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6–8 November 2019, São Paulo, Brazil
Friday 8 November

 

Interactive workshop 2 – Part 2

Financing growth and acquisitions in Latin America

 

Horacio Vianello
Vianello Law, Buenos Aires
vianello@vianellolaw.com

 

Session Co-Chairs:

Horacio Vianello  Vianello Law, Buenos Aires

David Flechner  Paul Hastings, São Paulo

 

Table moderators:

Otto Eduardo Fonseca Lobo  Lobo & Martin, Rio de Janeiro

Bruno Oliveira Maggi  KMM, São Paulo

Pedro Afonso Avvad  Freitas Leite, Rio de Janeiro

Guilherme Peres Potenza  Veirano, São Paulo

Luiz Sette  Azevedo Sette, São Paulo

Rodolpho de Oliveira Franco Protasio  Mundie, São Paulo

Andrés Aznarez  Posadas Posadas & Vecino, Montevideo

Fernando Minguez  Cuatrecasas, Madrid

Paul A Josephus Jitta  Heussen, Amsterdam

Alexandra Orbezo  Rebaza, Alcázar & De Las Casas, Lima

Antonio Villa Berkemeyer  Berkemeyer, Asunción

Victoria Bengochea  MBP Partners, Buenos Aires

Fabiola Augusta Cavalcanti  TozziniFreire, São Paulo

 

Overview

This interactive workshop session explored the challenges and trends in financing models and terms. The discussion focused on the numerous routes to financing for closely held and growing companies, both classic and new models, recent experiences with these models, and the role of the lawyer in choosing and implementing the right model for the client. How can we as lawyers continue to add value and ensure appropriate legal certainty to our clients in each of these models? In the first part of the workshop, delegates and moderators from several jurisdictions worked in breakout groups discussing several topics, including:

• trends and challenges of traditional lending;
• private equity, credit funds and growth capital players;
• capital markets in the Americas;
• the emergence of Fintech; and
• how to deal with distress situations and refinancing debt.
   

Topic 1: Trends and challenges of traditional lending

Table moderators

Pedro Afonso Avvad  FreitasLeite, Rio de Janeiro

Guilherme Peres Potenza  Veirano, São Paulo

Luiz Sette  Azevedo Sette, São Paulo

The discussion covered Argentina, Brazil, Costa Rica and the United States. Points raised at in this breakout group included:

• direct credit operations, peer-to-peer and marketplace lending are a trend which has become competition to traditional lenders, such as banks and credit funds. In Brazil, as in the US, these companies are a reality, but in the rest of Latin America, including Argentina and Costa Rica, discussions have only started and regulations are not expected soon;
• in Brazil, regulations regarding Sociedade de Crédito Direto (SCD) and the Sociedade de Empréstimo Pessoal (SEP) were issued in 2018 and boosted the formation of new entities with a focus on credit;
• these entities are still not competing with more traditional players, such as banks and credit companies, but are on the radar of credit funds;
• the fact that these companies allow up to 100 per cent of foreign capital has also been a factor of interest to foreign investors;
• another trend in the traditional credit market is the issuance of social bonds and other credit securities with the intention of having a positive social and environmental impact, including investment in renewable energy, healthcare, social housing and micro-finance;
• debt collection is still a major issue in Latin America, especially in connection with relevant corporate loans, and requires creativity from legal professionals in structuring guarantees; and
• modifications introduced in the legal system have increased the level of debt collection, such as the creation of the fiduciary lien which allow creditors to retain property of their assets, as well as consigned credit and credit scoring registry.

 

Topic 2: Private equity, credit funds and growth capital players

Table moderators:

Alexandra Orbezo  Rebaza, Alcázar & De Las Casas, Lima

Rodolpho de Oliveira Franco Protasio  Mundie, São Paulo

Paul A Josephus Jitta  Heussen, Amsterdam

Participants:

José María Allonca  Allonca Law Firm, Argentina

Melissa Carvalho Kano  KLA, Brazil

Felipe Toscano  Dannemann Siemsen, Brazil

Inez Sampaio  Sampaio Katalan, Brazil

Alain Craig  Campbells Law, Cayman islands

Juan Daniel Rodríguez C  Rodríguez Rueda, Mexico

 

The table discussion was held on the basis of the following questions.

