Contributed By Fiorio, Cardozo & Alvarado
Despite a slowdown in the first quarter of 2019, Paraguay has been one of the fastest growing economies in Latin America throughout the last decade, with the Paraguayan average annual growth rate for the 2014-2018 period being 3.8%. The financial sector grew by 4.7% in 2014, 6.6% in 2015, 4.1% in 2016 and 0.5% in 2017. The contraction in 2017 was a result of a deceleration in the overall amount of loans advanced in both foreign and local currency, largely due to lower commodity prices compared to previous years, which translated into decreased demand for loans for agricultural investment (accounting for lower foreign currency loans). In response to the low prices of commodities, the Central Bank issued resolutions that relaxed requirements and allowed debtors to refinance agricultural debts. The growth of loans has gradually recovered, both in national currency and in foreign currency.
Due to its size, the high-yield market does not play an important role in financing terms and structures. The high-yield market in Paraguay is very small since most companies offering debt in the local market are important economic players with solid local reputations. Moreover, despite being rated below investment grade, in practice, Paraguayan sovereign bonds have obtained investment grade interest rates.
Alternative credit providers play a key role in providing consumer credit in the Paraguayan market, particularly non-banking institutions. This is because most borrowers do not meet the requirements to qualify for banking consumer loans. Both bank and non-bank lenders must comply with usury laws, and both peacefully coexist serving different segments of the market.
Commercial financing is facing more competition of late, as there has been a rise in alternative ways of accessing finance. Local and international companies have successfully used the local market to access finance, commonly through debt offering.
Seasoned credit providers such as multilateral banks remain essential in project finance, and the syndication of bank lenders and financing vehicles such as quasi-sovereign bonds has also played an important part in financing infrastructure projects.
The local financial market has evolved to serve the needs of borrowers and lenders. In 2005, Law No. 2640 created the Financial Agency of Development (“AFD” for its acronym in Spanish), which is a public bank that promotes economic development and job creation by funnelling funds at reduced interest rates for investment projects and loans to the general population, through financial institutions and accredited co-operatives.
AFD provides for agriculture, educational financing, first-time home buyer credit, SME finance, investment and livestock investment projects, among others.
Passed in July 2018, Law No 6104 expanded the Central Bank’s oversight to some institutions that were previously beyond its purview, and gave the Central Bank greater authority to intervene and sanction non-complying financial entities.
Recently, the government has focused on implementing adequate mechanisms to allow for the control of transactions carried out through its financial system, and ensuring the transparent, accurate and timely information of the final beneficiaries of such transactions. These measures included establishing that all electronic transfers and non-electronic remittances abroad must be reported to the Central Bank, and made only through legally authorised entities that comply with requirements aimed at the identification of foreign counterparts. Paraguayan legislation has been through a process of eliminating bearer shares, with Law No 5895/17 establishing rules of transparency in the corporate governance of companies constituted by shares by implementing the Bearer Share Registration System in response to FATF Recommendation No. 24. As of today, bearer shares are no longer permitted.
In November 2018, the Secretary for the Prevention of Money or Property Laundering (SEPRELAD) presented a package of laws to Congress, aimed at revamping the prevention system for the mitigation of money laundering, the financing of terrorism and other such acts that threaten to destabilise the economic order.
Providing financing to a company organised in Paraguay does not require a permit, but it is important to highlight that the recurrence of the transaction could trigger regulation by the Central Bank in response to the volume of transactions, and a registration requirement before the anti-money laundering authority.
Foreign lenders are not restricted from granting loans in any way. Foreign persons and entities may grant loans in Paraguay as long as they comply with the usury laws and applicable regulations.
The granting of securities or guarantees to foreign lenders is not restricted or impeded in any way.
There are no controls on foreign exchange transactions, apart from bank reporting requirements for transactions in excess of USD10,000. Importers, exporters and any other person can buy and sell foreign exchange freely at commercial banks, finance companies or exchange houses, at the going market rate.
Local regulations do not impose any kind of restriction on the borrower’s use of proceeds from loans or debt securities.
Agent and trust concepts are recognised in Paraguay. Mortgage and pledge structures are commonly used as an alternative to the trust structure.
