNDES.
1 Overview
1.1 What are the main trends/significant developments in the lending markets in your jurisdiction?
Brazil has a highly sophisticated financial system, with a set of detailed and specific rules and regulations that must be observed, on the one hand, by local lenders (banks and financial institutions) and creditors (investment funds, securitisation vehicles and market investors) and, on the other hand, by borrowers and/or issuers of debt instruments (in terms of disclosure rules, registration requirements, exposure regarding specific lenders, collateral creation requirements, among others).Given a stable and promising economic scenario in the early 2000s, the level of debt incurred by local companies over the past 10 years doubled. Such growth in debt transactions was also verified due to the creation by the local government of a set of rules which provided better security to creditors such as: the creation of types of collateral with a more expeditious foreclosure proceedings (fiduciary sale/assignment of immovable and movable assets); better clarification on the rules governing extrajudicial and in-court debt reorganisations; the creation of new debt instruments better evidencing credit transactions (such as banking credit notes – cédulas de crédito bancário – and banking financial notes – letras financeiras); and the enactment of incentives for the use of the local capital markets for the private funding of local companies (through the issuance of debentures, for instance).During such period, an increase of lending/credit transactions was verified in a number of local market segments, including: typical commercial lending transactions, the proceeds of which being used for the short/medium-term cash needs of local companies; foreign currency denominated bond offerings, implemented by companies whose revenues are indexed to foreign currency (such as agribusiness and the oil & gas sector, as well as large exporters); and syndicated loan transactions (local and international lenders), in which short-term debt of local companies was converted into long-term ones with better conditions.Given the shortage of infrastructure in Brazil, the local government is promoting a number of public bids to try to bring local and foreign private investors to manage a number of infrastructure sectors, including energy generation and transmission, renewable energy projects, state and federal highways, ports, airports, logistics and urban mobility, among others. The funding needs of such long-term infrastructure projects is being provided not only by the local federal Exim bank (BNDES), but also by private banks (granting of bank guarantees and bridge loans) and the local capital markets (in this
2.6 Are there any exchange control or similar obstacles to enforcement of a guarantee?
There are no specific exchange controls for the enforcement of a guarantee. Brazilian exchange controls are focused on remittances from and to outside Brazil, registering such remittances on the Brazilian Central Bank’s system. Additionally, it is worth noting that remittances abroad can only be made by financial institutions.
3 Collateral Security
3.1 What types of collateral are available to secure lending obligations?
Under Brazilian law, collateral arrangements (in rem guarantees) are usually created by either a pledge (penhor), a fiduciary sale/assignment (alienação/cessão fiduciária) or a mortgage (hipoteca).A pledge is an in rem guarantee and consists of the delivery of transferable movable property by a debtor (or by a third party on his behalf) to its creditor (or to the creditor’s representative) in guarantee of the debt. It is important to note that a pledge generally requires tradição, i.e., the actual physical transfer of possession of the asset from the pledgor to the pledgee. A pledge creates a lien on movable property upon delivery thereof by the pledgor to the pledgee, with the express understanding that the asset shall be retained solely as security for a certain debt. Accordingly, the pledgee has the right to retain possession over the pledged asset, but it is not allowed to create any other type of interest over it. The pledge does not transfer title over the assets to the pledgee.The fiduciary sale/assignment is a type of security interest, pursuant to which the debtor assigns to the creditor the title to (“resolutory property”) and the “indirect possession” of a certain asset, holding, therefore, only its physical possession (or “direct possession”). The debtor has direct possession of the property and is liable for the duties of a bailee, or a trust, in relation to it. The debtor will have full title and indirect possession of the asset back when he has fulfilled all of its obligations under the guaranteed credit (that is why title of the creditor is called “resolutory property”). Such guarantee mechanisms have the effect of transferring to the creditor title to certain fungible movable assets (fiduciary sale) or to certain fungible rights over movable assets (fiduciary assignment), as the case may be.Mortgage is an in rem guarantee lying over real estate granted by a debtor (or by a third party on its behalf) in favour of its creditor to secure payment of a relevant debt.
3.2 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?
