Creditors' Rights in Brazil after PEC 12 The consequences to individuals, investors and Brazil's reputation of a Constitutional Amendment to allow the Default of Public Precatórios Debt in Brazil May 14 th, 2009 May 2009 Precatórios and the PEC 12
Keynote Speakers Flavio José de Souza Brando n Practicing attorney in São Paulo n President of the Special Precatório Commission at the Brazilian Bar Association (São Paulo Chapter) – OAB/SP n Vice-President of the Precatório Commission at the National Brazilian Bar Association José Virgílio Lopes Enei n Partner at the law firm of Machado Meyer Sendacz e Opice Advogados n Focused on corporate, banking, infra-structure and public law n Extensive experience in transactions involving the analysis, purchase and securitization of precatórios, representing local and foreign investors and holders of precatórios May 2009 Precatórios and the PEC 12 2
Dr. Flavio Brando President of the Special Precatório Commission at the Brazilian Bar Association (São Paulo Chapter) – OAB/SP May 2009 Precatórios and the PEC 12
PEC 12: 3 rd Official Default of Special Judicial Payment Orders A History of Defaults n Precatórios: special judicial payment orders originated from civil claims against federal, state or municipal public government agencies with final judgment no longer subject to any appeal by the public entities n Default history: ¨ 1 st default and restructuring (1988): n Payment plan: 8 annual installments n Government n Outcomes: was allowed to issue bonds to pay the precatório debt most proceeds were used for other purposes / precatório inventory grew substantially ¨ 2 nd default and restructuring (2000): n 10 -year extension n Continuity n Poor of default: no real pressure from the Courts or any relevant political stress language resulted in high flow of appeals to Higher Courts n Misleading n accounting: no adjustments to avoid tainting public accounts Lack of attention by the market due to Brazilian macro-economic conditions (hyperinflation, etc. ) May 2009 Precatórios and the PEC 12 4
PEC 12: 3 rd Official Default of Special Judicial Payment Orders Recent History and the Seed for the PEC 12 n “Real” plan provided better conditions: interest from professional investors as a way to diversify their portfolios n Estimated inventory of unpaid debt: US$50 billion ¨ Federal Government is the only reliable debtor – all other states or municipalities are not ¨ São Paulo State has not paid alimony precatórios since 1998 (11 years!!): US$6 bn and more than 600 thousand creditors ¨ Potential precatório cases against the Federal Government: US$75 billion n Federal Government has US$500 bn in past due taxes, São Paulo State has US$35 bn and Municipality of São Paulo US$18 bn: less than 1% is collected yearly ¨ A 20% collection or a securitization of those credits would resolve the precatórios problem n Growing activism by lawyers and creditors to resolve the situation n Outcome was worst than expected (the potential 3 rd default in precatório debt): the 2006 PEC 12 May 2009 Precatórios and the PEC 12 5
PEC 12: 3 rd Official Default of Special Judicial Payment Orders The PEC 12 is Born n Cap or limitation calculated over annual revenues for payment of State and Municipal precatórios ¨ 0. 6% to 2. 0% of net revenues ¨ No deadline for final payment n Limits are too low: Estimates indicate that city of São Paulo would take 26 years, State of Goias would take 90 years and Espirito Santo 100 years to pay down its debt ¨ Lack of judicial stability for new investments in Government securities, infrastructure and etc. n Reduction of interest rates to savings account interest for all precatórios ¨ Losses for creditors and investors – Federal precatórios are current and would not require such a “haircut” unless to benefit the Government (current rate is not above market – IPCA-E + 6% p. y. ) n New PEC does not allow for the precatórios to be used as currency (taxes compensation, mortgage payments, retirement funds, etc. ) ¨ Only possibility: participate in reverse auctions where the debtor is the sole buyer n Strong influence by São Paulo’s Governor, José Serra n Unfavorable environment for new investments in infrastructure in Brazil May 2009 Precatórios and the PEC 12 6
PEC 12: 3 rd Official Default of Special Judicial Payment Orders What’s next? n Approved in the Senate by unanimous vote n Currently in the House of Representatives (rapporteur: Mr. Eduardo Cunha, from PMDB party) n Large public demonstration in Brasilia last week: 2, 000 lawyers, creditors and human rights activists n Legal opinion delivered to the President of the House and the rapporteur n Agreement to hold public hearings in 2 to 3 weeks n Mr. Cunha publicly stated that it is unconstitutional to (i) change any terms and provisions related to changes in interest rates of court decisions; and (ii) change the chronological order ¨ Still, we remain cautious about those statements n Discuss alternative practical solutions to the problem, other than the default ¨ Need allies, including Mayors and Governors (despite the difficult situation generated by the Global Crisis) May 2009 Precatórios and the PEC 12 7
PEC 12: 3 rd Official Default of Special Judicial Payment Orders Potential Alternatives n Issuance of municipal and state securities guaranteed by the Federal Government to be swapped by the Precatório ¨ Different terms and maturities ¨ Could be used for alternative payments (such as overdue taxes, pension contributions, mortgage, etc. ) n Contribution to investment funds on infrastructure or purchase of stock in Government owned companies n States and Municipalities are restless to renegotiate their overall debt with the Federal Government n A NEW PUBLIC JUDICIAL DEFAULT IS A CLEAR AND PRESENT DANGER n UNNAPEALABLE COURT ORDERS OF ANY NATURE MUST BE FOLLOWED BY EVERYBODY n PEC 12 REPRESENTS THE MOST SERIOUS THREAT DO THE BRAZILIAN DEMOCRACY AND ECONOMY AFTER THE MILITARY REGIME May 2009 Precatórios and the PEC 12 8
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