Paraguayan law allows the assignment of creditor rights. The mechanisms to transfer loans and their associated security package differ depending on the way in which they were formalised. Typically, the assignment will consist of the execution of an agreement setting forth the terms governing the assignment, a notice to the debtors, and additional formalities to those necessary for the creation of the relevant rights. Thus, the transference of guarantees such as trusts and mortgages will require the execution of a public deed, while the transfer of negotiable instruments can be accomplished by a simple endorsement.
Local laws allow debt buy-back, permitting the borrower to prepay the loan (in full) with a discount of future interests.
Capital markets regulation in Paraguay does not require "certain funds" with respect to public acquisition transactions. However, acquisitions are normally made through private arrangements, since the public offering consists mostly of fixed-income securities.
The financing of private acquisitions is usually done through the participation of banks. The practice of financing the transaction through syndicated loans has been growing over the last few years, at least in the most important mergers and acquisitions in the local market.
Payment of the principal is not subject to taxes. Payments of interest to lenders are subject to withholding tax at 10% for VAT, and 6% or 15% for Corporate Income Tax for banks and non-banks respectively. The local borrower is responsible for withholding the tax.
There are no other applicable tax considerations.
In Paraguay, local usury laws limit the interest rates that lenders may legally charge. Interest rates are considered usurious when they exceed 30% of the average annual effective interest rates on consumer loans. On a monthly basis, the Central Bank publishes the average rates for consumer loans in local and foreign currency.
Real estate, machinery, term deposit accounts, raw products (such as soy crops) and account receivables are some of the assets typically available to lenders as collateral. Security typically takes the form of mortgages, pledges and trusts. Formalities and perfection requirements applicable to mortgages and pledges include notarisation and registration, while trusts are simply structured as contracts and may or may not be notarised. The costs involved and the timing will depend on the form of the guarantee; trusts will usually take longer as they are negotiated between the parties.
Even though they are not commonly used, Paraguayan law permits floating charges to guarantee debt materialised in a negotiable instrument. This guarantee is structured as a universal mortgage, which allows the grantor – who must be structured as a corporation – to use all its assets as collateral. In practice, floating charges are coupled with revolving credit facilities.
Paraguayan entities are legally permitted to give downstream, upstream and cross-stream guarantees. However, such powers must be expressly permitted in their bylaws or articles of incorporation, as applicable, since business entities are only authorised to act within those limits. In all cases, the guarantor must demonstrate that guaranteeing the main loan resulted in an economic benefit.
Local legislation prohibits corporations from making loans to third parties to acquire a participation in the corporation. The text of the law clearly restricts the corporation from granting financial assistance in the acquisition of its own shares; following the same train of thought, it can be inferred that, in the context of an acquisition, a corporation is not legally permitted to guarantee the acquisition of the target either.
Prospective buyers therefore look for alternative ways to finance the acquisition of the target. After the acquisition, the corporation will be free to take loans aimed at financing operations related to their corporate object and authorised in its bylaws.
Other restrictions relating to the grant of security will depend on the type of collateral. For example, perfection of a real estate guarantee may only be done through a mortgage, which must be instrumentalised in a public deed and annotated in the registry.
Another thing to take into account is that consents may also be required when the collateral is owned by a business entity, in which case the ability to use the assets as collateral must be specifically mentioned in its bylaws. Board of director deliberation could also be required.
Once the loan has been repaid, the creditor must proceed to the deregistration of the pledge or mortgage. The cancellation will be registered in the mortgage registry, along with the instrument by which the mortgagee cancels the lien, and a note will be entered in the real estate entry.
In Paraguay, rules governing the priority of competing security interests are determined by law. Debtors may choose to secure their obligations with a pledge or mortgage over a particular asset, or they may affect the assets by putting them aside in a trust. Upon default, secured creditors have the right to foreclose the assets that secure the main obligation. If there is more than one creditor, priority will be determined by the order in which such credits are annotated in the registry. The first mortgage will collect all its credit before the second and third mortgage, and any residual will go to the unsecured creditors, which will be paid pro rata. Unless contractual subordination is reached in a restructuring process within the insolvency process it will not survive, as it may alter third parties' rights.