Pledge and alienação/cessão fiduciária agreements and deeds of mortgages are formal documents which must comply with certain requirements for purposes of the perfection of the security interest created thereby, having specific formalities for each type. In this sense, the relevant security documents must, generally: (i) be in writing; (ii) be executed by both creditor and debtor and attested by two witnesses; (iii) contain, at a minimum, information pertaining to the amount, maturity and interest rate (whenever applicable) of the underlying obligation, as well as a description (including particulars) of the collateral; and (iv) be registered with the appropriate Brazilian Public Registry of the domicile of the debtor (e.g., the Registry of Deeds and Documents in the case of common pledges and of
In the infrastructure sector only, it is expected that over the next five years an amount of approximately R$ 70bn to R$ 100bn will be needed by local companies, given their long-term financial needs.
2 Guarantees
2.1 Can a company guarantee borrowings of one or more other members of its corporate group (see below for questions relating to fraudulent transfer/financial assistance)?
Yes. Pursuant to Brazilian laws and regulations, there is no limitation for a company to guarantee borrowings of one or more other members of its corporate group.
2.2 Are there enforceability or other concerns (such as director liability) if only a disproportionately small (or no) benefit to the guaranteeing/securing company can be shown?
There are no enforceability concerns if all the required corporate approvals (as required by the companies’ by-laws or articles of association) are in place. Brazilian law defines personal guarantees, such as surety (fiança) as an accessory personal obligation which depends on a main obligation to which it is bound. If the main obligation ceases to exist, the fiança will not endure. It is important to bear in mind, however, that such guarantees are usually granted without any consideration to be received by the guarantor and, in the event that a guarantor were to become insolvent or subject to a reorganisation proceeding (recuperação judicial ou extrajudicial) or to bankruptcy, the guarantees, if granted up to two years before the declaration of bankruptcy, may be deemed to have been fraudulent and declared void, based upon such guarantor being deemed not to have received fair consideration in exchange for its guarantee.
2.3 Is lack of corporate power an issue?
Yes. In order to execute a legal, valid and enforceable guarantee, the representative of the guarantor, executing the appropriate document, must have all corporate powers, pursuant to the company’s by-laws or articles of association and power-of-attorney; otherwise the guarantee can be declared null and void.
2.4 Are any governmental or other consents or filings, or other formalities (such as shareholder approval), required?
Generally, depending on the amount of the guarantee, it will be necessary to obtain approval from a shareholders’ or management’s meeting of the company, pursuant to its by-laws or articles of association.
2.5 Are net worth, solvency or similar limitations imposed on the amount of a guarantee?
No. The amount of a guarantee can be established freely by the parties.
In Brazil, shares are not usually issued in certificated form, despite the fact that the Brazilian Corporations Law allows such issuances. Shares are commonly issued as book entry records in the share registry book of the company issuer of the shares or registered with a bookkeeping entity.Considering that the abovementioned types of collaterals are Brazilian types of collateral, the agreements creating such liens must be governed by Brazilian law; nevertheless, the main agreement, with terms and conditions of the credit being secured, can be governed by New York or English law.Finally, it is worth mentioning that since January 2016 BM&FBOVESPA has been operating a new collateral system over shares of publicly held companies. Such new system enhanced the foreclosure procedures of collateral over shares of publicly held companies.
3.7 Can security be taken over inventory? Briefly, what is the procedure?
Yes, it is possible to take security over inventory. For the procedures involved, please refer to the answer to question 3.2 above.
3.8 Can a company grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility (see below for questions relating to the giving of guarantees and financial assistance)?
Yes, under Brazilian law, a company can grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility. It is worth mentioning that a thorough analysis of the company’s by-laws or articles of association is required in order to assess, for each specific company, what are the required corporate approvals.
3.9 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets?
Usually, regardless of the type of assets being given as collateral, the registration fees (either for the Real Estate Registry or Registry of Deeds and Document) involve a percentage of the amount being secured by the collateral, limited to a cap. There are also notarisation fees; nevertheless, neither the notarisation nor the registration fees vary according to the region the competent registry is located.
3.10 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?
The period for registering security over different types of assets can vary from one to 30 days if there are no requirements made by the competent registry. Please note that registrations before the Real Estate Registry take longer than before the Registry of Deeds and Documents. It is also worth noting that registrations before registry offices located in smaller cities may take longer.
alienação/cessão fiduciária and the Real Estate Registry in case of mortgages or alienação fiduciária of real estate properties). Registration is a mandatory requirement for the perfection of the security interest.
3.3 Can collateral security be taken over real property (land), plant, machinery and equipment? Briefly, what is the procedure?
