On August 29, 2019, the Brazilian Monetary Committee (local acronym CMN) issued Resolution No. 4598/2017 to regulate a new bond designed for the real estate market, known in Brazil as Letra Imobiliária Garantida, or LIG. The LIG is a financial bond created to raise funds to and increase finance in the real estate market. These bonds are similar to ‘covered bonds’, already existing in relevant foreign markets such as Germany, Australia, France, Spain and the United Kingdom. Despite the substantial size of the U.S. real estate market, covered bonds do not have a large market share in the U.S. due to, among other things, flawed regulations and uncertain fiscal aspects.
What makes LIGs unique and attractive for investors is the ‘cover pool’, a pool of high-quality assets such as Treasury bonds and real estate credits, which is segregated from the financial institution’s assets (“patrimônio de afetação”). This way, investors holding the bonds have an additional guarantee which is separated from the financial institution’s assets in case of default (e.g., intervention or liquidation). Upon default, a specific cover pool administrator is appointed for the purpose of paying investors and the other creditors of the financial institution will not have a claim against cover assets. Given this extra layer of protection, the LIG is not backed by Brazil’s deposit insurance fund FGC.
The LIGs have maturities of at least two years and redemption or repurchase is not allowed within twelve months, which gives financial institutions more stability to improve funding to the real estate market.
The LIG is an attractive investment option for both Brazilian and foreign investors when it comes to expanding the funding to the real estate market, especially in a scenario where interest rate is going down and people are putting less money into savings accounts, which are historically the resource most widely used to fund the real estate sector.
