A major liberalisation in Brazil’s agribusiness laws looks set to improve foreign lenders’ collateral options for commodity and trade finance facilities, key to supporting the country’s soft commodity exports.

Law number 13,986, which was enacted in April, introduces several improvements to the Brazilian legal framework to provide greater legal security to foreign banks financing trade in commodities such as soy and corn.

The changes include the introduction of a fiduciary lien over rural land, which will allow rural land to be granted as collateral to foreign lenders for the first time; the creation of the legal figure of a “segregated rural asset”, which will allow landowners to put land into a trust where it will not be subject to their general obligations and debt in order for it to be used as collateral; a change in the provisions of rural product notes legislation allowing them to be issued in foreign currency; and the introduction of certificates of agribusiness receivables, which allows for the securitisation of rural product notes.

To understand how this new legislation will support commodity trade finance in Brazil, GTR speaks to Lúcio Feijó Lopes, managing partner and head of the trade finance team at law firm Feijó Lopes Advogados.


GTR: What issues does this new legislation address?

Feijó Lopes: Soft commodities exporters in Brazil rely heavily on foreign lending to finance their exports, with export prepayment facilities being widely used by mid to large-sized producers and trading companies. These deals are structured by securing the cycle of goods that are being financed from phase to phase, from plantation to storage to stock and then to port as goods are exported to the offtaker.

The challenge has always been around ensuring you have proper collateral throughout the cycle, especially for foreign lenders. When you finance a producer of soybeans, you get as collateral the soybeans themselves, but for more security, lenders often seek to get land as collateral. This has been restricted in Brazil since 2010, when the government, in order to stop massive purchases of Brazilian land by private and sovereign investors, created an executive order limiting foreign ownership over Brazilian land. However, by doing this, they also restricted the ability of foreign entities to hold ownership-type liens over farmland, such as fiduciary lien, which protects lenders from borrower and guarantor’s judicial recovery (equivalent to US Chapter 11) and bankruptcy.


GTR: How have foreign lenders got around these legal restrictions so far?

Feijó Lopes: Until now, foreign lenders could safely place a mortgage on rural land, which is not protected against insolvency of the borrower. To hold fiduciary lien over farmland, foreigners were required to have a Brazilian person to act as collateral agent in case of needing to enforce the collateral. Such requirement adds a third party, extra fees and tax costs, which discourage some foreigners. Others even disregarded the existing government restrictions and used fiduciary liens directly without a Brazilian person acting as a collateral agent, which put them at risk in the courts.


GTR: What does this new law allow for?

Feijó Lopes: This new law has now brought in amendments that allow foreign lenders to directly hold Brazilian farmland as collateral. Foreign lenders now have a collateral instrument, a security instrument that protects them against the insolvency of Brazilian companies. It adds so much legal security to foreign lenders. This has long been something that foreign banks, funds, and companies doing business in Brazil have been asking for, and it is a huge change that will impact a lot of active and not-so-active foreign lenders that do trade finance in Brazil.

There are other changes that will also benefit foreign lenders in Brazil. It is now possible for foreign lenders to be beneficiaries of rural product notes indexed to foreign currency, and hold fiduciary liens over fungible goods, such as soybeans, corn, cotton, and other commodities.

This means that you now have a new set of collateral instruments that are protected, that are linked both to the financed goods and also to the farmland, which gives foreign lenders protection against insolvency of borrowers.

There have also been significant changes to a capital markets instrument widely used by agribusiness companies to raise funds. From now on, agribusiness receivables certificates may be issued with face value indexed to foreign currency, which will open the door for international investors to invest in Brazilian agribusiness through the capital markets.


GTR: How important is this in the Brazilian context?

Feijó Lopes: In the past, lenders operating in Brazil have realised that when you have to enforce collateral in courts, the courts tend to not give full protection or give full effect to that collateral. These instruments that have now become available to foreign lenders are respected in Brazil’s courts and once the lenders hold these instruments, their rights should be fully protected.

Now, in this pandemic period, which will certainly result in a number of restructurings, foreign lenders may renegotiate their existing facilities if needed and enhance their collateral position with these new alternatives.


GTR: How is this being received in the market?

Feijó Lopes: We focus on assisting foreign lenders and investors doing business in Brazil. In the month since this new law was put in place, even though we are in the midst of a pandemic, we have seen an increase of 50% in enquiries from foreign lenders.

Some of the enquiries come from lenders who have already been active in Brazil for many years and who know that these innovations will represent a huge enhancement to their rights in the country. Others come from institutions who have perhaps been a little afraid of lending to Brazilian companies and who are now feeling more encouraged to come to the market and start doing business here.

In addition, we have seen some deals that were on hold that are now in the drafting process, using this new collateral instrument. We are seeing very good momentum. We will see the full impact of this in the coming months, but we are seeing liquidity, especially for the mid to large-sized producers, being improved.