Deferred payment checks guaranteed by warrants

1. The CNV regulations create a new product in the stock exchange.

The General Resolution N°565 (the “Resolution”)[1] incorporates to Chapter XVII “Secondary Public Offer” of the Argentine Securities Commission (Comisión Nacional de Valores or “CNV”) regulations, article 17 “Direct Mode Guaranteed by Warrants”. Its main aim is to provide a new financing source to Small and Medium-sized Enterprises (“Pequeñas y Medianas Empresas” or “PYME”) related to the agricultural, industrial or commercial sectors, and to generate new instruments at the stock markets for the investments of institutional investors as well as of individual investors.

2. Deferred payment checks

Pursuant to the regime established by Law No 24,452 (Checks Law), the deferred payment check is an instrument that orders payee to make payment upon the lapsing of a certain amount of time, counted as of the date of its issuance. The issuer at the expiration date must have sufficient funds deposited in the check-account payable to its order or authorization to overdraw funds. The maximum admitted term that may be provided for the payment of a deferred check is 360 days.

The deferred payment check is an instrument that was created especially so that the PyMEs could access additional sources of financing[2].

Currently there are different types of deferred payment checks classified according to the person that requested their listing in the stock exchange. The different types of checks are:

(i)          checks which are “sponsored” (“patrocinado”) by their issuing companies,

(ii)         checks that are “guaranteed” (“avalado”) by a mutual guarantee company (sociedad garantía recíproca o “SGR”) or a financial entity, and

(iii)        checks that are listed under the “direct” mode.

Under the “sponsored” mode, the entities that issue the deferred checks in favour of third parties are the ones who request their listing so that they may be negotiated by third parties at the stock exchange.

Under the “guaranteed” mode, the checks are guaranteed by a SGR or by a financial entity, and these institutions are the ones who will request their listing at the stock exchange.

Under the “direct” mode, the beneficiaries and principal holders who receive the checks request their listing in the stock exchange which is located within the geographic area of their main place of business.

3. Deferred Payment Checks Guaranteed by Warrants

The deferred payment checks guaranteed by warrants are a new type of checks with the “direct” mode. They have an in rem guarantee that arises from the warrants, and must expressly not be guaranteed by the stock market nor the agents and brokerage firms.

The “warrant” is an in rem guarantee that is created on fruits or agricultural products, livestock, forestry, mining or manufactured goods inventory, deposited in state or third part owned warehouses, in accordance to the provisions of Law 9643. The depositary of the goods that constitute this in rem guarantee issues a “certificate of deposit” and a “warrant” that will be used to instrument the guarantee.

The Resolution that regulates this new type of deferred payment checks provides the following:

3.1 Minimum requirements

The checks must be registered with the financial entity, and must expressly state it is guaranteed by a warrant.

3.2. Custodian of the warrants

The stock market may act as custodian of the warrants. However, another entity may be appointed as custodian, which must be informed to the CNV on each opportunity. The custodian shall have, among others, the following responsibilities and faculties:

(i)          to create and manage the registry of the depositaries authorized to issue warrants that may be used as guarantee in the stock market and must control the compliance of the requirements and filings of documentation;

(ii)         to receive the warrant endorsed to his name and the deposit certificate, which must be kept in custody until their expiration and cancellation; and

(iii)        to inform the stock market of the warrants authorized to be granted as guarantee.

3.3 Term

The new regime establishes that the period for the listing of the check for its negotiation and the payment date may not be lower than twenty (20) calendar days, and not greater than the warrant’s expiration date.

3.4 Limits to the negotiation

The Resolution establishes that the guarantee granted by the warrant may have a collateral security margin that may not exceed a par value percentage to be determined by the stock market on the basis of the amounts needed for coverage of all the expenses and charges. The stock market may apply different collateral security margins when the market circumstances require.

The principal seller may negotiate up to the aggregate amount that rises from applying the relevant collateral security margin to the warrant’s par value.

Consequently, the stock exchanges must establish a scheme of the operating quotas including the maximum and minimum par value per check, per issuer, per principal seller and broker. To do this, it must instruct its brokers to make a risk analysis that shall include:

(i)          commercial reports that can be obtained by public access systems,

(ii)         verification of the credit records in the Financial Entities Debtors registry of the Central Bank (within periods of three months at minimum),

(iii)        issuance date of the CUIT (tax registration identification), and

(iv)        records that attest that the issuer has not issued checks that have been rejected for lack of funds during the past three years.

3.5. Margin reposition

The stock market will require the brokers to post additional guarantee in the event the value of the goods deposited under the warrants decrease significantly in value. The brokers must post additional margins when the good’s value decreases compared to the value they had when the warrant was created.

3.6 Procedure in the event of default

In the event a check is not cancelled at the payment date due to lack of funds, the Resolution authorizes the intervention of the stock market in order to foreclose the guarantee according to the proceedings established under the Law No 9643.

The Resolution specifies that the creditor may only enforce payment by foreclosing the warrant. The brokers must notify the buyers of the deferred payment checks that in the event of lack of funds on the payment date, the only recourse available will be the foreclosure of the warrant.

The stock market shall inform the CNV immediately of any unpaid deferred payment check guaranteed by warrants.