Foreign investors and fund managers looking for exposure to Brazil should consider the country´s fast-growing securitization market. Their relatively high yields, diversification benefits and recent tax exemption -for foreigners – make FIDCs (Fundo de Investimento em Direitos Creditórios) a very appealing investment opportunity.
FIDCs are receivables-backed funds that invest in the Brazilian middle market. Similar to consumer loan securitization elsewhere, FIDCs are backed by trade-receivables (Credit cards, auto loans and other similar assets) and are structured as bankruptcy remote vehicles and continue to operate even if the company that sold the receivables files for bankruptcy. Risk averse investors might opt to invest in FIDCs that consist on performing receivables only.
In most cases FIDC’s issue subordinate, mezzanine and senior shares. It is the only class of investment fund that distributes shares with different risks and returns among themselves. Senior and mezzanine shares offer target returns and are intended for investors – senior shares being the more risk averse-, while subordinate shares are acquired by the company or person who owns the fund. Subordinate shares will work as a guarantee against the credit risk and other risks associated with the operation. Therefore, the higher the subordination of the fund the more protection investors will have.
Recent changes in the Brazilian constitution have made FIDCs ever more attractive to foreign investors. Brazil’s Central Bank and tax authorities have ruled that certain investments are tax exempt for foreigners and under resolution 2689 FIDCs fit into this criteria.
The Brazilian Government determines conditions for a fund to be considered a FIDC.
FIDCs can have 13 different types of underlying assets.
FIDCs main categories are: Commercial Receivables, Corporate Credit, Vehicle Financing and Personal Credit.