Yes. Please refer to the answers to questions 3.1 and 3.2 above.
3.4 Can collateral security be taken over receivables? Briefly, what is the procedure? Are debtors required to be notified of the security?
Yes, it is possible to take a collateral security over receivables, pursuant to Brazilian law. The collateral is usually formalised through a fiduciary assignment of the receivables, together with a fiduciary assignment over the accounts that will receive such receivables. As for the procedure, please refer to the answer to question 3.2 above.
3.5 Can collateral security be taken over cash deposited in bank accounts? Briefly, what is the procedure?
Yes, it is possible to take a collateral security over cash deposited in bank accounts, pursuant to Brazilian law. The collateral is usually formalised through a fiduciary assignment over the accounts. As for the procedure, please refer to the answer to question 3.2 above.
3.6 Can collateral security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Can such security validly be granted under a New York or English law governed document? Briefly, what is the procedure?
Yes, it is possible to take a collateral security over shares/quotas in companies incorporated in Brazil. The most common type of collateral over shares is alienação fiduciária. As the alienação/cessão fiduciária transfers the ownership of the shares to the creditor, the creditor, in general, will have priority in case of insolvency of the debtor, as provided by the Brazilian Bankruptcy Law. The creation of the security interest over shares is evidenced by formal documents which must comply with certain requirements for purposes of the perfection of the security interest created thereby. In this sense, the security documents must, generally: (i) be in writing; (ii) be executed by both creditor and debtor (as well as by the custodian, as the case may be) and attested by two witnesses; (iii) contain, at a minimum, information pertaining to the amount (either the exact, estimate or maximum amount), maturity and interest rate (whenever applicable) of the underlying obligation, as well as a description (including particulars) of the collateral; and (iv) be registered with the Registry of Deeds and Documents of the domicile of the debtor and creditor.In addition to the registration before the Registry of Deeds and Documents, the security interest of registered shares is only created and perfected when the security interest is duly noted in the Share Registry Book. The security interest over shares held in custody with the stock exchange or other agent, in order to be valid in Brazil, must be duly registered in such system.As regards quotas of limited liability companies, the most common type of collateral is pledge. Such collateral is usually registered through an amendment to the company’s articles of association and filing of the respective quota pledge agreement before the Registry of Deeds and Documents.
5.1 Will your jurisdiction recognise the role of an agent or trustee and allow the agent or trustee (rather than each lender acting separately) to enforce the loan documentation and collateral security and to apply the proceeds from the collateral to the claims of all the lenders?
As lenders are not the direct beneficiaries of collateral agreements, should the lenders unilaterally file a lawsuit in Brazil to enforce the security interests created thereunder, it could be alleged that, by not being direct beneficiary under the collateral agreements, such party does not have legitimacy (legitimidade) to file a lawsuit and, if such allegation prevails, the lenders would not be able to enforce their security interest in courts on a unilateral basis; however, we understand that there are good arguments to sustain that the onshore collateral agent (trustee) has legitimacy (legitimidade) to represent the lenders, and any successor in lawsuits against the borrower and the guarantor, if the onshore collateral agent (trustee) is appointed as such by the lenders in the financing document governed by a foreign law.
5.2 If an agent or trustee is not recognised in your jurisdiction, is an alternative mechanism available to achieve the effect referred to above which would allow one party to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?
Please refer to the answer to question 5.1 above.
5.3 Assume a loan is made to a company organised under the laws of your jurisdiction and guaranteed by a guarantor organised under the laws of your jurisdiction. If such loan is transferred by Lender A to Lender B, are there any special requirements necessary to make the loan and guarantee enforceable by Lender B?
Unless there is an express prohibition in the loan agreement, credit assignments are valid under the laws of Brazil so long as the debtor is notified of the assignment. Generally, the collateral agreement is deemed as an ancillary obligation of the loan agreement (main obligation), which means that when the latter is assigned, the former is assigned too. From a practical perspective, it is advisable to amend both the loan agreement and respective collateral document with the names of the new debtor/guarantor to simplify the enforcement and avoid disputes on formal issues. Please note that, if a debt of a Brazilian company in relation to a foreign lender is assigned, in order to allow the remittance of funds to the new creditor, the registration of such debt before the Brazilian Central Bank must be updated.
