With the growing volume of offerings of Brazilian Real Estate Receivables Certificates (CRI) and Agribusiness Receivables Certificates (CRA), which reached BRL50 billion in the first half of 2024, securitization firm, structurers and fiduciary agents must take care of the reputational risks associated with the transactions.
Reputational risks are events that can negatively impact an organization’s credibility in the eyes of the market, its employees and regulators, generating financial and brand liabilities.
In Brazilian capital market offerings, because they involve both the perception of trust and transparency, as well as more complex legal structures, multiple parties and high values, this type of risk is more evident and harmful if it materializes.
See below 3 actions in Brazilian capital markets debt offerings to mitigate reputational risks:
1. Perform Legal Due Diligence on the Debtor, Guarantors, Credit Rights and Guarantees: In debt offerings (such as CRI and CRA), it is essential to perform Legal Due Diligence on the debtor company, guarantors, the underlying credit rights and accessory guarantees.
With regard to reputational risks, the objective is to identify, in addition to the common aspects of legal due diligence, materialized and hidden, direct or indirect liabilities, inconsistencies in information and documentation, potential fraud, among other negative events which may significantly impact the feasibility of the offering.
2. Clearly Identify Relevant Risks in the “Risk Factors” Section of the Documentation: As determined by the Brazilian Securities and Exchange Commission (CVM) regulations, investors in capital markets debt offerings must be informed of the risks associated with the offering, which are generally described in the “Risk Factors” section of the Securitization Agreement and in the offering prospectus (for offerings to retail investors).
In this section, all risks identified in the legal due diligence and other audits performed must be described so that the investor, when making the decision to subscribe to the offering or not, has the information and a clear notion of the risk identified (e.g. tax liability that may materialize in the future, criminal investigation, etc.). The greater the transparency and detail provided to the investor and regulator regarding the identified risk, the greater the reputational protection of securitization firms, structurers, fiduciary agents and other transaction providers.
3. Perform Regular Post-Closing Monitoring (Surveillance): Another fundamental point is regular post-closing surveillance of the transaction. CRI and CRA offerings generally contain financial and non-financial covenants, liabilities with a risk of materialization during the offering term, among other points of attention, which need to be monitored regularly.
Once materialized, such events must be communicated to investors in the form of the Securitization Term. The lack of surveillance can generate significant reputational risk for securitization firms, structurers, fiduciary agents and other providers.
In this context, reputational risks linked to Brazilian capital markets debt offerings (such as CRI and CRA) can negatively impact the credibility of organizations. Having measures to mitigate or neutralize them is essential.
