Creditors' Rights in Brazil after PEC 12 The consequences to individuals, investors and Brazil's reputation of a Constitutional Amendment to allow the Default of Public Precatórios Debt in Brazil May 14 th, 2009

Precatórios and the PEC 122 May 2009 Practicing attorney in São Paulo President of the Special Precatório Commission at the Brazilian Bar Association (São Paulo Chapter) – OAB/SP Vice-President of the Precatório Commission at the National Brazilian Bar Association Flavio José de Souza Brando Keynote Speakers Partner at the law firm of Machado Meyer Sendacz e Opice Advogados Focused on corporate, banking, infra-structure and public law Extensive experience in transactions involving the analysis, purchase and securitization of precatórios, representing local and foreign investors and holders of precatórios José Virgílio Lopes Enei

Dr. Flavio Brando President of the Special Precatório Commission at the Brazilian Bar Association (São Paulo Chapter) – OAB/SP

Precatórios and the PEC 124 May 2009 Precatórios: special judicial payment orders originated from civil claims against federal, state or municipal public government agencies with final judgment no longer subject to any appeal by the public entities Default history:  1 st default and restructuring (1988): Payment plan: 8 annual installments Government was allowed to issue bonds to pay the precatório debt Outcomes: most proceeds were used for other purposes / precatório inventory grew substantially  2 nd default and restructuring (2000): 10-year extension Continuity of default: no real pressure from the Courts or any relevant political stress Poor language resulted in high flow of appeals to Higher Courts Misleading accounting: no adjustments to avoid tainting public accounts Lack of attention by the market due to Brazilian macro-economic conditions (hyperinflation, etc.) A History of Defaults PEC 12: 3 rd Official Default of Special Judicial Payment Orders

Precatórios and the PEC 125 May 2009 “Real” plan provided better conditions: interest from professional investors as a way to diversify their portfolios Estimated inventory of unpaid debt: US$50 billion  Federal Government is the only reliable debtor – all other states or municipalities are not  São Paulo State has not paid alimony precatórios since 1998 (11 years!!): US$6 bn and more than 600 thousand creditors  Potential precatório cases against the Federal Government: US$75 billion Federal Government has US$500bn in past due taxes, São Paulo State has US$35bn and Municipality of São Paulo US$18bn: less than 1% is collected yearly  A 20% collection or a securitization of those credits would resolve the precatórios problem Growing activism by lawyers and creditors to resolve the situation Outcome was worst than expected (the potential 3 rd default in precatório debt): the 2006 PEC 12 Recent History and the Seed for the PEC 12 PEC 12: 3 rd Official Default of Special Judicial Payment Orders

Precatórios and the PEC 126 May 2009 Cap or limitation calculated over annual revenues for payment of State and Municipal precatórios  0.6% to 2.0% of net revenues  No deadline for final payment Limits are too low: Estimates indicate that city of São Paulo would take 26 years, State of Goias would take 90 years and Espirito Santo 100 years to pay down its debt  Lack of judicial stability for new investments in Government securities, infrastructure and etc. Reduction of interest rates to savings account interest for all precatórios  Losses for creditors and investors – Federal precatórios are current and would not require such a “haircut” unless to benefit the Government (current rate is not above market – IPCA-E + 6% p.y.) New PEC does not allow for the precatórios to be used as currency (taxes compensation, mortgage payments, retirement funds, etc.)  Only possibility: participate in reverse auctions where the debtor is the sole buyer Strong influence by São Paulo’s Governor, José Serra Unfavorable environment for new investments in infrastructure in Brazil The PEC 12 is Born PEC 12: 3 rd Official Default of Special Judicial Payment Orders

Precatórios and the PEC 127 May 2009 Approved in the Senate by unanimous vote Currently in the House of Representatives (rapporteur: Mr. Eduardo Cunha, from PMDB party) Large public demonstration in Brasilia last week: 2,000 lawyers, creditors and human rights activists Legal opinion delivered to the President of the House and the rapporteur Agreement to hold public hearings in 2 to 3 weeks Mr. Cunha publicly stated that it is unconstitutional to (i) change any terms and provisions related to changes in interest rates of court decisions; and (ii) change the chronological order  Still, we remain cautious about those statements Discuss alternative practical solutions to the problem, other than the default  Need allies, including Mayors and Governors (despite the difficult situation generated by the Global Crisis) What’s next? PEC 12: 3 rd Official Default of Special Judicial Payment Orders

Precatórios and the PEC 128 May 2009 Issuance of municipal and state securities guaranteed by the Federal Government to be swapped by the Precatório  Different terms and maturities  Could be used for alternative payments (such as overdue taxes, pension contributions, mortgage, etc.) Contribution to investment funds on infrastructure or purchase of stock in Government owned companies States and Municipalities are restless to renegotiate their overall debt with the Federal Government A NEW PUBLIC JUDICIAL DEFAULT IS A CLEAR AND PRESENT DANGER UNNAPEALABLE COURT ORDERS OF ANY NATURE MUST BE FOLLOWED BY EVERYBODY PEC 12 REPRESENTS THE MOST SERIOUS THREAT DO THE BRAZILIAN DEMOCRACY AND ECONOMY AFTER THE MILITARY REGIME Potential Alternatives PEC 12: 3 rd Official Default of Special Judicial Payment Orders