Growth capital versus growth debt: Which should a business choose?

In Brazil there are mainly five banks where a company can go to for financing, forming some sort of ‘cartel’. Two banks are state owned, the other three privately owned. These banks basically do not lend money to startup companies. Personal guarantees are usually requested by banks in return for lending money. Growth capital is provided to more mature companies. Often loans are granted with the possibility for the bank to convert the loan into a shareholding interest. In general there is little flexibility on loan terms or interest to be paid. The banks basically dictate their desired terms. In Brazil there is an ambiguity against shareholding in companies, as a shareholder incurs a liability risk for unpaid taxes and breaches to labour law. The courts in general are quite socially oriented as they tend to protect employees by holding shareholders liable. New legislation is being prepared to improve this situation for shareholders.

In Argentina there is a lot of co-investing and funding of funds. There is a lack of understanding the need for investing in expanding companies. Banks do not provide for such financing. In the early stages of financing, the conversion of debt into equity is common market practice.

In Peru the same patterns apply as in Argentina. During the growth stage flexible debt is mostly provided. Interest rates are flexible too. Conversion of debt of part of the debt into equity is also common market practice.

In Mexico there is a tendency that companies’ tax liability is also extended to shareholders and directors (‘piercing the corporate veil’). The market situation for financing of companies is similar to that described above for Brazil, ie, big banks dominate the market.

In the Netherlands banks are the dominant players too, but there is also a well-established private equity/venture capital market, with more than 400 players. Growth capital is generally provided to second stage growth companies. Early stage companies usually have easier access to debt financing, also by converting rights into equity. When obtaining finance through equity the investing shareholder usually stipulates a substantial (blocking) vote for all relevant company decisions in the general meeting of shareholders and on the board of directors.

 

To sell or not to sell? Which companies typically receive growth equity?

In Brazil growth equity is provided to more mature companies. Private equity frequently invests in franchise chains and a lot of strategic consolidation occurs in the marketplace. Funds also grow significantly. Softbank was mentioned as an active player in providing finance.

In Argentina private equity is more involved with investing in existing, old-fashioned types of companies that are medium-sized and mid-market.

In the Netherlands growth equity is provided to both early stage companies which lack income to pay interest and repay debt, as well as to second stage (scale up) companies, which have already proved their reasons for existence.

 

Minority versus majority interests

In Argentina, Brazil, Mexico and Peru growth capital providers mainly invest in minority stakes, aiming at an exit in the near future. Private equity in Peru invests in most sectors of interest, such as mining, energy, technology, but also more recently in education, agribusiness and health.

In general it was noted that investments in agribusiness and the medicinal use of cannabis are really booming in all Latin American countries represented in the workshop.

In Mexico most investments over the last decade have taken place in education and health. In Peru minority stakes are commonly obtained. In the Netherlands, private equity frequently acquires majority stakes in target companies by having its existing portfolio company acquire such a majority stake.

 

What are the trends in growth capital transactions in your market and what are the key trends in contractual terms?

In Peru preference shares are frequently used, giving specific rights in the event of liquidation, exit, granting the investor specific voting rights.

In Argentina venture capital is active in startups. English language templates from the National Venture Capital Association of North America are commonly used. This also happens in Brazil, whereby parties intend to avoid American legal concepts by using clearly defined terms. In Brazil these contracts frequently contain clauses regarding healthcare services, the environment, data privacy, anti-corruption and material adverse change clauses. A very high materiality threshold is known as a ‘big mac’. Arbitration in general is deemed too expensive and too slow. In Peru local arbitration is frequently used.

