Brazilian agribusiness companies are increasingly raising funds through structured credit transaction with Brazilian and foreign lenders.
Credit lines in U.S. dollars range from traditional export prepayments (PPEs) and direct lending (4131), to Rural Product Notes (CPRs) and CDAs/WAs with currency exchange adjustment, financed by foreign financial institutions, funds, tradings and investors .
Deals in Brazilian reais are structured through agribusiness receivables certificates (CRAs), debentures, commercial notes and bank credit notes, entered into with banks, receivables funds (FIDCs), agribusiness funds (FIAGROs), fintechs, family officers, among others.
Whether in U.S. dollar or Brazilian real terms, most of them are structured with personal guarantees and, mainly, in rem collateral over the financed commodities and real estate (land, industrial plants, warehouses, etc.).
The fundamental thing is that the collateral package observes the cultivation/harvesting/storage/sale cycle of the product.
Below we list 4 of the key collateral instruments governed by Brazilian law used by ag lenders:
1. Fiduciary Lien as Collateral Over Rural Land and Other Properties: The Brazilian Agribusiness Law (Federal Law N. 13.986) allowed rural land to be given as collateral in the form of fiduciary lien in favor of not only Brazilian lenders, but also foreign ones. The fiduciary lien may also be created over other fixed assets of the borrower and third party guarantors. It is currently one of the best collateral instruments in the sector.
The assets subject to this type of guarantee are not subjecdt to the effects of judicial reorganization of the debtor/guarantor (except due to their essentiality).
2. CDA/WAs: The Agricultural Deposit Certificate/Agricultural Warrant, endorsed as a collateral, represents one of the most liquid and solid guarantees in agribusiness. There are massive 1st and 2nd degree court decisions awarded in execution and judicial reorganization cases which recognize and protect the right of the creditor holding this security title over the assets subject to CDA/WAs.
Once endorsed, CDA/WAs are protected against judicial recovery/bankruptcy of the issuer.
3. Rural Product Certificate (CPRs) With Fiduciary Lien Over Fungible Goods: The Brazilian Agribusiness Law allows the CPR lender to be granted fiduciary lien over fungible assets, such as commodities (soybeans, corn, cotton, tobacco, etc.) and other agricultural products. CPR with fiduciary lien built-in gives the creditor protection against judicial reorganization of the issuer/debtor.
4. Fiduciary Assignment of Credit Rights: This collateral instrument is widely used in agribusiness and other sectors for the assignment and advance of receivables. It is important to observe the legal requirements for the lien constitution and notification of the debtor.
Bearing also in mind the risk assessment regarding the nature of the underlying receivable (whether performed or to be performed), the fiduciary assignment of credit rights is an instrument that provides legal certainty to the creditor.
The above security instruments are having (and will have) a great positive impact on increasing liquidity for agribusiness funding. Brazilian and foreign lenders should evaluate which ones fit into the structure and cycle of the transaction being designed to mitigate/neutralize borrowers’ credit risk as much as possible.