Project Finance 2023 Comparisons

In Brazil, project finance is especially important in the context of public-private partnerships (including traditional “concession schemes”). Sponsors are usually industry developers – in particular, civil contractors – and, to date, most PPP contracts count on debt raised via development banks, such as Banco Nacional de Desenvolvimento Econômico e Social (BNDES) and Caixa Econômica Federal (CEF).

As Brazil is a civil law country, there are specific laws regulating PPPs. Concession schemes (also known in most countries as “user-pays” PPPs) are regulated by Federal Legislative Act No 8.987/95 (the “Common Concessions Act”), which affords specific legal provisions both for public procurement and for contractual issues.

In Brazil, the British PFI model is regulated as two specific types of concessions under Federal Legislative Act No 11.079/04 (the “PPP Act”). Under the PPP Act, “government-pays” PPPs are called “administrative concessions” when all the funding comes from the government, either because the service is free of charge for users or because the service is provided directly to the contracting authority. Whenever government funding coexists with user payments, the PPP contract is called “sponsored concession” (since part of the funding comes from the government). Also, under the PPP Act it is possible for financing to be granted for capital expenditures, and more elaborate securities can be provided for the special purpose vehicle (SPV) by the government.

Certain industries also have specific regulatory provisions that must be met, in addition to either the Common Concessions Act or the PPP Act. Some examples include for:

• basic sanitation (treated water and wastewater, and waste management);
• electricity;
• oil and gas;
• mobility; and
• public transportation.

Thus, in general terms it is common for industries to have their own specific law that must be combined with the general provisions of either the PPP Act or the Common Concessions Act.

Project companies are usually incorporated as SPVs and are usually owned by the parent companies that are responsible for sponsoring and/or developing PPP projects (in a broad sense, encompassing government-pays and user-pays PPPs, with the latter usually referred to as “concession schemes”). In Brazil, project companies are generally incorporated either as limited liability companies or as private stock corporations. The latter tend to be more common, especially in mega-projects, because of the higher level of legal governance required by the Joint Stock Company Act of 1976. It is also possible to perform an initial public offering of a project company incorporated as a private stock corporation, though this is not yet common in Brazil.

In Brazil, project finance is mostly structured in capital-intensive public infrastructure projects. Private projects may also rely on project finance, as in the real estate industry (in particular, shopping malls and logistic plants/facilities), though public infrastructure is certainly where project finance is seen the most. Project finance has reached the billion-dollar mark for user-pays PPP (concession scheme) contracts.

There have been recent cases of success involving non-recourse project finance, such as the MT-100 highway user-pays PPP (concession scheme) in the State of Mato Grosso – financial close was reached in early 2022. Finance was granted by BNDES, the Brazilian development bank.

Recently, in December 2022, BNDES approved for another loan to be granted on a non-recourse basis, in the basic sanitation industry. According to recently published news, BNDES will grant approximately BRL19 billion (roughly USD3.6 billion) in order to gear up Águas do Rio, the SPV responsible for the largest contract in this industry in Brazil, in a user-pays PPP (concession scheme).

In addition, the road concessions that reached commercial close in the State of São Paulo in 2009, 2014 and 2019 were all financed via project finance – the latter being the Piracicaba-Panorama road concession encompassing 1,200km of roads in the São Paulo State countryside, with an estimated capital expenditure of BRL14 billion (roughly USD2.5 billion). This was also the first case in Brazil where a consortium was formed by only financial investors – in this case, Singapore’s Sovereign Fund and the Pátria Fundo de Investimentos, a well-recognised national investment fund.

Public lighting projects are also being financed via project finance, as there is a special tax paid by electricity consumers that must be spent on the operation and maintenance of public lighting systems. The revenues from such tax collection can be used to secure government payments in the correspondent PPP contracts.

Roads, electricity, water and wastewater, airports, public transportation and mobility are among the more traditional industries. National parks are also now an official trend in the Federal PPP programme, and iconic parks such as Iguaçu Falls and Lençóis Maranhenses, São Joaquim National Park, Chapada dos Guimarães National Park and Jericoacoara National Park have been included in the pipeline, and are all being structured/tendered as PPPs, in addition to historical buildings/sites following “Revive Portugal”.

As Brazil is a civil law country, all securities are established by a specific legislative act. According to the Civil Procedure Code, cash and bank deposits are the general rule in terms of security. In such cases, the creditor must obtain a judicial warrant in order to notify the bank.