In Mexico the federal courts are usually chosen. International arbitration (International Chamber of Commerce (ICC) or American Arbitration Association (AAA)) is less favoured, as arbitral judgements/awards can too easily be challenged before a national court.

In the Netherlands crowd funding lags behind as method of financing compared with financing by banks and private equity. There is plenty of venture capital available. Fintech is mostly financed through venture capital. Key trends in contractual terms are not new but the usual suspects:

• security rights (pledges of shares, assets, insurance claims, trade receivables);
• conversion rights; and
• blocking voting rights.

As the Dutch court system functions very well and is affordable, many of the parties choose local district courts in dealing with conflict. Alternatives are the Dutch National Arbitration Institute (NAI), where proceedings can be undertaken in English; and recently, the National Commercial Court (NCC), where proceedings also can be in English. Arbitration in general is considerably more expensive than ordinary court proceedings, but has the great advantage of total secrecy. Whereas proceedings before Dutch courts are in principle, publicly accessible. International arbitration is also used, in particular the ICC in Paris.

In Brazil 80 per cent of the arbitration takes place before the Canadian Chamber of Arbitration. This is the most experienced arbitration tribunal in Brazil.

 

Other growth capital players: raising money from a trade buyer?

In Brazil Embraer is a good example of an active operating company which also invests in other companies, in particular in startups. In Peru several corporate entities provide capital and commercial agreements for other companies. In Argentina Telefonica is investing in other companies. In the Netherlands credit insurance companies such as Atradius, Euler Hermes, Allianz and Lloyds are active, as well as factoring companies, as are the banks and sale and lease back companies.

 

Topic 3: Capital markets in the Americas

Table moderators

Antonio Villa Berkemeyer  Berkemeyer, Asunción

Otto Eduardo Fonseca Lobo  Lobo & Martin, Rio de Janeiro

Bruno Oliveira Maggi  KMM, São Paulo

 

Which prominent capital market cases have taken place your market over the last 12 months?

• Casting Vote and CRSFN (Vinci Equities case)

In 2018, a federal judge of Distrito Federal decided that there is no possibility of a casting vote by the sessions’ president to condemn the company, since there is no legal precedent. According to the decision, in the event of a tie, only the Minister of Economics has the casting vote.

• The privatisation of Eletrobras

President Bolsonaro has signed the bill number 9,463/2018 which authorises Eletrobras’ privatisation process without golden shares, that is, without special voting rights to the government which has veto power. The privatisation process will take place through company capitalisation, with dissolution of government’s participation to less than 50 per cent. Under the new law, the government’s goal is that Eletrobras will take back its capacity of investment. The company will no longer sell energy with artificially low customer prices.

• The Brazilian Development Bank’s (BNDES) investment portfolio reduction

The purpose for this is focusing resource allocation on startups and infrastructure for national development through the granting of credit and investment funds. BNDES no longer aims to participate in operations to rescue companies in difficulty. The aim is to sell the estimated value of BRL 120bn (approx. $29bn) in three years. In the first half of 2019, BNDES received BRL 10.1bn (approx. $2.43bn) selling its participation in companies such as Eletropaulo and Fibria.

• Vale and the Novo Mercado of B3

Vale’s migration to the Novo Mercado still has positive affects on the market, preventing its control from being exercised by the government and allowing increased and safer investments with no risks of political influenced decisions. The operation involved, for instance, the conversion of Vale’s PN shares to ON shares, changes to its bylaws to comply with Novo Mercado rules and the merger of Valepar, simplifying its corporate structure on payment of ten per cent of control premium regarding the Valepar shareholder’s position.

Do you know of and/or were involved in any form in an insider trade case?

• Banco BTG Pactual case

Application of the theory of ‘Corporate Mind’ and ‘Chinese Wall’ in multiservice banks. It was decided that insider trading analysis must involve a detailed investigation to obtain robust and converging evidence of the practice. In this case, BTG Pactual was acquitted due to the lack of evidence and proof of deployment of a Chinese Wall.

What are your views on the current position of capital markets in your country?

