LCI and LCA: what is it and how does it work? Find out everything!

First of all, LCI and LCA – fixed income securities related to the real estate and agribusiness sectors – are on the rise due to the exemption from Income Tax. Let's find out how these investments work, their advantages, disadvantages and risks.

Initially, to invest in real estate and agribusiness bonds, the first step is to evaluate your own investor profile and your objective with the money invested and remunerated.

After all, you need to analyze the chances of you needing your funds before the investment matures, among other points. Despite sharing similar structures, letters of credit have particular characteristics that must be considered.

So, keep reading and find out all about:

• What is LCI and LCA and how does it work;
• What is the profitability like;
• What is liquidity like;
• What are the risks of investing in LCI and LCA;
• How taxation and fees work;
• What are the advantages and disadvantages;
• How to invest in LCI and LCA step by step!

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What is LCI and LCA and how does it work?

LCI (Real Estate Credit Letter) and LCA (Agribusiness Credit Letter) are fixed income investments exempt from IR that provide higher returns than savings.

These two types of investments are similar to CDBs issued by banks. Therefore, when you acquire them, you are lending money to financial institutions and receiving interest on the invested resources as remuneration.

LCIs are securities used by banks, real estate credit companies, savings and loan associations, and mortgage companies to raise funds to support their credit issuing activities.

LCAs are issued by rural producers and cooperatives, with financing directed from production to the commercialization and industrialization of products, inputs and machines that feed the agricultural sector.

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What is the profitability like?

Both LCIs and LCAs act as securities prefixed, postfixed or linked to inflation variation. Let's understand how each modality works.

The choice of securities to invest in depends on the investor's characteristics and goals. Those who want to have a more defined value as a return on their investment in the long term will find post-fixed securities to be the most stable and conservative investment option.

However, if your goal is to maintain the purchasing power of your money, inflation-linked notes may be the best option.

Pre-fixed letters

Here, the investor knows the interest rate defined at the time of the investment, which allows him to know the exact amount he will receive on the maturity date of the paper. This rate can vary, for example, between 5% and 7% per year.

Postfixed letters

The investor has access to a reference indicator to which variations in the remuneration of the LCI or LCA are subordinated, which is normally the rate of CDI.

The highs and lows of this indicator determine the return on these investments. Thus, the return on investment in a post-fixed bond is indicated as 90% of the CDI, for example.

Inflation-linked letters

LCIs and LCAs are made up of a fixed portion and a post-fixed portion. Most of the time, the paper guarantees an interest rate, such as 3% or 4% per year, but the variation is calculated by IPCA (Broad Consumer Price Index)or by IGP-M (General Price Index – Market) for inflation.

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What is the liquidity like?

The ease of converting funds from an LCI and LCA into cash and redeeming them is usually less than that of other fixed-income securities. The first thing that investors interested in these securities need to consider is the grace period.

Since LCIs and LCAs comply with a minimum investment period, regulated by the National Monetary Council (CMN).

First of all, for LCIs, the minimum term is usually 90 days, for pre-fixed and post-fixed bonds. This term is extended when the remuneration of the bond is linked to a price index, such as 12 months for an annual update bond and 36 months for a monthly update bond.

The same minimum term is applied to pre-fixed and post-fixed LCAs, with 12 months for annual bills according to the price index used.

Regarding the redemption of securities before maturity, that is, before the grace period, the investor has options for LCAs and LCIs with daily liquidity after a minimum period of 90 days that can be redeemed at any time.

However, when redemption is only possible upon maturity of the investment, this may vary from one to three years.

Another option for those who need to redeem their investment before the end of the application is to negotiate their bonds on the secondary market, where the investor may take some time to negotiate them or may be forced to give discounts to attract interested investors.

In the secondary market, securities are traded at market price, that is, at prices established to meet investor demand, which may be above or below the value initially paid.

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What are the risks of investing in LCI and LCA?

Even though they are securities backed by real estate and agricultural loan operations, LCIs and LCAs are subject to the risks of the issuing financial institutions.

Therefore, even if the bank, for example, has liquidity problems unrelated to the collateral of these letters of credit, its valuations will be influenced.

The Credit Guarantee Fund, FGC, covers up to R$250,000 of the amount invested by the investor per financial institution, protecting the investor from the institution's eventual bankruptcy.

However, this guarantee is registered by CPF and institution. Therefore, if the investor has money in a current account or savings account of the entity in question, these investments will occupy part of the limit for coverage of resources.

Therefore, surpluses above R$ 25 thousand will not be refunded and the orientation of the experts is the investment diversification in letters from different institutions, which naturally increases the amount covered by the FGC. The total limit covered by CPF is R$1 million, renewed every 4 years.

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How taxation and fees work?

As we have seen, LCIs and LCAs are exempt from IR, and therefore, the profitability obtained from these investments is already net, without any value to be discounted at the time of redemption.

