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Understanding Brazilian LTNs

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Brazil LTN

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The post-1964 reforms and other policies of the military government, together with the state of the world economy, created conditions for very rapid growth between 1968 and 1973. Such growth was financed by running up the foreign debt. The expectation was that the combined effects of import substitution industrialization and export expansion eventually would bring about growing trade surpluses, allowing the service and repayment of the foreign debt. The economic problems were accompanied by political turbulence where by the mid 60's inflation was running at 30% per year and as a result, something needed to be done.

In 1965, Brazil's nascent financial system began from laws no 4,357 and no 4,595, the formation of Brazil Central Bank ("BCB") and National Monetary Council ("NMC") which set out to reshape standards for regulations, currency, new institutions, strengthening existing ones and by shaping Brazils markets for stocks, bonds and tax credit funds, all of which resemble what they are today.

Brazil Creates LTN

As a result of inflation and to protect investors from currency losses, the 1st Federal Public Instrument, no 4,357/64 and no 54,252/64 the ORTN (later OTN) was created as an inflation indexed Bond. At that time, inflation indexed securities were the only instruments to implement both monetary and debt policy. However, by the 1970's BCB needed to create new fixed rate instruments which were more suitable for monetary policy. Laws no 1,079 and CMN Resolution no 150 of 1970 were passed thus establishing Letra Tesouro Nacional ("LTN") National Treasury Bills for Monetary Policy. In 1970 LTNS were 5% of the total debt and by 1972 weekly LTN auctions were introduced allowing for market pricing of these securities and as a result LTNs rose to 33.6% of the debt. LTNs became critical short-term instruments to fund the Government and to help bring inflation and monetary policy under control.

A Circuitous Path for Historic LTN

LTNs were originally issued as one-year notes and were to expire in 5 years after their original maturity date. Due to large number of LTNs in existence, and to formalize the LTN expiration, in 1987 those LTNs issued in the 1970's were formally declared to no longer exist via a new law Art. 3, of Decree-Law no. 11/25/1987. However, there were a very large number of LTNs in existence which were never redeemed and as a result new laws were enacted to revalue them and extend their maturity dates.

In 1995 under the terms of Art. 5, XXXIV, "b" Art. 37, Art. 70, Sole Paragraph, of the amended Constitution, in accordance with §§ 1 and 2, of Article 5 of the Constitution law No. 9,250, of 12/26/1995, those LTNs issued in the 1970's were granted terms for revaluation, monetary correction, interest in arrears, and adjustments for inflation. This resulted in the process we know today as "Repactuation". Moreover, this process now accounts for the "revalued" LTNs to be listed and accounted for in Brazil's Internal Public Debt obligations.

The process of Repactuation, Certification, issuance of Travel Authorizations, GRU Taxes are Secretary of Tesouro Nacional are fee-based requisites for historic LTNs. The process of collecting taxes and fees for these instruments via the terms of Complementary Law No. 101, dated May 4, 2000 and No. 10,179, Of 06/02/2001, mandating Art. 5, XXXVI and §f 1, as well as Art.37, further mandate the Constitutional Guarantees and rights for the titleholders of such LTNs where they can be placed in the open markets.

LTN as Payment for Taxes

Today, according to Article 100 of the Constitution, with new wording by Constitutional Amendment No. 62, dated 9/12/2009, and the new CPC, and with precedence, LTN's issued in the 1970's are fully enforceable for the Titleholder to use said LTN for the purposes of Federal Tax Payments, Debts Banking, Labor, Financial Recoveries in Bankruptcies etc.

LTN Exchange / Redemption at Maturity

Under Brazilian Law, and as referenced in new LTN title documents, LTNs at maturity are exchangeable into a Financial Certificate of the Treasury a "CFT". Under Law 10,841 of February 18, 2004, conversion by MP No. 137 of 2003, set forth in Article 62 of the Federal Constitution, with wording given by Constitutional Amendment No 32, combined with Article 12 of Resolutions No. 1 of 2002-CN and  Article IV 10.179 of 2001 “Securities may be exchanged”. CFT's are Privatization Currencies and can, via the privatization exchange process, be subsequently exchanged for cash, all of which provides the lawful mature LTN value.