• Law No 13,874/19 (Lei da Liberdade Econômica ‘Economic Freedom’ Law):
  • Disregard of legal personality: parameters to be observed, eg, fraud.
  • Investment funds: (i) legal definition; (ii) quota holders and service providers’ limitation of liability; (iii) registration directly in the CVM; (iv) exemption from the subscription bulletin for public offerings that are settled on the stock exchange; and (v) possibility of segregate its property.
  • Corporates: exemption from the subscription of the list or bulletin, in the capital increase, in the event of public offering of shares settled in an organised securities system.
  • Companies: ‘debureaucratization’ of the constitution and performance processes of companies results in a relaxation of formalities related to the execution of business economic activities eg, automatic filing of corporate acts and electronic document storage.
• Bill to change the Recovery and Bankruptcy Law (Bill No 10,220 of 2018):
  • to create a more efficient regime which would in place a system to retain and stimulate new investments/ bring new money into insolvent companies under judicial recovery with additional guarantees to investors.
• Petrobras - class actions (Lava-Jato):
  • possibility of an investor to sue a corporate for the violation of its duty to report. The US has decided that it is possible and a deal was made to end the case. In Brazil, supported by a decision of TJ-SP (Court of Justic, State of São Paulo), minority shareholders have initiated an arbitration proceeding before the CAM (market arbitration chamber). Is this an application of the fraud on the market theory?

Bank loans versus capital markets: Which is more attractive for finance projects?

The reduction in interest rates in the region and how it affects the financial market.

• Scenario of interest rate reduction
  • increase of small investors' participation in ICOs, demand for risky assets, debentures and funds.

How capital markets are being used to finance infrastructure projects:

• ICVM 6060 of 2019
  • Creation of the ‘Fundo Incentivado de Investimento em Infraestrutura’ (FI-Infra), a specific investment vehicle for infrastructure-encouraged securities, in line with the objective of promoting long term infrastructure. Its characteristics include:
    • target audience - qualified and retail investors;
    • classification - fixed-income funds; and 
    • concentration by financial asset modalities - at least 85 per cent of its equity must be allocated in 'Valores Mobiliários Incentivados em Infraestrutura'.
• Debentures' legislation
  • The government aims to change debentures’ legislation to allow institutional investors such as pension funds to finance infrastructure projects instead of BNDES through issuing a series of new debentures with higher interest in exchange for a reduction on taxes on profit plus 100 per cent of promised interest going to the investor.
• Petrobras' pre-salt blocks auction
  • This aims to bring new players into the market, particularly foreign investors.

The role of the foment institutions and public development banks in financing infrastructure projects. Are they a reality in your country?

Suggested issues include primary public interest issues and the new role of the development banks and foment institutions in the region.

• Roles of BNDES in infrastructure projects
  • The current plan is to keep the percentage of financing low. Operations will be complementary to those of private capital. In a low interest scenario, BNDES aims to leave most of its credit to private banks and to syndicated bank operations, including multilateral institutions, as well as providing guarantees.
     

Security litigation

The pros and cons of judiciary and arbitration in different jurisdictions. Suggested issues include specialised commercial courts versus arbitrators, cost and litigation finance, confidentiality and cross-border enforcement issues.

• The benefits of arbitration:
  • choice of decision maker with expertise;
  • speed;
  • lower costs;
  • flexibility;
  • confidentiality; and
  • selection of applicable law.
• The drawbacks of confidentiality of arbitration in capital markets:
  • investors and shareholders access to information is reduced:
    • Processo Administrativo CVM No RJ 2008/0713 (Director Relator Otavio Yazbeck, 2010) - CVM decided that access to information is not unrestricted, confidentially of the arbitral procedure must prevail except in cases of mandatory disclosure to the market. 
• Third-party funding in arbitration:
  • investors cover the party's arbitration procedure costs in exchange for receiving a percentage of the result, therefore sharing risks.
     