6 Withholding, Stamp and Other Taxes; Notarial and Other Costs
6.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?
(a) Interest payable by a Brazilian debtor to a foreign lender is generally subject to the withholding of income tax at a rate of 15% or 25% if the creditor is located in a blacklisted low-tax
3.11 Are any regulatory or similar consents required with respect to the creation of security?
Generally, no regulatory or similar consent is required with respect to the creation of securities, except for companies that operate in regulated business such as energy, telecoms, etc., which may need authorisation from the regulatory agencies regulating such sectors.
3.12 If the borrowings to be secured are under a revolving credit facility, are there any special priority or other concerns?
No. The amount secured will always be the amount (or maximum amount) established on the respective agreement that formalises the collateral.
3.13 Are there particular documentary or execution requirements (notarisation, execution under power of attorney, counterparts, deeds)?
No particular documentary or execution requirements are needed, with the exception of mortgages which must be made through a public deed. It is also worth mentioning that if the agreements are in the English language, they must be translated into Portuguese before being registered. If the document is executed abroad, in order to be registered in Brazil, it must be notarised and legalised by the nearest Brazilian consulate of the place of execution. However, Brazil is about to adopt the apostille system in the next months.
4 Financial Assistance
4.1 Are there prohibitions or restrictions on the ability of a company to guarantee and/or give security to support borrowings incurred to finance or refinance the direct or indirect acquisition of: (a) shares of the company; (b) shares of any company which directly or indirectly owns shares in the company; or (c) shares in a sister subsidiary?
(a) Shares of the companyUntil 2015, there was an overall restriction for publicly held companies becoming (by means of succession – i.e. merger) a debtor of financial obligations initially incurred by its controlling shareholder. Since June 2015, this restriction is no longer applicable.(b) Shares of any company which directly or indirectly owns
shares in the companyGenerally, there are no restrictions for this hypothetical situation. However, please note the following: (i) it is not uncommon to find provisions in by-laws that prevent corporations from giving guarantees or security for the benefit of third parties; (ii) in case the so-called company (guarantor) is a Brazilian financial institution, insurance company or pension plan corporation, there could be a restriction depending on the amount of equity interest held by the beneficiary of the collateral/guarantee in the guarantor. Basically, such entities are not allowed to extend loans or give guarantees/security for the benefit of certain persons (e.g. controlling shareholders and managers).(c) Shares in a sister subsidiaryThe same comments mentioned in item (b) above apply to this item. Also, generally, publicly held companies shall not offer collateral to secure obligations of a third party, especially if such third party is in any way related to the controlling shareholder of the said publicly held company.
6.5 Are there any adverse consequences for a company that is a borrower (such as under thin capitalisation principles) if some or all of the lenders are organised under the laws of a jurisdiction other than your own? Please disregard withholding tax concerns for purposes of this question.
Under Brazilian tax regulations, certain tax constraints in respect to the tax-deductibility of interest expense at the level of the Brazilian debtor may apply, if the foreign lender is: (i) a related party to the Brazilian borrower; or (ii) located in a blacklisted (tax haven) or greylisted (privileged tax regime) low-tax jurisdiction. Such tax limitations mays apply due to (a) thin capitalisation, and (b) transfer pricing regulations. Pursuant to current thin capitalisation rules, interest paid by sources located in Brazil to individuals or legal entities resident abroad will only be deductible for corporate tax purposes (IRPJ/CSL) if: (i) the debt with a related party (not located in a blacklisted jurisdiction) does not exceed two times the net equity of the Brazilian borrower (if the debt exceeds the threshold, the interest assessed on the excess amount will not be deductible); or (ii) the debts with entities located in a blacklisted jurisdiction does not exceed 30% of the net equity value of the legal entity resident in Brazil (if the debt exceeds the threshold, the interest assessed on the excess amount will not be deductible).Cumulatively, one should also observe transfer pricing limits for the tax-deductibility expense arising from interest payments made to foreign lenders that are a related party to the borrower or located in black/greylisted jurisdictions. Under transfer pricing rules, depending on certain features of the relevant cross-border loan agreement, different tax-deductibility thresholds based on the interest of the contract shall apply: (i) for transactions denominated in US dollars at a fixed rate, the market rate for Brazilian government bonds issued in the foreign market, also in US dollars, will be adopted, plus a 3.5% spread; (ii) for transactions denominated in BRL at a fixed rate, the market rate for Brazilian government bonds issued in the foreign market in Brazilian Reais will be adopted, plus a 3.5% spread; and (iii) in other cases, the six-month LIBOR will be adopted, plus a 3.5% spread.