In other fixed income investments, the investor pays income tax according to the rates on a regressive table. An investment redeemed before 6 months, for example, pays 22.5% of income tax on the profitability. However, if it is redeemed after 10 years, the income tax rate drops to 20%.

Therefore, if an LCI presents a lower return than a CBD, this does not mean that this investment is more advantageous. With the IR exemption, the return on an LCI that pays 87% of the CDI may be higher than that of a CDB with a return of 100% of the CDI, when comparing one-year investments.

Another point in favor of investing in letters of credit is the absence of incidence of administration fee. Some brokers still charge brokerage or custody fees on investments, while others have already eliminated this cost.

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What are the advantages and disadvantages?

In advance, LCIs and LCAs are interesting investments for those looking for profitable fixed income options at a time of low interest rates that we are experiencing today.

Letters of credit are issued by institutions of varying sizes, operating in different segments.

LCI and LCA bonds are guaranteed by the FGC

This means that investors have a wide range of options to diversify their portfolio with securities guaranteed by the FGC – which does not cover all fixed income investments.

High remuneration

Government bonds only involve risks related to government resources, while LCI and LCA are exposed to the credit risk of financial institutions, which makes their remuneration higher.

Income tax exemption on LCI and LCA

Even though it does not reach the level of other private credit investments, the exemption from Income Tax on income makes investing in these securities advantageous.

Negative point: No daily liquidity!

However, for those who need to withdraw their money quickly, investing in letters of credit may not be so interesting, since they do not have daily liquidity. In other words, the redemption can only be made on the maturity date of the security.

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How to invest in LCI and LCA (step by step)

Open your account with a broker

Banks issue their own letters of credit, but brokers issue letters from different banks, providing investors with more options for profitable securities.

Study the type of LCI and LCA title you will purchase

Compare pre-fixed and post-fixed securities and discover the best and most attractive products to meet your financial investment goals.

Those who fear a drop in interest rates over time until the investment is redeemed – which is not easy to calculate – prefer to invest in pre-fixed bonds.

When analyzing the LCI and LCA options for investments in your brokerage, you will see a table similar to the one we will see below, which contains fictitious information for the purpose of example:

ISSUER	LIQUIDITY	PERFORMANCE	RATING	AGENCY	MINIMUM APPLICATION VALUE
Bank 1	90 days	88% CDI	A+	Fitch	R$1000.00
Bank 1	120 days	85% CDI	AA+	Moody's	R$3000.00
Institution1	90 days	87% CDI	AA-	Moody's	R$5000.00
Institution2	90 days	89% CDI	B2	Fitch	R$3000.00
Bank 2	120 days	88% CDI	AA-	Moody's	R$1000.00
Bank 3	180 days	90% CDI	A+	Fitch	R$15000.00
Institution3	180 days	92% CDI	B2	Fitch	R$10000.00
Ininstitution3	360 days	91% CDI	AA-	Fitch	R$5000.00

Column 1 represents various LCI and LCA issuers. In column 2, liquidity corresponds to the number of days that the investment will remain in the bank's custody, i.e., the maturity date when it can be redeemed.

Column 3 indicates the rate that the LCI or LCA will pay upon maturity of the investment. These returns are linked to the CDI rate.

Column 4 indicates how institutions are classified according to their solvency capacity. Thus, the better the debt payment history, the more stable and financially healthy the institution is.

Rating agencies – column 5 – classify banks, financial institutions and even countries according to their credit risk, assigning them a grade. In column 6, we have the minimum amounts that can be invested in the purchase of securities.

When assessing your risk tolerance, what steps could you take if the issuing institution had solvency issues?

You need to classify whether the resources you are investing are extra or whether they are part of your assets and whether the total amount you will invest will be covered by the FGC.

By the way, the FGC reimbursement is usually not quick, and can take weeks or even months. And in that time, your resources are no longer remunerated, and you may be missing out on a good opportunity cost if you have other investments in mind.

Pay attention to the minimum value

Minimum investment amounts vary according to the level of risk and inherent return potential. The most attractive LCIs and LCAs have minimum amounts that range from R$30,000 to R$50,000 or more. To make things easier, brokers offer investment versions with lower initial amounts.

Please note the R$ 250k limit

As the FGC coverage limit is 250 thousand per institution, to invest with greater security, the ideal is to respect this value by distributing your investment among the various options of banks, real estate credit companies, savings and loan associations, mortgage companies, producers and rural cooperatives.

See expiration date

The variation in maturity terms is subject to the characteristics of each security. The longer the maturity term of the investment, the more profitable it is. These securities do not have daily liquidity and can only be redeemed on the maturity date.

Simulate

The final step before purchasing the LCI or LCA is the use of Investment Simulator, which will show you how much your money can earn in the chosen application.

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