Topic 4: The emergence of Fintech

Table moderators

Victoria Bengochea  MBP Partners, Buenos Aires

Fernando Minguez  Cuatrecasas, Madrid

Andres Aznarez  Posadas, Posadas & Vecino, Montevideo

 

During the Financing Session of Sao Paulo IBA, we have shared and discussed about the emerge of fintech industry, and how law and lawyers (we) are dealing with it.

As we know, fintech is the short for financial technology or, let’s say, it is the innovative use of technology in the design and delivery of financial services. So, in our table we agreed that things such as crypto currencies, big data, per-to-per lending, digital payments or blockchain, just to name a few, are transforming people’s life, the whole financial industry, and of course, it also is transforming lawyers’ life.

So, despite the fact that we have discussed general matters regarding fintech regulation, the approach of my conclusion is mainly focus in regulation in Latin America, and how lawyers are facing challenges arising from fintech, as well as the whole universe of business emerging from new financial technologies.

Despite its potential benefits, fintech services also pose new types of risks such us misuse of personal data, difficulties in identifying customers, electronic fraud, among others. So, it is worthwhile to ask ourselves if fintech should be regulated, how and to what extent. It is also proved that excessive regulation in a context of growth or emergence of a business might not be desirable because it could be deadly for start-ups; in other words, excessive or inappropriate regulation might asphyxiate new developments.

So, in our table, our first conclusion is that regulation is needed, and it has to permit the growth of the industry, and at the same time, ensure appropriate oversight.

How Latin American countries are dealing with regulation issues? Are they regulating or not?

In Argentina fintech’s regulation is atomize and incipient. In 2018, National Securities Commission approved under dispositions of Productive Financing’s Law, a resolution providing legal framework for crowdfunding. Regarding cryptocurrencies, regulation is limited to taxation and AML, but nothing is said about exchanges, or the use of digital assets. P2P lending is in a limbo too, there is no formal regulation, and companies build their business structure taking advantages and risks of such legal vacuum. For many players, this legal vacuum situation is seen as an opportunity.  

In other countries, such as Mexico, fintech regulation is so strict that is making tough the environment for those who seek to develop fintech projects. Regulation on investment crowdfunding have been placed in Brazil since 2017, as well as P2P lending and funding operations among electronic platforms. Colombia and Chile have not regulated yet, but authorities took a more aggressive attitude towards fintech development.

Regulation of fintech industry in Latin America is not an easy task, but the truth is that policymaking and regulation is being debate in a very active ecosystem.  

Questions discussed by delegates were broken down by region, and below there are some of the topics discussed:

 

Fintech in Latin America

• Do you think that the Fintech sector is a challenge for lawyers and why, or how?
• Is Fintech regulated in your country and how? Do you think it should be regulated? What is the attitude of authorities towards Fintech
• There are jurisdictions where the authorities are receptive to new developments and others which prohibit or limit such activities.
• In cases of no regulation, what risks do you think may result from lack of regulation?
• Conversely, in cases of regulation, do you think excessive regulation could have an adverse effect on the development of Fintech companies? If so, in what way?

Fintech in the European Union

• What does the term ‘Fintech’ mean to you, or how is it understood in your jurisdiction? Dose it refer to new financial businesses or rather to the impact of technology in finance in general?
• Where do you see technology effecting finance the most? Do you really think technology is reshaping the financial business?
• What should the regulatory approach be? Should Fintech be facilitated?
• Should innovators benefit from lower regulatory requirements, albeit temporary, such as ‘sandboxes’?
• Do you see interactions between Fintech and other areas of law such as data protection, cybersecurity?
• How, if at all, should financial services lawyers change their approach? Are any new skills required?

Crowdfunding in Latin America

• Has your jurisdiction regulated crowdfunding? If so, what are its main characteristics?
• Does this regulation truly ‘democratise’ finance and how?
• What types of crowdfunding platforms are currently popular in your country (eg, donation, reward lending, or equity)?
• For which kind of businesses is crowdfunding available and used?
• Are there any special conditions for issuances of initial coin offerings (ICOs) as opposed to more traditional initial public offerings (IPOs)?