7 Judicial Enforcement
7.1 Will the courts in your jurisdiction recognise a governing law in a contract that is the law of another jurisdiction (a “foreign governing law”)? Will courts in your jurisdiction enforce a contract that has a foreign governing law?
Yes, Brazilian courts would recognise a foreign governing law in an agreement, provided that such law does not offend Brazilian national sovereignty, public policy or good morals.
7.2 Will the courts in your jurisdiction recognise and enforce a judgment given against a company in New York courts or English courts (a “foreign judgment”) without re-examination of the merits of the case?
If any final judgment of a court outside Brazil is rendered, such judgment would be recognised and enforced by the courts in Brazil without any retrial or re-examination of the merits of the original action, upon confirmation of that judgment by the Brazilian Superior Court of Justice (Superior Tribunal de Justiça). In order to be recognised by the Superior Court of Justice of Brazil, a foreign
jurisdictions as defined in the applicable regulations. Interest payable by a Brazilian debtor to a local lender is also generally subject to the withholding of the income tax (not applicable to financial institutions) based on a regressive rates regime that vary from 22.5% to 15% according to the days elapsed since the loan was granted and the payment date. Note that, in this case, the tax withheld will be deemed a payment in advance of the corporate income tax locally due by the lender (at a general 34% rate for corporations and at a current 45% rate for financial institutions).
(b) The proceeds of a claim under a guarantee or enforcing security shall observe the same rules above, that is, the interest component paid by the lender would be subject to taxation, whereas principal should not be impacted by taxes. Other taxes may apply to either onshore and offshore loans transactions, although not under a withholding systematic.
6.2 What tax incentives or other incentives are provided preferentially to foreign lenders? What taxes apply to foreign lenders with respect to their loans, mortgages or other security documents, either for the purposes of effectiveness or registration?
One can highlight that cross-border loans whose proceeds are destined to the financing of Brazilian exports benefit from the 0% withholding income tax on interest. Offshore fundraising executed by means of the issuance of the so-called infrastructure debentures also benefit from the 0% rate of the withholding income tax, provided certain requirements are met. On top of that, certain tax treaties entered into by Brazil with other jurisdictions also provide a beneficial tax treatment for interest income paid out to foreign lenders.Moreover, another tax advantage of foreign lender regards to the different treatment of the Tax on Financial Transactions in these cases. In effect, as a general rule, onshore loans with principal previously defined by the parties are impacted by the assessment of the Tax on Financial Transactions (“IOF/Credit”), which is generally levied at a daily 0.0041% rate, capped to 365 days, plus a flat 0.38%, thus leading to a combined 1.88% rate for transactions older than one year. On the other hand, cross-border loans whose average maturity term is set for a term longer than 181 days benefit from the 0% rate of the so-called IOF/FX – another modality of the Tax on Financial Transactions, which is triggered upon the execution of inbound/outbound FX transactions. However, the IOF/FX rate is increased to 6% if the loan average maturity term is lower than 181 days. Please note that FX transactions executed in connection with the payment of principal and interest by a Brazilian debt under a cross-border loan benefit from the 0% rate of the IOF/FX. Cross-border loans are not subject to the IOF/Credit.
6.3 Will any income of a foreign lender become taxable in your jurisdiction solely because of a loan to, or guarantee and/or grant of, security from a company in your jurisdiction?
As a general rule, no, since Brazilian tax rules concerning permanent establishments do not encompass cross-border lending transactions.
6.4 Will there be any other significant costs which would be incurred by foreign lenders in the grant of such loan/guarantee/security, such as notarial fees, etc.?
No. The tax impact to foreign lenders is generally limited to the withholding tax on income derived from the loans.
not opt for adjudication, the next step is the out-of-court sale; (v) the out-of-court sale shall take place through two public auctions: (a) in the 1st public auction, real estate property must be sold by at least its appraisal value; or (b) in the 2nd public auction, real estate property must be sold by at least a fair (non-vile) amount; (vi) if the property is not sold in the first and second auctions a new option of adjudication of the property by creditor may be determined (at the discretion of the court); and (vii) no “mutual release” event is verified in mortgage foreclosures. Thus, if upon the sale of the real estate property or its adjudication the debt amount is not totally repaid to the creditor, the creditor still has an unsecured claim against the debtor for the remaining amounts due under the credit transaction (and other guarantees may be foreclosed).
