With the massive use of credit cards by Brazilian retailers, wholesalers and fintechs, the constitution of collateral over card receivables is increasingly used by Brazilian and foreign lenders and investors.
In operation since 2021, the book-entry system for recording card receivables, provided Brazilian Central Bank regulation, modernized the structuring of lien for debt and equity transactions.
See below 5 important aspects on the assignment of card receivables as collateral for debt or equity transactions in Brazil:
1. How the Card Receivables Registration System Works: Receivables units (RUs) are sets of information composed of: (i) identification of the seller; (ii) transaction payment arrangement (credit, debit, brand); (iii) identification of the acquirer of the arrangement; and (iv) settlement date.
These URs are registered and can be traded with one of the 4 registration entities authorized by the Brazilian Central Bank.
2. Prior Consultation of Receivables Schedules: Schedules represent sets of RUs of the same debtor, with different settlement dates. It is recommended for creditors to request authorization to consult the debtor and carry out an opt-in operation in one of the registration entities, to verify if the flow of receivables is sufficient to guarantee the total debt.
3. Integration with Registration Entities: To operate with any of the registration entities, it is necessary to go through their approval process or rely on a third party that has already been approved. The advantage is the interoperability of the registry system, not being necessary the homologation in all the registration entities.
4. Collateral Management: The creditor must be careful when registering collateral on card receivables so that the value of the guaranteed obligation is not exceeded. The guarantee must be released to the extent that the guaranteed obligation is amortized.
5. Registration of the Collateral Agreement: the contract will not need to be registered at a Registry of Titles and Deeds for the lien to be effective. The creditor will register the contract directly with the registration entity with which it has made the systemic integration. Amendments, collateral releases and changes to receivables will also all be made directly in the book-entry system.
In this context, the collateral over credit card receivables, if properly structured, will be increasingly used by local and foreign lenders and investors to back debt and equity transactions.
