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

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ResolutionCNSP No. 391 (“Resolution CNSP 391/2020” or “Resolution”)was published on 4th November 2020, bringing an important andunprecedented tool for the (re)insurance market for raising funds: the issuanceof 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”).

TheResolution was subject to a public consultation in August 2020 (PublicConsultation No. 17/2020) and provided further details for the meaning of“subordinated debts”. It indicates that not only debentures and othersubordinated debt instruments may be a means of issuance but also “commercialnotes”; all such instruments must contain a clause contemplating thesubordination of payments to other debts, having preference from shareholdersin the payout considering the remaining assets, if existent, in the event ofliquidation of the Supervised Entity.

Theissuance of the subordinated debt shall observe certain rules set forth in theResolution, such as:

·        Theissuance must be informed with prior notice to the Brazilian(Re)insurance Authority (“SUSEP”) and within 5 days fromits approval in the respective corporate meeting, which must haveat least information about the nature of the fundraising, amount intended tobe fundraised, its maturity and the financial outlay  by the creditors; hence, SUSEP’s priorapproval is not required;

·        SupervisedEntities categorised as S4 are not permitted to issue subordinated debts;

·        TheSupervised Entity intending to issue the subordinated debt must have had itsoperations registered in systems approved by SUSEP by authorised registeringcompanies, in line with Resolution No. 383/20 and Circular SUSEP No. 599/20,both published this year. With respect to the registering companies, SUSEP hasauthorised at least 4 companies to act in such capacity recently.

·        Thedebt issuance must be supported by a document that must contemplate the minimuminformation required by the Resolution in a section called “Núcleo deSubordinação”. Here is some of the information: (i) the payment of thedebt is subordinated to the payment of other debts, giving priority to theremaining shareholders, if existent, in the event of liquidation of theSupervised Entity responsible for the issuance; (ii) automaticprohibition for payment of creditors in the event the Supervised Entity doesnot have enough capital to cover its technical provisions or has the need torecompose its solvency situation; (iii) possibility of suspension ofpayment to creditors by SUSEP, including the principal, when there is atechnical review justifying the need to preserve the rights of insurers,guarantors, principals, loss payees, policyholders, subscribers of capital  titles and participants to open plan pensionof the issuer.

·        Thedebt may be issued in Brazil or abroad;

·        Therepurchase or prior redemption by the Supervised Entity, when applicable, mayoccur within a period of 5 years counted from the issuance date up to the dateof repurchase or prior redemption; and

·        Alldocuments issued by the Supervised Entity relating to the subordinated debtmust have at least the information required in the “Núcleo de Subordinação ”.

TheResolution will be complemented by a Circular to be issued by SUSEP, given thatthis authority will need to define, for example, how often information aboutthe book value of the debts should be released and the amount of disbursementby the creditors.

Finally,Resolution CNSP 391/2020 (a) sets forth that the Supervised Entity may beprevented from issuing subordinated debts for 3 years if payment is made tocreditors when the Supervised Entity does not have enough capital to cover itstechnical 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 ofany breach by the Regulated Entities of the rules relating to subordinateddebts.

TheResolution will become effective on 1st December 2020.

TheDR&A Team is available for any clarification needed and will be glad tohelp.