7.5 Do restrictions apply to foreign lenders in the event of (a) filing suit against a company in your jurisdiction, or (b) foreclosure on collateral security?
Any plaintiff not resident in Brazil will be required to place a bond as security for court costs and for third party attorneys’ fees if it does not possess any real property in Brazil, except in case of collection claims based on an instrument that may be enforced in Brazilian courts without review of its merits (título executivo extrajudicial) or counterclaims.
7.6 Do the bankruptcy, reorganisation or similar laws in your jurisdiction provide for any kind of moratorium on enforcement of lender claims? If so, does the moratorium apply to the enforcement of collateral security?
Within the context of bankruptcy proceedings, there is an automatic stay which derives from the decision which actually declares the bankruptcy. In this sense, bankruptcy declaration stays the course for all judicial actions and enforcements against the guarantor. Accordingly, to the extent bankruptcy proceedings – in principle – attach to all the guarantor’s creditors, the secured party holding the collateral will be affected by the automatic stay of bankruptcy proceedings. In this scenario, the assets constituting the collateral will not be delivered to the secured party for payment of the secured debt. More significantly, the secured party will not be able to take any legal action to enforce and liquidate the collateral. The assets given in collateral will be gathered by the trustee for subsequent liquidation and payment of creditors that eventually hold a privilege or preference.Within the context of judicial reorganisation proceedings, the automatic stay derives from the court decision that grants the processing of the judicial reorganisation application filed by the guarantor. Granting of the judicial reorganisation proceedings stays the course for all legal actions and enforcements proceedings against the guarantor related to all creditors subject to/affected by the judicial reorganisation proceedings. Under no circumstances can the automatic stay in judicial reorganisation proceedings exceed 180 days.Within the context of extra-judicial reorganisation proceedings, the mere filing of such procedure does not entail the suspension of any court proceedings against the guarantor.
7.7 Will the courts in your jurisdiction recognise and enforce an arbitral award given against the company without re-examination of the merits?
Yes. Please refer to the answer to question 7.2.
judgment must meet the following conditions: (i) it must comply with all formalities necessary for its enforcement under the laws of the jurisdiction where it was rendered; (ii) it must have been issued by a competent court after proper service of process on the parties, which service must comply with Brazilian Law if made in Brazil, or after sufficient evidence of the parties’ absence has been given, as required by applicable law; (iii) it must be final and therefore not subject to appeal; (iv) it must not offend Brazilian national sovereignty, dignity of human being and/or public policy; (v) it must not violate a final and unappealable decision issued by a Brazilian court; (vi) it must not violate the exclusive jurisdiction of Brazilian courts; and (vii) it must be duly authenticated by the competent Brazilian consulate (except in case there is a bilateral agreement with the relevant country to waive such authentication by the Brazilian consulate or if apostilled in case the relevant country is signatory to the Hague Convention of 5 October 1961 Abolishing the Requirement of Legalisation for Foreign Public Documents and accompanied by a translation thereof into Portuguese, made by a certified translator in Brazil, except if waived by treaty.)
7.3 Assuming a company is in payment default under a loan agreement or a guarantee agreement and has no legal defence to payment, approximately how long would it take for a foreign lender to (a) assuming the answer to question 7.1 is yes, file a suit against the company in a court in your jurisdiction, obtain a judgment, and enforce the judgment against the assets of the company, and (b) assuming the answer to question 7.2 is yes, enforce a foreign judgment in a court in your jurisdiction against the assets of the company?
In Brazil it is very difficult to predict how long it takes for a court to render a decision over a lawsuit, as it varies between each city and, even in the same court, varies between each judge; nevertheless, it possible to estimate that, on average, in case of (a) above, it would take between two and three years and, in case of (b) above, around two years.
7.4 With respect to enforcing collateral security, are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction, or (b) regulatory consents?