Generally, any type of asset can be named as security, but general practice is to judicially enforce and sell the asset so that proceeds can be used to pay the creditor. An exception applies to the “fiduciary cession” where banks do not need judicial proceedings to be brought in order to auction the assets taken as security.

Security can also be taken over shares. In Brazil, all shares are in certificated form; however, according to the Civil Code, it is only possible to enforce this form of security if all others have been depleted or are insufficient. Additionally, although assets in general (such as real estate, plants, buildings and crops) can be taken as security, regulated assets (such as public utilities, and public and governmental infrastructure) cannot, under any circumstances, be expropriated or sold to pay for defaulted obligations. In such cases, though, the Concessions Legislative Act provides for the PPPs’ receivables being security, as well as for ensuring that the lender can step in to avoid bankruptcy by refinancing debt and restructuring the project’s cash flow.

Receivables can be taken as security specifically in PPP contracts (in a broad sense, encompassing both government-pays and user-pays PPPs, concession schemes and other PPP-like contracts that fulfil the IPSAS 32 PPP concept). For the chargor to collect, the debtor must incur breach of contract or default. Specifically, the public authority must be previously notified if the PPP contract has already so stipulated. However, in some cases, depending on the PPP contract’s provisions, the public authority must approve collection for contract breach or default by the debtor.

It is also possible to use trusts. Such parties are designated as “fiduciary agents”. This concept is regulated by Instruction Norm No 583/2016, enacted by the Comissão de Valores Mobiliários (CVM), which functions as the Brazilian counterpart to the US Securities and Exchange Comission (SEC). Additionally, although security trusts exist, it is possible (especially for small contracts) to enforce the mechanisms of parallel debt and joint and several creditor status.

Under Brazilian law, it is permissible to create a “floating charge” or other universal or similar security interests that encompass all the current and future assets of a company.

In Brazil, the costs associated with registering collateral security interests can vary depending on several factors, including:

• the type of security interest;
• the value of the collateral; and
• the specific registration process.

Common costs and fees associated with registering collateral security interests in Brazil may include:

• registration and notary fees;
• adminsitrative costs; and
• taxes.

Under Brazilian law, for the granting of security interest, it is necessary to specify the collateral. Certain categories, such as real estate, require specific registration in the Real Estate Registry (Cartório de Registro de Imóveis).

Regulated assets (such as public utilities, and public and governmental infrastructure) cannot, under any circumstances, be expropriated or sold to pay for defaulted obligations.

Guarantees must necessarily be individualised. However, as stated in 2.4 Granting a Valid Security Interest, certain categories (such as real estate) require specific registration. Regarding real guarantees, it is important to emphasise that the removal of the registration is required once it has been fulfilled.

Other guarantees, as previously discussed, do not have specific formalities.

In Brazil, lenders typically satisfy themselves with respect to the absence of other liens on their collateral through a combination of due diligence, legal procedures and searches. The presence of liens on collateral can significantly impact on a lender’s risk, so thorough checks are essential.

It is necessary to register real guarantees with an indication that the guaranteed obligation has been satisfied.

The other forms of guarantee, as a rule, do not require specific formalities – in such cases, it is sufficient that the guaranteed obligation has been satisfied or that the validity period of the guarantee has expired.

In Brazil, a secured lender can enforce its collateral under various circumstances, typically when the borrower defaults on the loan or fails to meet the obligations specified in the loan agreement. The specific methods, procedures and restrictions for enforcing loans, guarantees and security interests can vary depending on the type of collateral and the terms set out in the security agreement(s).

The choice of a foreign law as the governing law of a contract and the submission to a foreign jurisdiction is generally upheld and recognised by the Brazilian legal system. Brazilian law respects the principle of party autonomy in contractual matters, meaning that parties to a contract have a significant degree of freedom in choosing the governing law and jurisdiction for resolving disputes.

In Brazil, a judgment given by a foreign court or an arbitral award can be enforceable, but may require judicial recognition and enforcement procedures. These procedures typically do not involve a retrial of the merits of the case. The enforceability of foreign judgments and arbitral awards is governed by Brazilian law, which has specific rules and processes in place for determining their recognition and enforceability.

Article 1,134 of the Civil Code sets forth a series of requirements for a foreign company to operate effectively in Brazil. It outlines specific formalities to be observed, such as the need for authorisation and the documents that must accompany the application. This includes the submission of documents that prove the foreign company’s legal existence in its home country, as well as its capacity to operate in Brazil. Compliance with these requirements is essential to ensure that the foreign company can operate in accordance with Brazilian law.

