BRAZIL Law and Practice Contributed by: Roberto Panucci, Tiago Severo, Diogo Nebias and Guilherme Teles, Panucci, Severo e Nebias Advogados
Brazilian borrowers and global investors have grown more comfortable with such structures, especially for cross-border deals where a foreign HoldCo raises debt to acquire a Brazilian target, or vice versa. Likewise, preferred equity instruments are being used as quasi-debt in certain deals. Rather than traditional mezzanine loans, private equity sponsors have occa- sionally injected capital as preferred shares with pref- erential dividends and redemption rights to achieve financing needs without increasing formal debt on the balance sheet. These preferred equity stakes can mimic debt eco- nomics – for example, they carry a fixed cumulative dividend and are redeemable at a premium – while keeping leverage ratios in check from a legal stand- point. Borrowers appreciate this because it can pre- serve covenants or regulatory ratios and investors accept it for the higher returns and potential equity upside. 1.6 ESG/Sustainability-Linked Lending ESG lending and sustainability-linked lending have gained significant traction in Brazil’s financing spec- trum. In the past couple of years, there has been a notable uptick in sustainability-linked loans (SLLs) and green loans offered by both domestic banks and inter- national banks to Brazilian companies. Project finance has seen widespread use of green- labelled structures in wind, solar and transmission, alongside sanitation; agribusiness issuers tap “green” Certificate of Agribusiness Receivables ( Certifica - dos de Recebíveis do Agronegócio , or CRAs), and sustainability-linked bonds with step-up/step-down interest rate mechanics are more common. Super- visors have reinforced the trend: National Monetary Council ( Conselho Monetário Nacional , or CMN) and Central Bank of Brazil ( Banco Central do Brasil , or BCB) rules embed social, environmental and climate risk management into credit processes, the Securi- ties and Exchange Commission of Brazil ( Comissão de Valores Mobiliários , or CVM) has strengthened ESG disclosures, and a domestic taxonomy is under dis- cussion. Together, market practice and regulation are making ESG factors part of standard underwriting and ongoing reporting.
In addition to widespread use in renewable energy, sanitation and agribusiness, sustainability-linked instruments are also gaining ground in logistics and infrastructure projects — for instance, railway issu- ers tapping ESG debentures tied to greenhouse-gas reduction targets. CRAs labelled as “green” have expanded significantly and social impact lending has reached areas such as female entrepreneurship and low-income housing. These developments reflect not only market practice but also regulatory requirements, embedding climate-risk management into credit pro- cesses. 2. Authorisation 2.1 Providing Financing to a Company In Brazil, providing financing on a regular basis is a regulated activity. Banks and other financial institu- tions must be licensed by the Central Bank of Brazil to operate. The authorisation process for a new institution requires submission of detailed documentation, including busi- ness plans and governance structures. Capital thresh- olds must also be complied with. For non-financial institution lenders, the requirements depend on the nature and scope of their financing activities. Brazilian law does not prohibit a one-off or occasional loan from a company that is not a financial institution – for example, a parent company can lend to its subsidiary or a commercial company can extend trade credit to a business partner (all without requir- ing a banking licence). However, if a non-bank entity were to regularly extend loans to the public (espe- cially if raising funds from third parties to do so), it would likely be deemed a financial institution and thus require authorisation. 3. Structuring and Documentation 3.1 Restrictions on Foreign Lenders Providing Loans Foreign lenders may extend loans to Brazilian borrow- ers on a cross-border basis without holding a local banking licence, provided the transaction is duly reg-
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