Central Bank Of Brazil Regulates Covered Bonds

Pursuant to the provisions of Law 13,097 dated as of January 19, 2015 ("Law 13,097"), the National Monetary Council approved, in extraordinary meeting, the publication by the Central Bank of Brazil ("BCB"), on August 29, 2017, of Resolution No. 4,598 ("Resolution"), which regulates the issuance of Covered Bonds (Letras Imobiliárias Garantidas - "LIG") by full service banks, commercial banks, investment banks, credit entities, financing and investment companies, savings banks, mortgage companies and savings and loan associations. The purpose of the new bond is to complement the sources of funds for the real estate sector.

LIG is very similar to covered bonds, widely used abroad. The typical characteristic of covered bonds that LIG brings to the Brazilian market is its double guarantee, that is, like covered bonds, LIG is secured (i) both by assets, mainly for real estate credits, organized in a cover pool, i.e., in a portfolio of assets, (ii) and by the maintenance of the issuing institution as the one liable to investors for the performance of the issued LIGs, in case the asset portfolio is insufficient to pay the LIG.

Unlike the securitization process, for example, in which the real estate credit is assigned to the securitization company, in the issuance of LIG and covered bonds the credit is maintained with the issuer itself, integrating its balance sheet. This allows the issuer to replace the assets of the asset portfolio (see the Portfolio Management section below), subject to the requirements on the Replacement and Reinforcement of the Asset Portfolio established in the Resolution.

We highlight below the main aspects related to the LIG regulated by the BCB.

Definition and Conditions for Issuance

The Resolution repeats the concept given to LIG in Law 13,097, that is, "registered, transferable and freely negotiable commercial paper, secured by a portfolio subject to the fiduciary regime."

Several conditions have been set for the issuance of LIGs by institutions authorized to do so; non-compliance will subject the institution to the suspension of any new LIG issuances. In summary, these conditions are focused on: (i) the restriction of the values of the assets comprising the portfolio that guarantees the security in relation to the total assets of the issuing institution (10% of the total assets of the issuing institution in the S1 segment - financial institutions whose size equals or is greater than 10% of GDP or that carry out relevant international activity, regardless of size - and 30% of the total assets of the issuing institution in the other segments established by the BCB in Resolution 4,553, dated as of January 30, 2017); and (ii) with respect to the minimum requirements for Reference Equity, Level I and Principal Capital established by the BCB.

The issuing institution, together with the issuing fiduciary, shall inform the BCB who the officer responsible for the LIG issuance is, who may be in charge of other tasks at the issuing institution, except for those related to the management of...