As regards pledges and fiduciary sale/assignment, if the debtor defaults pursuant to the security documents or the main agreement, the trustee owner, security trustee or creditor should notify him of the delay (through a simple registered letter, by a registered letter issued by the Registry of Deeds and Documents or bill of protest) and may sell the assets to third parties, irrespective of public sale, auction or any other judicial or extrajudicial measure.As regards mortgages, in case the debtor defaults under the debt, in the absence of an insolvency scenario, the foreclosure proceeding for mortgages shall be the following: (i) upon default, the debtor is summoned to pay the debt plus interest, monetary correction, court costs and attorneys’ fees within the cure period determined by the relevant security agreement. If the debtor does not perform its payment obligations within said period, the attached property shall be foreclosed; (ii) the next step is the appraisal of the attached property; (iii) at this stage, creditor may opt for adjudication (i.e. judicially transferring the asset’s property and possession to the creditor) of the property for the value of appraisal (if the appraisal amount is lower than debt amount, the creditor would still have an unsecured claim over the remaining amount); (iv) if the creditor does
In addition, transactions implemented before or after the debtor’s bankruptcy liquidation adjudication (including the implementation of a security) may be revoked through the filing of a claw-back lawsuit (ação recocatória) if they were performed fraudulently, irrespective of whether they were committed during the claw-back period. Indeed, section 130 of the BBL establishes that acts performed with the intent to defraud creditors may be revoked, provided there is evidence of (i) fraudulent collusion between the debtor and the contracting third party, and (ii) actual loss suffered by the estate.
8.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?
The BBL (which regulates bankruptcy liquidation proceedings) does not apply to government-owned entities, mixed-capital companies, public or private financial institutions, credit unions, consortia, supplementary pension companies, healthcare plan companies, insurance companies and special saving companies.Financial institutions’ insolvency (except federal institutions) is regulated by Law No. 6,024/74, which contemplates the intervention and extrajudicial liquidation regimes. Ultimately, both the intervention and extrajudicial liquidation may be converted to bankruptcy liquidation as regulated by the BBL, as the case may be.Other regulated entities, such as healthcare plan companies and insurance companies, will follow insolvency proceedings as established before the respective regulatory framework, as applicable.
8.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of a company in an enforcement?
Although certain types of fiduciary lien collaterals may be foreclosed in an extra judicial basis, in a contested case a creditor should necessarily resort to in-court proceedings to seize and expropriate assets of the debtor in the context of an enforcement proceeding.
9 Jurisdiction and Waiver of Immunity
9.1 Is a party’s submission to a foreign jurisdiction legally binding and enforceable under the laws of your jurisdiction?
The submission of a party to the non-exclusive jurisdiction of a foreign jurisdiction is legal, valid and binding under the laws of Brazil and will be accepted by the Brazilian courts, subject to certain assumptions and qualifications.
9.2 Is a party’s waiver of sovereign immunity legally binding and enforceable under the laws of your jurisdiction?
Generally, no non-public owned entities have immunity from suit, proceedings, the enforcement of any judgment, any attachment or from any other legal process (whether on the grounds of sovereign immunity or otherwise) under Brazilian law in respect of their respective obligations under the pledge agreements.
8 Bankruptcy Proceedings
8.1 How does a bankruptcy proceeding in respect of a company affect the ability of a lender to enforce its rights as a secured party over the collateral security?
Under judicial reorganisation, upon the filing, the Court will eventually accept the filing and grant the processing order (“Processing Order”). As a result of the Processing Order, the debtor enjoys a stay period of 180 calendar days (“Stay Period”). During the Stay Period, all actions, enforcement and foreclosure proceedings against the debtor are generally stayed (or cannot be commenced). The Stay Period is designed to provide the debtor with breathing room to formulate, negotiate and eventually obtain creditors’ support and approval of a Plan of Reorganisation. During the Stay Period, creditors holding collateral in the form of a fiduciary lien (a bankruptcy-remote collateral) are not entitled to remove the respective asset from the debtor’s possession in case such asset is deemed to be essential to the debtor’s activities.Further, in case bankruptcy liquidation is adjudicated, as a rule all assets should be scheduled by the court-appointed trustee to be subsequently sold. Creditors holding securities in the form of a fiduciary lien should be entitled to remove the respective asset from the bankrupt estate through the filing of a claim for restitution, as the case may be.
8.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g., tax debts, employees’ claims) with respect to the security?
