Securitization companies play a fundamental role in the financial market by structuring operations that transform credit rights into negotiable securities. These companies enable the anticipation of receivables for ceding companies and offer investment opportunities in the capital market.
In this article, we will explain the concept of a Securitization Company, the main types that exist, and the essential legal considerations in the securitization process.
Content:
- What is a Securitization Company?
- What are the types of Securitization Companies?
- What are the necessary legal considerations in the securitization operation?
What is a Securitization Company?
A securitization operation is the creation of a security backed by a credit right for trading with third parties. The Legal Framework for Securitization (Law No. 14.430/22) defines a securitization operation as “the acquisition of credit rights to back the issuance of Receivables Certificates or other securities to investors, whose payment is primarily conditioned to the receipt of funds from the credit rights and the other assets, rights, and guarantees that back them.”
To understand how securitization works, it is also necessary to understand the basic concepts of this operation – the underlying asset and the credit right.
Basically, a credit right is any right to receive credit that someone has, which may have a payment forecast of short, medium, or long term. An example is the “duplicata mercantil” (trade bill), a credit instrument issued in sales transactions of goods made on credit, in which the buyer undertakes to pay the supplier, in the future, the value of the goods acquired.
When we talk about the underlying asset or “backing securities,” we are indicating that an agreement made between parties – in this case, the securitization company and the investor – has a value and this value is based on something. In other words, in the case of Receivables Certificates issued by the securitization company, these will have their value backed by the value of the credit rights acquired by the securitization company, as indicated in their content.
Receivables Certificates, according to the Legal Framework for Securitization, “are registered credit instruments, exclusively issued by a securitization company, (…) freely negotiable, which constitute a promise of payment in money.” They are instruments prepared and issued by the securitization company, in the form provided by law, which will generate a right to credit for the investor, based/backed by the credit right held by the securitization company.
That said, in a securitization operation we have:
Cedente (Originator): company or person that sells credit rights to the securitization company, subject to a discount;
Companhia Securitizadora (Securitization Company): creditor of the credit rights and non-financial institution that issues Receivables Certificates or other instruments or securities backed by the acquired credit right;
Investors: third parties who acquire the Receivables Certificates issued by the Securitization Company and will have credit rights backed by the credit right acquired from the Originator.
As a rule, the securitization operation follows the flow below:
What are the types of Securitization Companies?
Securitization operations can be defined in different types or modalities, depending on the type of credit right that will be the underlying asset of the operation or the instrument to be issued by the securitization company.
Below, we bring the main and most used types currently in the market:
Certificado de Recebíveis Imobiliários (CRI) – Real Estate Receivables Certificate: this is a credit instrument backed by credit rights from the real estate market, that is, related to the sale of properties, usually assigned by construction companies with the aim of obtaining resources for the completion of the work;
Certificado de Recebíveis do Agronegócio (CRA) – Agribusiness Receivables Certificate: this is a credit instrument backed by credit rights from agribusiness, backed by credits originating from the production of rural producers and agricultural cooperatives, such as sales of harvests;
Debênture (Debenture): this is a debt instrument issued by corporations (sociedades anônimas), in which the raising of funds takes place through a kind of loan made by the investor, backed by a set of credit rights and/or assets of the company. In this case, unlike Receivables Certificates, payment to investors will be made by the company itself, as debt repayment.
The Legal Framework for Securitization, enacted during the Covid-19 pandemic, aimed to extend the possibilities in which a securitization operation could be carried out, which was previously restricted only to those mentioned above.
In the definition itself promoted by the aforementioned Law, Receivables Certificates are conceptualized in a generic way, without establishing in which cases they can be issued, only indicating that they must be backed by credit rights to be specified in the instrument itself.
What are the necessary legal considerations in the securitization operation?
The securitization operation is complex and demands some care for the purpose of prevention and mitigation of risks by the securitization company, as well as, to guarantee compliance with the applicable legislation and regulation.
