© 2008 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved.

BOVESPA IPOs:Yesterday, Today and Tomorrow

9 May 2008

Francesca L. Odell

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Overview

3

What drives the IPO process in Brazil?

(Other than the financial markets…..)

Investment bank standards for disclosure and due diligence

Standards of international law firms and auditing firms

•10b-5 negative assurance letters from lawyers

•Auditor comfort letters

Local regulators (CVM, Bovespa, Central Bank)

Sometimes foreign regulators (New York, European jurisdictions)

Secondary market liquidity

Exit from the US public markets?

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Trends in BOVESPA IPOs

Yesterday•Limited to large, usually industrial, issuers

•Usually SEC-registered, NYSE listed

Today•Much broader range of issuers

•Typically no international listing (144A/Reg S abroad)

•Beginning of variations (LSE, Lux, etc)

Tomorrow•More listings of foreign (Lat Am) companies on BOVESPA?

•Broader use of European listings?

•Return to SEC-registered IPOs with new SEC rules and flexibility?

Trends in BOVESPA IPOs: Yesterday

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Yesterday: What did Brazilian IPOs look like?

Limited to large, usually industrial, issuers (Petrobras, Vale)

Issuers had significant local presence (Unibanco, Bradesco)

Usually SEC-registered, NYSE listed

•Attract international investors

•Assure liquidity

Oftentimes privatizations or family-owned companies where family was divesting of a portion of its interests (Petrobras, Unibanco, Gol)

Underwritten by large, international investment banks

•Provided access to investors abroad

•Local investment banks catered mainly to retail segment

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Yesterday: What did Brazilian IPOs look like?

Disclosure

•Driven fully by SEC process

•Focus entirely on English documentation

•Portuguese language offering documentation was an afterthought

Underwriting

•US style, multiple tranche underwritings

•10b5 letters and comfort letters often only for the US/international tranche of the offering

Timing

•Usually very slow; process often took a year

•Focus entirely on SEC registration process

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Yesterday: Why was there a shift in Brazilian IPOs?

Boom in Brazilian market: huge demand, making timing more crucial

Sarbanes-Oxley Compliance

•Audit committee requirements and 404 compliance

•Board independence

Ongoing reporting requirements

•Annual report on Form 20-F

•Periodic reporting

Financial statements

•US Gaap or reconciliation for full three years

•Timing of going to market and staleness of financials

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Yesterday: Why was there a shift in Brazilian IPOs?

Cost

•SEC filing fees and NYSE/Nasdaq listing fees

• Increased costs of professionals

•Ongoing costs of compliance and reporting

Timing

•SEC review process is lengthy

•Local regulators have a more abbreviated review process, and comments tend to be fewer in number and less substantive

Language

• Initial drafting was in English, and later translated into Portuguese, which was cumbersome for many issuers, local bankers and local lawyers

Trends in BOVESPA IPOs: Today

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Today: What do Brazilian IPOs look like?

Much broader range of issuers

•Markets accessible to middle and small-sized issuers

•Companies from a variety of smaller, more locally-based industries

•Less sophisticated structures, often requiring corporate restructurings

•Less advanced internal systems and functions (audit, internal controls, legal and compliance, etc.)

More diffused ownership

•Companies often don’t have a controlling shareholder

•Following IPO, typically a truly public company

•Exits for private equity investors available

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Today: What do Brazilian IPOs look like?

Typically no international listing

Any international selling efforts are through transactions exempt from registration

•Rule 144A: sales to qualified institutional buyers

•Regulation S: sales offshore the United States, to non-US persons

International sales actually in the form of a “placement” for tax reasons, so in essence is a 4(2) private placement and not a “resale” under 144A

•Placement facilitation agreement usually governs (and Brazilian underwriting agreement tracks it substantively)

•One of few jurisdictions with a true “firm guarantee” underwriting

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Today: What do Brazilian IPOs look like?

Full diligence procedures, as with a SEC-registered transaction

•Full business due diligence (including diligence with auditors)

•Legal due diligence (not just documentary, but actual conversations with different business units of the issuer)

Auditor procedures now mimic US/international style offerings

•Arrangement letters often required to “ringfence” the Reg S and Rule 144A portions of the transaction

•Comfort letters on both sets of offering documents, including “ticking” and “tying” numbers and negative assurances

Pre-deal research permitted in Brazilian IPOs, but not in US, Canada or Japan, and must respect a blackout period (15 days prior to reds, through 40 days following closing of offering)

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Today: What do Brazilian IPOs look like?

Differences in disclosure

•Feasibility study

•Period-to-period balance sheet comparisons

•Additional CVM required disclosure

–Additional risk factors

–Enhanced disclosure re shareholder structure and other corporate background information

Timing between different sets of offering documents is essential for consistency

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Today: What do Brazilian IPOs look like?

Beginning of variations in deal structures….

GDR/ADR deals for Brazilian issuers

•Allows international buyers to purchase an instrument other than the share traded on the Bovespa

BDR deals for non-Brazilian issuers

• Issuers organized in another jurisdiction, but with mainly Brazilian operations (GP, Dufry, Wilson Sons)

•Truly foreign issuers searching for liquidity (Banco Patagonia)

Foreign listing is required for BDRs

•Luxembourg

• Ireland?

•UK (LSE, AIM?)

Trends in BOVESPA IPOs: Tomorrow

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Tomorrow: What will Brazilian IPOs look like?

More listings of foreign (Lat Am) companies on Bovespa?

•Continued use by Argentine companies?

•Expansion to other jurisdictions (Uruguay vs Chile)?

Broader use of European listings?

• Increased incorporation in foreign jurisdictions for efficient tax planning and to attract international investment

•Use by Brazilian issuers for primary listing?

•Particularly interesting for private equity, hedge funds, etc with complicated structures

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Tomorrow: What will Brazilian IPOs look like?

Return to SEC-registered IPOs with new SEC rules and flexibility?

Foreign Private Issuers Can Now Use IFRS, as adopted by IASB•Brazil planned in 2010

•Novo Mercado already provides for reconciliation

Easier Exits (in some cases) from SEC Reporting Requirements: Changes to Deregistration Rules

Proposed Overhaul of “Home Country Exemption” from SEC Reporting

Increased Flexibility for Resale of Restricted Securities: Liberalization of Rule 144 Requirements

Proposed Shorter Filing Deadline for 20-F and Other Proposed Changes Affecting 20-F Filers

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