Brazilian Agribusiness Receivables Certificate (know as CRA) offerings are one of the main ways for agribusiness companies and cooperatives to raise funds in Brazil, but they have been in the news headlines in recent weeks due to events of default and judicial recoveries.
In this context, from a legal and credit perspective, are CRAs still attractive securities for foreign and Brazilian retail, qualified and professional investors, who want exposure to the agribusiness sector?
See below 5 essential points about these securities:
1. What is an Agribusiness Receivables Certificate (CRA)? CRAs are fixed income securities from the capital market, backed by receivables originated from agribusiness activities. They can be issued in reais or foreign currency;
2. What Type of Companies Can Raise Funds Via CRAs? Companies whose “main sector of activity” is agribusiness, which includes producers of agricultural commodities, trading companies, cooperatives, industries, among others related to agricultural products, inputs and machinery;
3. How Are CRAs Issued and Who Are the Investors Who Buy CRAs? There are 2 most commonly used methods for issuing CRAs: (i) “corporate” offerings, where the ag company issues a debt security (such as a debenture, Financial CPR) in favor of a securitization company, which will issue CRAs backed by the debt security, or (ii) “dispersed” offerings, where the agricultural company transfers receivables generated in its activity (such as barter, credit) to the securitization company, which will issue CRAs backed by such receivables.
In both cases, CRAs will be acquired by capital market investors, including individuals (who benefit from income tax exemption) and institutional investors;
4. Is there a Minimum Size and Term for CRAs? CRAs are tailored to the size of the borrowing company, the risk of the receivables portfolio, the business cycle, investor interest, and other market conditions. In recent years, there have been transactions ranging from BRL15 million to BRL2 billion, with terms ranging from 3 to 10 years;
5. What Legal and Credit Points Should Structuring Companies and Investors Pay Attention to in CRAs? In both (i) “corporate” CRA offerings (backed by the debtor’s debt instrument) and (ii) “dispersed” CRA offerings (backed by the debtor’s receivables generated from its activity), it is essential that structurers and investors assess whether the transaction will be “clean” or “secured”.
In clean transactions, the legal and credit structure is based on the liquidity of the issuer of the credit instrument (corporate CRA) and the payers of the receivables assigned (dispersed CRA). If there is default in these flows, investors will not be able to enforce collateral, except for the personal guarantees (aval or fiança) that may have been granted in favor of the CRA. In short, clean transactions are based mainly on the financial soundness of the debtor and payers of receivables.
In secured transactions, the legal and credit structure is based on the liquidity of the payers, and also on the collateral package (e.g. rural land, warehouses, among others), which will contribute to the satisfaction of payment for investors. If there is a default in the payment flow, investors can use the secured assets to pay off the outstanding balance.
In short, CRA offerings remain one of the main ways of raising funds in Brazilian agribusiness, but structurers and investors must pay attention to the legal and credit structure of the offerings when making their decision to invest or not.
