BRAZIL Law and Practice Contributed by: Caio Ferreira Silva, Thiago Braga Junqueira, Vinícius Pimenta Seixas and Rodrigo Vieira, Pinheiro Neto Advogados
operational companies. However, the number of transactions in this regard is still not significant in Brazil. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans As indicated in 3.1 Senior Loans , the typical structure with revolver, senior, mezzanine jun- ior and subordinate debt is not widely found in finance structures in Brazil. In the securitisation market, however, creditors often transfer their credit rights to FIDCs, which issue different classes of quotas, having their sponsors holding senior quotas and the assignors of credit rights generally holding mezzanine or subordinate quo- tas for the payment of proceeds from the FIDC in the redemption or amortisation of quotas, and also as a way to allow credit enhancement through over-collateralisation. PIK loans are extremely rare in local deals. How- ever, parties may structure convertible loans or take on debt by means of the issuance of con- vertible securities, such as debentures. PIK-like loans may be achieved using merger transactions. In such arrangements, the share- holders of the merged company (or the com- pany whose shares were merged into the other) become shareholders of the surviving or merging entity. As a result, the former shareholders of the merged entity receive shares in the surviving or merging entity as compensation for the takeover. 3.3 Bridge Loans Bridge loans are typically contracted in the form of direct loans, CCBs entered into with major banks, or via the issuance of local bonds (eg, debentures) or similar debt instruments sub - scribed for by the banks/underwriters. Although common in project finance transactions, such types of short-term loans are rarer in M&A trans-
actions but are available for purchasers, such as in cases where a long-term loan is to be entered into in the future. 3.4 Bonds/High-Yield Bonds The issuance of bonds (debentures) and trans- actions with underwriting structures are rela- tively uncommon in Brazilian acquisition finance transactions. Nevertheless, a number of transac- tions involve off-the-shelf vehicles structured to acquire target companies with the proceeds of debentures privately placed to local banks. As the secondary market in Brazil remains relatively underdeveloped, banks subscribing for securi- ties in such transactions usually keep the deben- tures instead of selling them on the market. Brazil’s capital markets have recently undergone significant reforms aimed at enhancing transpar- ency, simplifying regulations and promoting high- er standards of corporate governance. These efforts have led to a notable increase in public offerings of debt securities. The typical structure involves banks underwriting and distributing the debentures in public offerings filed with the CVM (or by means of offerings with restricted efforts, exempt from registration requirements under the fast-track process set forth in Brazilian regula- tion), including the execution of underwriting and distribution agreements, an indenture, an offer- ing prospectus (except in certain cases where an exemption may apply) and the reference form ( formulário de referência ) disclosing the issuer’s and the offering’s information. 3.5 Private Placements/Loan Notes A private placement of securities is available for acquisition finance in Brazil and is very common in view of the relatively small capital markets environment compared to developed econo- mies. It is also possible and usual for obligors to issue promissory notes, either as a form of
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