Initially, we highlight that securitization companies must be constituted under the corporate type of a corporation (sociedade anônima) that has as its exclusive activity the securitization of credit rights.
As for the credit instruments, the Legal Framework for Securitization defines the way in which Receivables Certificates must be issued by the securitization company and formalized by a Securtization Term, which must contain, at a minimum, the following:
- name of the issuing securitization company;
- order number, place, and date of issue;
denomination “Receivables Certificate” plus the nature of the credit rights; - nominal value;
- ordinary due date of the nominal value and redemption of the Receivables Certificates and, if applicable, breakdown of the amounts and dates of payment of amortizations;
- remuneration by fixed, floating, or variable interest rate, which may include a premium, fixed or variable, and allow capitalization in the period established in the securitization term;
- criteria for monetary updating, if any;
- foreign exchange variation correction clause, if any;
- place and method of payment;
- indication of the issue number and the possible division of the Receivables Certificates comprising the same issue into different classes or series, including the possibility of subsequent amendments for the inclusion of new classes and series and requirements for collateral supplementation, when applicable;
- indication of the existence or non-existence of subordination between the classes comprising the same issue, understood as the preference of one class over another for the purposes of amortization and redemption of the Receivables Certificates;
- description of the credit rights that make up the collateral for the issuance of the Receivables Certificates;
- indication, if applicable, of the possibility of substitution or future acquisition of the credit rights linked to the Receivables Certificates with the use of resources from the payment of the original credit rights linked to the issue, with details of the procedure for its formalization, eligibility criteria, and deadline for the acquisition of the new credit rights, under penalty of mandatory early amortization of the Receivables Certificates;
- if any, fiduciary or real guarantees for amortization of the Receivables Certificates comprising the issue or specific classes and series, if applicable;
- indication of the possibility of assignment in payment of the credit rights to the holders of the Receivables Certificates, in which case the procedures to be adopted must be established;
- rules and procedures applicable to the general meetings of holders of Receivables Certificates; and cases in which the securitization company may be removed or replaced.
It is worth noting that depending on the way in which the Receivables Certificates or other instruments issued are offered by the securitization company – public or private offering – the activities of the securitization company may become regulated by the Securities and Exchange Commission (CVM).
This is because, in a public offering, in which the securitization company directs the offer to acquire the instruments to the public and not to specific investors, such instrument is characterized as a security, according to Law No. 6.385/76, and is therefore under the competence of the Securities and Exchange Commission (CVM) to regulate them. The Legal Framework for Securitization determined, in these cases, that the CVM is responsible for regulating:
the registration, structure, operation, and activities of securitization companies;
the characteristics and information provision regime associated with Receivables Certificates and other publicly offered securities; and
the cases of removal and replacement of securitization companies.
Due to this, the CVM published CVM Resolution No. 60/21, which determines the registration of the securitization company with the CVM and compliance with rules related to the provision of periodic information to the regulator, implementation of internal control procedures, holding of special investor meetings, format and rules to be observed for contracting service providers of bookkeeping, custodian, independent auditor, and fiduciary agent, among others.
For both modalities of securitization company – regulated or non-regulated – the fiduciary regime must be instituted (unless the securitization company is registered in the S2 category with the CVM), which deals with the segregation of assets related to the credit rights that are the collateral for the Receivables Certificates from the other operations and assets of the securitization company, including in relation to tax, social security, and labor liabilities.
The securitization operation is complex and demands special attention to the applicable legislation and the mechanisms presented by the Legal Framework for Securitization itself, which aims to prevent and mitigate liquidity risks of the securitization company to fulfill its obligations with the Receivables Certificates and other instruments that may be issued.
Securitization companies must have expertise related to each type of securitization operation they will carry out to ensure security, even in high-risk investments, which can be done from the issuance of the securitization term, through the clauses contained therein, to the establishment of a fiduciary regime and care with its assets.
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