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Receivable Note funds

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1. What is it?

Receivable note funds – or FDICs, in the Portuguese abbreviation – invest their resources in receivable notes issued by financial institutions, industry, real estate lending companies and other such issuers authorized by CVM (the Brazilian SEC). The Receivable note funds was created to offer further liquidity to the credit market, reducing risks and widening the availability of resources.

FDICs are bonds issued over receivable rights such as checks, notes, rent leases, services provided, and such. If a company has many receivables pending, it may issue FDICs and trade them. They work very similarly to factoring, extending, however, to all possible receivables the company may have.

This type of funds has to focus a minimum of 50% of their portfolio in receivables notes. They can be opened funds or closed funds (respectively, allowing or not quota holders to withdraw funds at any time) – if they’re closed funds, quotas may be traded in the Stock Exchange or in the over the counter market.

Only qualified investors may buy into FDICs – these are institutional investors, made of companies with net assets over R$ 5 million or people with investments over R$ 300 thousand. Minimum investment amount is R$ 25 thousand, what may represent the biggest advantage of this type of fund.

All FDICs are evaluated and classified as per their risk levels. This grade, given by a rating agency, will also help investors evaluate the funds’ risk levels, considering ratings of their investment portfolios. An audit is also conducted by an independent company to check both the portfolio, payments made to investors and financial reports – which may assist the investor further when it’s time to make a choice.

FDIC profitability is usually higher than what’s presented by other types of funds. Here, the benchmark usually follows DI rates (CDI, in Portuguese), but it could also follow the Broad Consumer Price Index or the General Market Price Index (respectively, IPCA and IGPM, in Portuguese), for example.

Currently, there are 4 classes of FDIC funds:

1. Factoring

For this class, investments focus on fragmented receivable notes (to minimize risks) originating and being sold by a number of issuers anticipating receivables by factoring checks and notes.

2. Financial

This class of fund will invest in portfolios of real estate lenders, consigned credit lenders, personal credit lenders, car financing companies and such.

3. Agricultural, industry and commerce

Here, funds will choose portfolios of receivable notes from the infrastructure, agricultural, industry and commerce markets. They’ll also seek corporate credit companies, commercial receivable notes and multi-market agricultural receivable notes.

4. Others

Funds in this class will focus investments in the recuperation market, public service companies and multi-market receivable notes.

To check the complete list of FIDCs being currently traded in the Brazilian Stock Exchange, please visit:

http://www.bmfbovespa.com.br/shared/iframe.aspx?altura=600&idioma=pt-br&url=http://www.bmfbovespa.com.br/rendafixa/FormConsultaFUN_ResumoEmissoes.asp

FDICs follow the CVM (the Brazilian SEC) instruction rules numbered 356/01 and 393/03.


2. How it works

Let’s assume a company sells products in installments. Customers who buy those products will be paying installments until the item is totally paid. Installments, however, can be negotiated and traded. The company establishes a FDIC and submits its notes receivable to the fund, which issues the quotas and sell them to investors. So the fund pays the company for the notes, and becomes the right holder on receivables.

As due dates come, the customer who bought the product will be paying installments in a bank, which repass the credit to the FDIC. Once the payments are made, the fund is able to remunerate the investors as previously determined within the fund’s prospects and rules.

FDICs have an ‘extra’ guaranty for investors, granted by the companies which initially submitted the receivable notes to the fund. They are called ‘subordinated quotas’. There are two types of quotas that form the FDICs:

Subordinated quotas

Subordinated quotas are those which are literally subordinated to “senior quotas” for any amortization, withdrawal or distribution matters. In other words, they are not preferential quotas. Companies or institutions which submit receivable notes to the funds necessarily have to underwrite part of their quotas as ‘subordinated’, which means they will just get profits from investments after senior quotas are all paid. Another important aspect here – if something goes wrong with the FDIC and it is enforced by law, subordinated quotas should be used as ‘guarantee’ for senior quotas holders, and serve as payment to them.

Senior quotas

Senior quotas, otherwise, work similarly to preferred stock – they get preferences on interests, amortization and payments. As they are somewhat backed by subordinated quotas, at least partially, their risk in significantly lower.

There are two ways of acquiring these quotas: at the primary market, when the fund is firstly created, and at the secondary market, where quotas are traded and sold by investors, at the stock exchange or through OTC markets.


3. Taxation

FDICs are not burdened by income tax, tax over financial transactions (IOF, in Portuguese), or other Brazilian taxes (such as CSLL, PIS and COFINS) upon credit payment.

For quota holders of these funds, however, income tax shall be withheld at the time of redemption. Rates will vary in a scale inversely proportional to de time of investment, as per the table below:

  • Investments for up to 180 days: 22.5% (only over profits)
  • Investments between 181 and 360 days: 20% (only over profits)
  • Investments between 361 and 720 days: 17.5% (only over profits)
  • Investments over 720 days: 15% (only over profits)

4. Advantages

  • Higher profitability;
  • Diversification opportunity;
  • Rating companies may assist in finding the best options;
  • Has, as a sort of guarantee, the so-called subordinate quotas, offering more safety.

5. Disadvantages

  • Not guaranteed by the Credit Guarantee Fund;
  • High administrative fees may impact profitability;
  • Relatively high risk. Credit risk is key for this type of investment. Investors choosing these funds have to pay close attention to the portfolio of account receivables chosen, average terms for correct and belated payments and the quality and fragmentation of the bond’s issuing companies.
  • Reserved only for qualified investors;
  • R$ 25 thousand minimum initial investment;
  • Liquidity reduced for secondary market negotiations.

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