The Real Estate Credit Bill (LCI) is one of the fastest growing bonds in Brazil and one of the most sought-after fixed income instruments by individual investors as holders of this bond are exempt from income tax. The LCI is a funding source for the country’s real estate sector and is guaranteed by real estate credits.
The LCI is issued by financial institutions – commercial, multiple and investment banks, as well as building societies, savings and loan associations, and mortgage companies – and is regulated through Law 10,931/2004 and the Central Bank of Brazil Circular Letter 3,614/12. It can be remunerated at floating or fixed rate.
When choosing the LCI, the investor assumes the credit risk of the issuer. It also contains an added security feature linked to the mortgage loan portfolio of financial institutions. Another key differential of the LCI is the fact that it is eligible for coverage from the Credit Guarantee Fund (FGC).
The LCI cannot be repurchased at any time, but it can be traded on the secondary market. The minimum maturity term for this bond varies according to the index, i.e., 36 months when it is updated monthly by price index or 12 months when it is updated annually by this index. If a price index is not used, then the maturity period is 90 days. These terms are counted from the date that a third party, whether an individual or legal entity, buys the bond from the issuing institution. In such periods, the issuing institution may not repurchase or redeem the LCI.
Pursuant to this rule, mortgage loan transactions linked to the LCI must be used as guarantee on their net present value, less any related obligation.
AT B3, the LCI registration is done by an issuing financial institution, who is responsible for informing the issuing conditions and for managing the credits backing the operation. Gurantees include: mortgage-backed housing loans or fiduciary ownership transfer, whether or not contracted through the Housing Finance System (SFH); chattel mortgage or fiduciary transfer over real estate property; and other mortgage-backed loans or fiduciary ownership transfers.