Private Credit | 5 Points of Attention for Investors in the Purchase of Brazilian Receivables

Brazilian Receivables Funds (known as FIDCs), financial institutions and other investors acquire and advance more than BR$100 billion in trade receivables annually, originated by companies in their sales of products and services.

From the legal disputes that arise from sales of receivables, we identified points that acquirers should pay attention in order to mitigate risks linked to this type of transaction.

See below 5 of these key points in the acquisition of receivables by FIDCs, financial institutions, and other investors:

1. Do Due Diligence on Receivables to be Prepaid: FIDCs, financial institutions, and investors acquire receivables performed (the majority) or to be performed.

With regard to “performed”, the investor must (i) confirm that the seller is the legitimate holder of the receivables, (ii) review the documentation that supports the credit rights, such as commercial contract and invoice issued, and (iii) confirm with the debtor of the receivables that they are owed and there is no commercial dispute between the supplier (credit seller) and the debtor.

2. Specify the Underlying Receivables in the Purchase Agreement: The Receivables Purchase Agreement must provide for the main specifications of the receivables, in order to individualize them and, thus, ensure their right of assignment vis-à-vis the supplier, the debtor and third parties.

For continuous receivables assignment programs, details of the receivables to be assigned should preferably be attached to the Receivables Purchase Agreement, which may be updated or replaced as new receivables are negotiated.

3. Notify and Obtain Acknowledge from the Debtor Regarding the Assignment of Receivables: This is one of the crucial points in the acquisition and anticipation of credit rights. Observe the rules of art. 290 of the Brazilian Civil Code, which requires that the debtor of the assigned receivable be notified of the assignment and declare that he or she is aware of it, is a key precaution for investors.

According to market practice and caselaw, the format of notification and acknowledgment of the debtor may occur in various ways, but within accepted limits.

4. Ensure the Right of Recourse in Key Situations: Although the advance of receivables is commonly signed without recourse against the seller (i.e., the credit risk is assumed by the investor), the investor must ensure the right of recourse against the seller if (i) there are defects in the documentation that originated the receivables that invalidate them or make them unenforceable, (ii) there is a dispute with third parties over their ownership, (iii) if there is a commercial dispute over the receivables between the seller and the debtor, or the commercial contract has been annulled or amended, without the investor’s consent, among other events.

5. Protect Your Assignment of Receivables: In addition to notifying and informing the debtor of a specific assignment of receivables, consider registering the Receivables Purchase Agreement with the Brazilian Registry of Titles and Deeds of the seller’s jurisdiction.

Although it is not a condition for the validity and enforceability of the assignment, registration will publicize the assignment and guarantee seniority rights in the face of third-party disputes.

The above points of attention are important to be considered by FIDCs, financial institutions and other investors in credit rights, aiming to mitigate some of the main risks involved in a market with great opportunities.


Share on facebook
Share on linkedin

Subscribe to
our Newsletter:

* Mandatory fields