Issuance of subordinated debt becomes permitted in the Brazilian (re)insurance market

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Resolution CNSP No. 391 (“Resolution CNSP 391/2020 or Resolution) was published on 4th November 2020, bringing an important and unprecedented tool for the (re)insurance market for raising funds: the issuance of subordinated debts by companies set up as corporations, namely (a) insurers, (b) capitalisation companies, (c) local reinsurers, and (d) private pensions open plan companies (“Supervised Entities”).

The Resolution was subject to a public consultation in August 2020 (Public Consultation No. 17/2020) and provided further details for the meaning of “subordinated debts”. It indicates that not only debentures and other subordinated debt instruments may be a means of issuance but also “commercial notes”; all such instruments must contain a clause contemplating the subordination of payments to other debts, having preference from shareholders in the payout considering the remaining assets, if existent, in the event of liquidation of the Supervised Entity.

The issuance of the subordinated debt shall observe certain rules set forth in the Resolution, such as:

  • The issuance must be informed with prior notice to the Brazilian (Re)insurance Authority (“SUSEP”) and within 5 days from its approval in the respective corporate meeting, which must have at least information about the nature of the fundraising, amount intended to be fundraised, its maturity and the financial outlay by the creditors; hence, SUSEP’s prior approval is not required;
  • Supervised Entities categorised as S4 are not permitted to issue subordinated debts;
  •  The Supervised Entity intending to issue the subordinated debt must have had its operations registered in systems approved by SUSEP by authorised registering companies, in line with Resolution No. 383/20 and Circular SUSEP No. 599/20, both published this year. With respect to the registering companies, SUSEP has authorised at least 4 companies to act in such capacity recently.
  • The debt issuance must be supported by a document that must contemplate the minimum information required by the Resolution in a section called “Núcleo de Subordinação”. Here is some of the information: (i) the payment of the debt is subordinated to the payment of other debts, giving priority to the remaining shareholders, if existent, in the event of liquidation of the Supervised Entity responsible for the issuance; (ii) automatic prohibition for payment of creditors in the event the Supervised Entity does not have enough capital to cover its technical provisions or has the need to recompose its solvency situation; (iii) possibility of suspension of payment to creditors by SUSEP, including the principal, when there is a technical review justifying the need to preserve the rights of insurers, guarantors, principals, loss payees, policyholders, subscribers of capital  titles and participants to open plan pension of the issuer.
  •  The debt may be issued in Brazil or abroad;
  • The repurchase or prior redemption by the Supervised Entity, when applicable, may occur within a period of 5 years counted from the issuance date up to the date of repurchase or prior redemption; and
  • All documents issued by the Supervised Entity relating to the subordinated debt must have at least the information required in the “Núcleo de Subordinação ”.

The Resolution will be complemented by a Circular to be issued by SUSEP, given that this authority will need to define, for example, how often information about the book value of the debts should be released and the amount of disbursement by the creditors.

Finally, Resolution CNSP 391/2020 (a) sets forth that the Supervised Entity may be prevented from issuing subordinated debts for 3 years if payment is made to creditors when the Supervised Entity does not have enough capital to cover its technical provisions or has the need to recompose its solvency situation and (b) amends Resolution CNSP No. 321/15 to set forth sanctions in the event of any breach by the Regulated Entities of the rules relating to subordinated debts.

The Resolution will become effective on 1st December 2020.

The DR&A Team is available for any clarification needed and will be glad to help.