Financial Letter (LF) is a fixed income security issued by financial institutions (banks, credit unions, etc.) for the purpose of raising long-term funds and, in return, offering investors more attractive returns over time and the impossibility of early redemption. In this way, LF benefits both financial institutions that need to raise funds and investors who have significant amount for long term investments.
LF may not be issued with a unit face value of less than:
- R $ 50,000.00, if it does not contain a subordination clause; or
- R $ 300,000.00, if it contains a subordination clause.
In addition, LF has a minimum issuance term and redemption seal:
- 24 months if it does not contain a subordination clause; or
- 60 months if it contains a subordination clause.
The security may be remunerated at fixed or floating interest rates and may also be traded in public or private form.
In the case of the LF issued with subordination clause, its holders have their credit right conditional on the payment of other debts of the issuing institution in the event of bankruptcy or default. However, this type of LF offers accounting benefits to issuers and therefore tends to provide better compensation when compared to LF without reporting clause.
The subordination clauses may make the composition of the issuing institution's reference equity eligible, as follows:
- Eligible Financial Letter - Level II (LFSN) - contains a subordination clause that makes the instrument eligible to compose the Tier II capital of the issuing institution's reference equity; or
- Eligible Financial Letter - Complementary Capital (LFSC) - contains subordination clause that makes the instrument eligible to compose the issuing institution's complementary capital.
They may be issued with redemption / repurchase options by the issuing institution, provided that the LF has a term of more than 3 years and the first exercise date of such option is at least 24 months of issue. Subsequent dates must respect the minimum interval of 180 days.