Relevant Aspects On The Indebtedness By Brazilian Companies Of The Public Sector

Co-written by Camila Ferreira de Oliveira Gomes and Tamy Fujiwara

I. Introduction

Credit transactions carried out by public companies in general, either in the Brazilian or international market, are subject to certain special conditions set forth by the Brazilian Federal Constitution. The main purpose of such constitutional provisions is to ensure that the Federal Union controls the foreign indebtedness of the federation, the budget balance and the responsibility for the fiscal management of the public indebtedness.

In this respect, according to the Federal Constitution, the Federal Senate 1 is privately empowered to (i) decide on the total limits and conditions for the internal and external credit transactions of the Federal Union, States and Municipalities, as well as for its governmental agencies and other entities controlled by the Federal Public Power, and (ii) establish the total limits for the amount of the restated debt 2 of the Federal Union, States and Municipalities, as per proposal of the President (Federal Constitution, Art. 52, VI and VII).

In addition, the Federal Constitution establishes that a complementary law shall be enacted in order to set forth the general provisions concerning the public finances and the applicable parameters for the indebtedness of the public entities and the granting of guarantees thereby (Federal Constitution, Art. 163).

In this sense, on May 4, 2000, Complementary Law 3 no. 101 was enacted within the Fiscal Stability Program presented by the President on 1998, which aims the reduction of the public deficit and the stability of the public debt in relation to the Gross Internal Product.

The purpose of such Complementary Law is the restructuring of the debts of States and Municipalities, the reorganization of the state banking system and the implementation of the measures of fiscal adjustment by the state and municipal governments, with the intention of establishing the responsible fiscal management regime, upon the adoption of the legal mechanisms that shall guide the public administration.

In this context, credit transactions carried out by public companies are also subject to certain rules of the Complementary Law, as they impact on the public indebtedness.

Therefore, an overview of the regime of credit transactions of public companies in Brazil cannot omit the general conditions to which the public indebtedness is subject, indicating the basic guidelines arising out of three main sources:

the rules of the Federal Senate which establish the limits and conditions for the indebtedness of the Federal Union, States, Federal District and Municipalities;

the rules of the Fiscal Responsibility Law which directly or indirectly limit the power of the public entities when performing credit transactions; and

the rules for private financial institutions which restrict the credit availability of the public entities.

This paper intends to present an overview on these three aspects in which the subject may be divided, in order to provide for an overview of the legal regime in force and applicable as to internal and external credit transactions carried out by entities of the public administration.

II. Resolutions Of The Federal Senate

1. Direct And Indirect Federal Public Administration

Resolution no. 96/89 4 of the Federal Senate refers to (i) total limits for internal and external credit transactions of the Federal Union and its governmental agencies and other entities controlled by the Federal Public Power, and (ii) limits and conditions for the granting of guarantees by the Federal Union in relation to internal and external credit transactions.

Resolution 96 refers not only to the Federal Union, but to all its direct and indirect federal administration. However, it does not refer to the States, Federal District and Municipalities credit transactions - which shall observe the provisions of Resolution 78 of the Federal Senate (see item 2 below) - and does not exclude the independent public companies - which are referred to in Resolution 78 and Complementary Law no. 101.

As per Resolution 96, credit transaction is a transaction which represents obligations with creditors in the country or abroad, such as:

any and all obligation arising out of financing or loan (contracts, issuance and acceptance of notes/bonds);

lease transactions; and

granting of any guaranty.

The States, Federal District and Municipalities and its respective governmental agencies are not allowed to enter into agreements directly with suppliers, services' providers or contractors, upon issuance or guaranty (aval) of notes, acceptance of bills or other similar transactions.

1.1. Limits

The amount of credit transactions in each fiscal year cannot exceed the amount of the capital expenditures (investments, financial inversions, capital transfers, as defined by law), exception made only to the authorized transactions upon supplementary or special credits with specific purpose (credits which are not foreseen in the correspondent fiscal budget), duly approved by the Legislative Power by an absolute majority of votes.

The internal and external credit transactions with financial nature of the Federal Union and its governmental agencies and the issuance of guarantees by the Federal Union...