Financial Market | 5 Key Clauses for Banks, Fintechs and Funds in Credit Agreement with Brazilian Borrowers

The volume of credit facilities in BR$ and foreign currency for Brazilian companies is at high levels, given the greater appetite of traditional lenders, such as banks and credit cooperatives, and entry of new players, including fintechs, FIDCs, FIAGROs, FIMs and family offices.

Of these credit transactions, a high percentage is carried out based on credit agreements, financing and prepayments without key clauses for protection and reduction of credit and legal risk for creditors.

Based on our experience, we’ve listed below 5 key clauses for financial institutions, fintechs and funds to pay attention to when structuring their transactions:

1. Clause of Conditions Precedent for Disbursement: Essential in credit agreements, this clause lists the conditions that must be satisfied by the borrower and guarantors for the credit to be disbursed. These so-called “conditions precedent” may require that (i) all legal instruments must be signed and notarized (or digitally signed) and held by the lender, (ii) guarantees must be registered in the competent public records and evidence received by the creditor, (iii) all borrower’s and guarantors’ corporate approvals have been obtained, (iv) no relevant adverse event has been verified by the lender, whether with respect to the borrower, overall economy, politics, legal, among others;

2. Clause of Affirmative Covenants: The lender must clearly establish in the credit agreement the obligations for the borrower and guarantors must affirmatively do, such as (i) furnishing of periodic management and financial reports, (ii) complying with financial covenants until full payment, (iii) observing the level and market value of the collateral granted and obligation to, in case of default, immediate adjustment, (iv) providing unrestricted access for the lender to do so, at any time , auditing its operations, collateral and accounting, and (v) reporting to the creditor any and all adverse events that may impact its ability to pay, including operations’ losses, relevant administrative and legal proceedings, among others;

3. Clause of Negative Covenants: This clause deals with obligations that the borrower and guarantors undertake to “not do”, except with the creditor’s prior written consent, including (i) not to carry out corporate transactions that entail a change of control, (ii) not sell relevant assets, (iii) not make relevant changes to its business plans, (iv) not take on debt above a predetermined amount, and (v) not carry out transactions with related parties, subject to specific criteria, among others;

4. Clause of Specific Performance: Usually forgotten in credit agreements, the specific performance clause is directly related to the affirmative and negative covenants sections. It allows the creditor, in case of default by the borrower or guarantors, to seek legal protection to determine that the specific defaulted affirmative or negative covenant is performed by the defaulting party;

5. Clause of Assignment: Strategic clause for lenders, the assignment clause must give autonomy to the lender to, if desired, assign all or part of the credit to third parties at its discretion. With the growth of the securitization market and sale of the credit portfolios, the assignment clause has become a fundamental part of credit agreements.

It is not uncommon to see financial contracts without an assignment clause in favor of the creditor or, if they do, they do it in an insufficient way and with language that allows for legal discussion.

In this context of greater credit volume in BR$ and foreign currency, it is important for creditors to back their credit in contracts with strategic clauses to protect credit and legal risk.

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