A secured lender may enforce its collateral only after the borrower is in default under the main loan. Acceleration must be contractually agreed, and customarily requires two unpaid installments. Mortgages have a different rule: interest should remain unpaid for more than six months before the mortgagee can accelerate and demand payment of the capital.
The law establishes that the parties may freely decide the law that will govern their contracts. Exceptions to this rule apply to consumer product, labour, and agency and distribution contracts.
Local laws establish that court judgments are enforceable in the terms of existing treaties. In the absence of treaties, the enforcement is subject to the completion of the following requirements:
Beyond the inconvenience of litigating abroad, foreigners do not face special difficulties when enforcing their rights under loans or security agreements.
The law does not regulate company rescue or reorganisation procedures outside of insolvency proceedings. However, an extra-judicial renegotiation of debt terms with creditors is not forbidden as long as it does not forfeit other creditors' rights over the debtor's assets.
According to Paraguayan bankruptcy law, lenders who hold a credit originated before the commencement of the debtor’s insolvency process may not promote or continue judicial debt collection processes. Secured creditors are exempted from these rules as they may choose to initiate foreclosure procedures to collect from the guarantee. Depending on the situation, secured creditors may collect their money in its entirety or remain partially unsecured, in which case they will collect pro rata with other unsecured creditors. Labour creditors are also exempted from this automatic stay.
Under Paraguayan law, labour claims have a super-priority over the debtor's assets. Other priorities over the assets will depend on whether or not the credit was guaranteed with a designated asset (mortgage, pledge). If the credit was guaranteed with a specific asset, once the administrative expenses of the foreclosure have been paid off, the proceeds of such foreclosure process will go to pay the secured creditors. The secured creditor that was not fully paid with the proceeds of the foreclosure will participate pro rata with other unsecured creditors over the rest of the debtor's collective assets.
Insolvency laws do not contemplate the concept of equitable subordination.
Insolvency may result in two different scenarios: a restructuring process in which the creditor could suffer a reduction of its credit and an extension to the payment term, and bankruptcy in which the main risk is that the debtor might not have enough assets to cover all debts. Under Paraguayan insolvency laws, the lender cannot take over the business of the borrower as a result of a restructuring process; there is no concept similar to the “preservation of the going concern of the company”. Therefore, when a company faces insolvency, the lender relies entirely on the guarantee for repayment. The creditor will remain an unsecured creditor for the unpaid portion of the debt if the guarantee does not cover the credit in its entirety.
The insolvency of the security provider will not affect the effectiveness of the guarantee if it was properly registered in favour of the creditor. The creditor will have priority over unsecured creditors of the security provider to collect the foreclosure proceeds, and over secured creditors of the security provider that registered their rights after the secured creditor.
In recent years, Paraguay has been regarded as an attractive nation for doing business in Latin America. The Central Bank has adopted a conservative approach and implemented legislation that protects strategic investments and guarantees a friendly environment for the development of large industrial plants and infrastructure projects.
The project finance landscape in Paraguay is mainly composed of government infrastructure projects. To accomplish its infrastructure investment goals, Paraguay has several financial tools at its disposal, such as the issuance of bonds, loans from multilateral and bilateral organisations, as well as its own resources. The Inter-American Development Bank and The World Bank are currently Paraguay’s largest creditors, accounting for 22.9% and 9.7% of the total public sector external debt, respectively.
For an overview of the legal framework, please refer to the sections below.
Paraguayan Congress approved the PPP Law in November 2013. This piece of legislation provides a framework for the formation of partnerships between the public sector and private companies to finance and provide the services required for infrastructure development.
In addition to the PPP Law, another method for infrastructure investment is provided by Law No. 5.074/13 for “Turnkey Infrastructure Projects”. One of the most important characteristics of turnkey infrastructure projects is that the government only pays once the projects are finished and operational, therefore incentivising the efficient and timely completion of such projects.
Project finance transactions aimed at financing governmental projects are usually the result of a public procurement process. These projects typically involve a combination of loans and project bonds. There is no particular government approval needed for the transactional documents, beyond the specifications of the tender documents, although bond projects will need government approval if they have quasi-sovereign status.
The Vice-Ministry of Mining and Energy is part of the Ministry of Public Works, and is the government agency in charge of the oil and gas, power and mining sectors.