The Brazilian Bankruptcy Law (“BBL”) regulates scenarios where antecedent transactions are deemed ineffective or voidable. Indeed, certain specific acts and contracts performed under a statutory period before the adjudication of the debtor’s bankruptcy liquidation (falência) are considered ineffective. Further, acts performed with the intent to hinder or defraud creditors may also be declared null and void.Section 129 of the BBL establishes that certain acts performed during a claw-back (look-back) period (termo legal) shall be declared ineffective in relation to the estate. The claw-back can generally retroactively apply up to 90 days prior to: (a) the filing of a bankruptcy liquidation (involuntary) request by the debtor’s creditor; (b) the filing for court-protection under judicial reorganisation (in case judicial reorganisation has been subsequently converted into bankruptcy liquidation proceedings); or (c) outstanding protest of a debtor’s title due to lack of payment.Ineffectiveness declaration should apply regardless of whether the involved parties were aware of the financial condition of the debtor or had the intention to defraud creditors. The following actions (inter alia), if consummated during the claw-back period, shall be considered objectively ineffective: (i) payment of unmatured obligations (i.e. preferred payment); (ii) payment of matured obligations in a different manner than originally established by the parties in the relevant contracts; and (iii) creation of collateral (security) to secure an existing unsecured debt. The transfer of substantially all of a debtor’s assets shall also be ineffective if consummated without consent or payment of all creditors existing at the time of the transfer.
Such regulations expressly allow legal entities located in Brazil to contract loans with legal entities located abroad. In this case, the funds raised abroad by Brazilian entities should be necessarily invested in “economic activities”, although the regulations have not defined such a concept. It is, however, generally understood that such funds obtained abroad should not be used for speculative purposes in Brazil.Considering that, as long as the loan is contracted in accordance with the applicable regulation, it will not constitute the carrying on of the business of banking in Brazil, nor will it subject the lender (or any of its affiliates) to any oversight by the Brazilian regulatory authorities. Apart from that mentioned herein, loan transactions do not require any approval from, or notice to, any Brazilian regulatory authority. However, it is important to mention that although no physical documents are involved in the Central Bank registration process, the Brazilian debtor shall keep the loan agreement (and guarantees, if any) in its files for five years as from the date when the loan is granted.
11 Other Matters
11.1 Are there any other material considerations which should be taken into account by lenders when participating in financings in your jurisdiction?
There are no further considerations that need to be mentioned.
AcknowledgmentThe authors would like to thank Luiz Felipe Fleury Vaz Guimarães, associate at Pinheiro Neto, for his invaluable assistance in the preparation of this chapter.
10 Licensing
10.1 What are the licensing and other eligibility requirements in your jurisdiction for lenders to a company in your jurisdiction, if any? Are these licensing and eligibility requirements different for a “foreign” lender (i.e. a lender that is not located in your jurisdiction)? In connection with any such requirements, is a distinction made under the laws of your jurisdiction between a lender that is a bank versus a lender that is a non-bank? If there are such requirements in your jurisdiction, what are the consequences for a lender that has not satisfied such requirements but has nonetheless made a loan to a company in your jurisdiction? What are the licensing and other eligibility requirements in your jurisdiction for an agent under a syndicated facility for lenders to a company in your jurisdiction?
Any individual or legal entity may enter into a loan agreement subject to certain interest limitations in case the lender is not a financial entity under the supervision of the Central Bank. Therefore, only financial entities have the authorisation to extend loans without pre-defined limits on interest rates. It is a criminal offence in Brazil to carry out any activity that is reserved exclusively for financial institutions. Generally, no specific requirements apply for agents (trustees) in syndicated facilities.Treatment for corporate lending activities under Brazilian law is different depending on whether the transactions are domestic or made offshore. If the corporate lending transaction is entered into by a Brazilian counterparty with an offshore financial institution, such transactions (direct foreign loans) shall observe Law No. 4131, of September 3, 1962, Brazilian Monetary Council Resolution No. 3.844, of March 23, 2010, and Central Bank Circular No. 3.491, of March 24, 2010.
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Ricardo Simões Russo is a partner in Pinheiro Neto Advogados’ corporate department, practising in the São Paulo office. He advises corporate and investment banking clients on public and private financing transactions, securities offerings and listings, and M&A transactions, with particular experience in financing and restructuring transactions. He also provides advice on corporate governance matters and corporate and securities law and regulation. Ricardo is acknowledged as having built a prominent reputation in both the DCM and private financing markets and has been recognised as a leading corporate finance lawyer by a number of industry publications.
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