One of the topics discussed at our table was how crowdfunding is regulated within the region.

We noted that many countries within the region including Argentina, Brazil, Colombia and Uruguay, have recently ratified regulations on crowdfunding. Their regulations share similar characteristics. Some notable exceptions who have not ratified crowdfunding regulations include Chile and Peru.

The characteristics of these regulations include:

• regulating a specific type of crowdfunding – investment-based crowdfunding, where people invest directly or indirectly in new or established businesses through buying shares or debt securities;
• establishing a limit on the amount of the offering – in Argentina the limit is approximately ARS 16m ($266,664) per year through one or more offerings, in Brazil the limit is BRL 5m ($1.2m) per year and in Colombia, COP 2,000m ($600,000) for non-qualified investors and COP 7m for qualified investors;
• imposing certain restrictions on the issuers, eg, they must be local companies, not registered as securities issuers;
• specifying who can invest, they all allow both qualified/sophisticated and non-qualified/non sophisticated investors;
• establishing a low cap on the amount non-qualified investors may invest in crowdfunding projects, for example in Brazil, it’s BRL 10,000 through one or more crowdfunding project;
• permitting the issuance of both equity and debt securities;
• requesting the registration of the intermediary (ie crowdfunding platform) before the relevant local regulatory authority such as the CVM in Brazil or CNV in Argentina; and
• requiring that offers and issuers are registered before the relevant local regulatory authority.

Topic 5: How to deal with distress situations and refinancing debt

Table moderator

Fabiola Augusta  Cavalcanti, TozziniFreire, Rio de Janeiro

 

The table comprised lawyers from Argentina, Brazil, Paraguay and Uruguay. The debate focused on aspects of status of local capital markets, corporate, insolvency and anti-corruption legislation.

The key findings were:

• the representatives from Argentina, Paraguay and Uruguay were unanimous in indicating that their respective countries’ capital markets are far less developed than Brazil’s capital market and, consequently, do not act as a regular source for (re)financing debt;
• there is room for improvement in local insolvency legislation, in line with Brazilian practice; and
• there was consensus in respect to the necessity of further developing anti-corruption legislation and practices.

Comments

Argentina’s Insolvency Act, in force since 1995 authorises companies under financial difficulties to renegotiate their debts out of court. If a company files for judicial reorganisation, the trustee becomes responsible for mediating the negotiations with government to refinance taxation debts. Trade unions tend to be the very active in debt restructuring proceedings and, consequently present difficulties to restructuring companies.

Brazil has experienced a slight economic recovery during the last year, but its economy still suffers the effects of stagflation. A consequence of the economic crisis is that Brazil’s lawyers expect an increase in the operation of vulture funds in the country. Furthermore, Congress is currently debating an amendment to the 2005 Insolvency Act, in order to: facilitate re-negotiations; reinforce the sale of assets (productive units) which are free and clear of any debt; and stimulate the financing of restructuring companies via debtor-in-possession (DIP) financing.

Finally, Brazil’s Congress has enacted legislation dubbed the ‘Economic Freedom’ Act as a means of easing business regulation. A reform of foreign exchange legislation is currently under debate in Congress.

Unlike most South American countries, Paraguay has been experiencing continuous economic growth and expects to attract capital from Brazil and Argentina, notably because of ease in initiating business there. On the other hand, its capital markets are not very active, despite good stock exchange performance.

Additionally, in spite of Paraguay’s intention to join Financial Action Task Force (FATF) on money laundering, the Congress has yet to initiate legislative reforms establishing a framework for punishing corruption and money laundering.

Uruguay’s law imposes several legal barriers to accessing capital markets. Its banks have low capitalisation and there are only five relevant pension funds. Despite the existence of anti-money laundering legislation, the country does not have FCPA equivalent legislation.

The insolvency legislation does not provide for the sale of assets (productive units) free and clear of liability. Debt financing and restructuring takes place via traditional negotiation.

 

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