Mining Law No 3180/2007, its modifications Law No 4269/2011 and No 4935/2013, and Decree No 8699/2018 are the primary laws and regulations on mining.
According to the law, mining rights are those that derive from the permits and concessions granted by the state. The law allows foreign entities to be granted mining rights in Paraguay, as long as such entities comply with the requirements set forth in the law. One of these requirements is to establish a local subsidiary, or to at least appoint an agent.
Mining projects are divided into three stages: prospection, exploration and exploitation. Prospection and exploration permits are granted by the Ministry of Public Works, while exploitation is only granted by means of concessions, which are granted by law. Mining rights may be transferred, but the assignment must be authorised by the Ministry of Public Works or the Executive Branch, depending on which was the authorising authority.
The execution of the project is guaranteed with a policy equivalent to 10% of the investment committed per stage. Mining companies are exempt from paying taxes in the prospection and exploration stages. In the exploitation stage, royalties are owed and calculated over the quarterly net income, and are paid in cash or in kind, at the election of the State.
Hydrocarbons Law No 779/1995 and Decree No 8785/2018 are the primary regulations on the prospecting, exploration and exploitation of petroleum and other hydrocarbons.
The law also allows foreign entities to acquire exploitation rights in the jurisdiction, and the projects are also divided into the three stages of prospection, exploration and exploitation. The key difference between the mining and hydrocarbon laws is that, in hydrocarbon projects, the exploration and exploitation stages must be awarded through a concession. These rights may also be transferred, and the assignment must bear the previous authorisation of either the Ministry of Public Works or the Executive Branch, depending on which was the authorising authority.
The projects require insurance covering civil liability and all risks insurance during the exploration and exploitation stages. Fees are applicable at the exploitation stage, as well as royalties, which are established according to gross crude oil production. The services provided by third parties to companies in the exploration and exploitation stages are exempt from taxes, except for income, which is still taxed at a lower coefficient than income from services provided to other people. During the exploitation stage, the concessionaire is exempt from all types of taxes, except for income tax, which is calculated on liquid profits.
The main issues will depend on the terms of the tender documents, and applicable legislation which will vary depending on the field of the project. There are no restrictions on foreign investment – lenders will pay particular attention to the viability of the project and the risks involved. Easy access to repayment methods will determine the investment interest in the project.
Infrastructure projects are typically financed by syndicated bank loans or project bonds, or a combination of both. These projects typically require both long- and short-term credit facilities, which are typically funded by syndicated bank financing and multilateral loans.
It is also worth mentioning that the government sets up a trust to safeguard enough funds to respond to payments it shall make to the contractor for reasons of the project. The creation of this trust guarantees the effectiveness and efficiency of the payment of its commitments.
Infrastructure projects are usually divided into milestones. The completion of a milestone triggers the government’s obligation to inspect and receive the works, if they are acceptable in accordance with the tender documents. Once the government accepts a milestone as having been completed, it issues a payment certificate (CRPAGO) for which the contractor acquires the right to be paid in proportion to the completed work.
In accordance with the Paraguayan Constitution, the government is the sole owner of oil and mineral resources within its territory. Corporations and individuals can be granted concession rights for exploiting these resources in exchange for royalties. However, concessions need Congress authorisation to do so, which should be granted through a bill.
The exportation of natural resources is allowed, with the exception of timber in its natural state, which is restricted. As of today, Paraguay’s number-one export is hydroelectric power produced at the Itaipu and Yacyretá dams, co-owned with Brazil and Argentina respectively.
Finally, individuals and corporations from neighbouring countries are legally banned from owning land within 50 km of the border.
Before the call for tenders, infrastructure projects typically go through a phase in which the government studies their socioeconomic and environmental impact, taking the need of the affected population and the applicable environmental legislation into consideration. The Ministry of Environment and Sustainable Development is the agency responsible of granting a licence to the contractor, after going through an environmental impact assessment. Safety issues in the execution phase of the project are overseen by the Labour Ministry.
As of today, Islamic finance instruments have not been structured in Paraguay, nor has Islamic finance been specifically regulated under Paraguayan laws.
See 9.1 The Development of Islamic Finance.
See 9.1 The Development of Islamic Finance.
See 9.1 The Development of Islamic Finance.
See 9.1 The Development of Islamic Finance.