CFT's (Certificado Financeiro do Tesouro) are issued in multiple series from A though H, and sub series 1 through 5 all of which are different categories of interest and indexes and are fully described in Articles 9 through 18 of Decree No. 9,292, of February 23, 2018 of the Constitution. CFT's are created by the Finance Minister and are considered "Privatization Currencies." Privatization currencies are certain Brazilian debt securities which may be used as payment for acquiring the stock of public companies in the privatization process, where Brazil is converting state owned companies to publicly held companies.

From the government's perspective, the purpose of the privatization process is to avoid the use of scarce government resources to fund industries which can be successfully run by private enterprise, as well as eliminate significant volumes of foreign and public debt. For this reason, investors may use Brazilian government debt instruments (CFT's) to invest in the privatization of state companies (these instruments trade at a discount in the market, but generally have parity with cash at privatization auctions).

Negotiable instruments available for privatization auctions include Brazilian foreign debt instruments (DCB's) and certain public debt instruments, including Siderbras debentures and rural debt instruments (TDA's). All public debt instruments usually have parity with cash in the auction process, while DCB's are valued at 75% of face value.

Why is this important? Each newly exchanged LTN into Electronic Financial Instrument Certificates where electronic custody of the instrument is held by National Treasury, carries the language of exchange and redemption at maturity into a CFT. This means, the exchanged Electronic Financial Instrument Certificates into CFT's are listed in Brazil's Federal Public Debt Obligations and are exchangeable into a Privatization Currency and subsequently cash thus creating value for Electronic Financial Instrument Certificates at maturity.

LTN as Electronic Certificates

Demonstrably, via the laws of 1970, 1991, 1995, 1997, 2000, 2001, 2002, 2003, 2004, 2009 and 2018 as evidenced herein, LTNs of the 70's and through today are successful legal Federal Debt Instruments with a caveat. The reflection of the laws sited in Black Screen issuances prior to 2023 will need to be updated to reflect instances where 1970 based laws have been superseded by newer laws which provide for the consolidation of public debt securities under the responsibility of the National Treasury with additional updates to laws that refelct the ability to carry out operations at the discretion of the Minister of Finance and updates to laws which states that CFT's are book-entry obligations of the National Treasury issued for financial operation. As of this date, OVO is the only firm working with STN to ensure new Black Screens reflect the latest revisions of laws and decrees.

Why is updating the Black Screens important? In legal due diligence, references to out dated laws and decrees are among the most simple reasons to diqualify instruments.

Furthermore, at the federal level, Law No. 10,683, of 2003, provides that it is the responsibility of the Ministry of Finance (MF) to manage the internal and external public debts of the Federal Government. In addition, Law No. 101 of 2000, known as the Fiscal Responsibility Law (LRF), establishes that the MF must verify compliance with the limits/conditions related to credit operations carried out by each member of the Federation. In addition, Law 10,683 was regulated by federal decree No. 6,102 of 2007, which approved the internal structure of the MF, stipulating that the National Treasury Secretariat (STN) would manage the internal and external public debt, directly or indirectly under the federal government, as well as verify aspects related to credit operations. Administrative Law MF No. 183 of 2003 stipulates that STN will deal with securities transactions.

In addition to fully updated Black Screens which are to reflect updated laws as desribed herein, two Authentication Certificates (i) a Financial Instrument Registration Screen Authentication Certificate issued by STN which certifies the following: a. the instrument is held in electronic custody; b. titleholder; c. instrument validity; d. that it may be exchanged to a CFT; and e. that it can be used as collateral; and (ii) certification of GRU taxes havin been fully paid where both Authentication Certificates are required and will be used for internationally accepted authentication for Hague Convention applicable Apostille.

Moreover, "GRU" taxation, will need to be current. The new Electronic Financial Certicates are exchangeble at Maturity to CFT's and thus can be upon internationally accepted authentication, used as collateral in new Asset Backed Securitzed Notes where the new ABS Note can be instututionally exchange listed and exited for value via Eurocealr/Clearstream Devlivery Vs. Payment procedure exits. OVO can assist with new Black Screens and STN Authentication Certificates and of course execute the exchange listing and exit.

To learn more about institutionally listing and exiting Financial Electronic Certificates via Euroclear/Clearstream DVP procedures, click the button below to contact us.

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