Brazil: Brazilian Pension Plans Can Now Guarantee Investments in Infrastructure Projects

The Brazilian Monetary Council (Conselho Monetário Nacional – CMN) decided to amend the rules applied to Brazilian Pension Plans¹ to permit that they increase their exposure regarding investments in infrastructure projects. The new policy for investments of Pension Plans is established by CMN Resolution No. 3846, of March 25, 2010, which amended CMN Resolution No. 3792, of September 24, 2009 that sets for the applicable rules currently in force.

CMN Resolution 3792/2009 allows Pension Plans to invest up to 20% of their portfolio in instruments and securities issued by special purpose companies (Sociedade de Propósito Específico – SPE). The SPE must be formed to finance new projects (any types of projects, including infrastructure projects) for a fixed term of duration, and shall have its activities restricted to those provided for in the corporate purpose, as established and defined at the time of the incorporation. There are also allocation limits per issuer, in relation to each plan administrated by the Pension Plan and this limit is 10%, whenever the issuer is an SPE. The concentration limit per issuer, considering the aggregate sum of the resources administrated by the Pension Plan, is 20% of the same SPE.

The concentration limit per investment, also considering the aggregate sum of the resources administrated by the Pension Plan, is 25% of the same development project. However, debentures issued by an SPE are excluded from this limit.

CMN Resolution 3846/2010 expressly authorizes the Pension Plan to guarantee the investment made by an SPE, after analyzing the risks represented by such investment and upon prior evaluation of economic and financial feasibility of the project to be carried out by the SPE.

The guarantees so rendered shall be computed in the same thresholds for allocations of investments in SPEs established by CMN Resolution 3792/2009. This means that a Pension Plan can only guarantee the investment of an SPE in which the Pension Plan already holds an equity investment. Furthermore, the Pension Plan must obey the maximum limit of exposure in SPEs, which corresponds to 20% of its portfolio and up to 10% in the same SPE. Within the same SPE, the Pension Plan may have up to 25% of exposure and the value of the guarantee will be aggregated to its percentage in the capital stock of the SPE (i.e. the Pension Plan´s equity investment in the SPE) for the purpose of this calculation.

Item IV of article 53 of CMN Resolution 3792/2009 prohibits that Pension Plans to render guarantee (fiança) or to give endorsement (aval) or acceptance (aceite) or to assume co-obligation in any form whatsoever. Article 2 of CMN Resolution No. 3846/2010 expressly states that this prohibition does not apply to the rendering of guarantees in obligations assumed by an SPE in which the Pension Plan has an equity investment as from January 1^st, 2010.

Originally, these guarantees were forbidden because the authorities did not want to enable the creation of a secondary market for granting of guarantees (fianças) by Pension Plans. The purpose of this prohibition was to avoid that the Pension Plans acted as financial institutions without being authorized to operate in such capacity and, therefore, completely out of the control and supervision of the Central Bank of Brazil (Banco Central do Brasil – Bacen), with the possibility of selling these guarantees to third parties in a kind of non-authorized "parallel market".

This new measure was adopted to allow the Pension Plans to render guarantees to banking loans granted to SPEs and, it is expected, may help to implement many of the projects of the second phase of the Growth Acceleration Program (Programa de Aceleração do Crescimento) known as "PAC-2" to be announced by the Brazilian Federal Government, which aims to improve the country´s infrastructure.

Footnote

1. Brazilian Pension Plans are occupational pension plans, organized as closed entities, used to finance private pension benefits, structured in the form of pension funds and sponsored by corporations. This type of Pension Plan in Portuguese is denominated "Entidade Fechada de Previdência Complementar- EFPC" (Closed Entity of Complementary Security). They can offer defined contribution (DC) pension benefits or defined benefit (BF) type pension benefits. These Pension Plans are not-for-profit organizations by definition and are ruled by a special Government Agency, the Secretariat of Complementary Security ("Secretaria da Previdência Complementar – SPC") under the Ministry of Social Security.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.