There are no significant restrictions on foreign lenders granting loans in Brazil. Foreign capital inflow and currency exchange are generally allowed, subject to compliance with the Central Bank’s procedures for declaration and registration. However, direct foreign investment in financial agents such as commercial banks does require authorisation from the Central Bank.

Additionally, currency operations are subject to the financial operations tax (IOF) at varying rates. It is important to note that onshore accounts must be in Brazilian reais, but companies can establish and maintain offshore accounts with the requirement of full disclosure to the Receita Federal do Brasil (similar to the US Internal Revenue Service) and the Central Bank.

In Brazil, the granting of security or guarantees to foreign lenders is generally not restricted or impeded. Brazilian law allows for the provision of security interests or guarantees both to domestic and to foreign lenders, and there are no specific legal restrictions that discriminate against foreign lenders. However, it is essential to ensure compliance with relevant exchange control regulations and to review specific financing agreements for any lender-specific requirements or conditions.

Brazil has a well-defined and regulated foreign investment regime designed to attract foreign capital while protecting national interests and promoting economic development. It is characterised by its openness to the participation of foreign investors in many sectors of the economy, with rights and legal protections equivalent to those of domestic investors. While there are some restrictions in specific sectors, most areas welcome foreign investment without discrimination, encouraging foreign capital and economic development.

Foreign investors must comply with registration requirements, regulatory reporting requirements, and foreign exchange, tax and labour regulations, and may be subject to national security reviews in critical sectors. Legal counsel is often recommended to successfully navigate the foreign investment regime in Brazil.

No information is available on this topic.

It is generally permissible for a project company in Brazil to maintain offshore foreign currency accounts.

Certain financing or project agreements may need to be registered or filed with government authorities, or to comply with local formalities, to be valid and enforceable. This often applies to security agreements, real estate transactions and regulatory approvals. For instance, mortgage agreements on real estate assets must be registered with the Real Estate Registry to establish valid security interests.

Additionally, the National Registry of Vehicle Property (RENAVAM) may require registration for security interests in movable assets such as vehicles. Compliance with local formalities and registrations is crucial for ensuring the enforceability and validity of financing and project agreements in Brazil.

In project finance scenarios in Brazil, ownership of land or natural resources, as well as the operation of such assets, requires licences or permits. These requirements can vary depending on the specific location and type of project, especially in sectors such as energy, mining and agriculture.

While Brazilian law generally allows foreign entities to hold licences for land or natural resource ownership, specific regulations and restrictions may apply in some cases, particularly concerning rural land ownership. Due diligence and compliance with local licensing requirements are crucial for ensuring the legal operation of such assets in Brazil.

In Brazil, the agent and trust concepts are recognised and widely used in project finance arrangements. Trust structures, often referred to as “fiduciary assignments” or “fiduciary trusts”, are commonly employed for holding assets or rights on behalf of lenders and project participants. These structures provide a level of security and separation of assets, facilitating the management of collateral and the enforcement of security interests. In addition to trust structures, security and collateral arrangements, such as mortgages, pledges and other forms of guarantees, are also common in project finance for securing lenders’ interests.

In Brazil, security interests are ranked based on the order in which they were created or registered. Methods of subordination, where one security interest takes precedence over another, are recognised and can be contractually agreed upon. These subordination provisions can survive the insolvency of a borrower incorporated in Brazil, subject to certain legal constraints. However, during insolvency proceedings, the ranking and enforceability of these subordination agreements may be subject to the court’s approval and alignment with the specific insolvency laws and creditor hierarchy defined by the insolvency process.

Many projects are established as Brazilian entities. The typical legal form of a project company in Brazil is a limited liability company (sociedade limitada) or, in the case of more significant and complex projects, a corporation (sociedade anônima). Often, projects are set up in the form of a “special purpose company” (sociedade de propósito especial – SPE).

The choice of legal form depends on factors such as the nature of the project, capital requirements and the preferences of project participants. Project companies are often established as separate entities to ring-fence their liabilities and risks from their shareholders and parent companies, aligning with the objectives of project finance. Legal advisers play a crucial role in determining the most suitable legal structure for each project.

In Brazil, the availability and practice of company reorganisation procedures are governed by the Brazilian Bankruptcy Law (Law No 11,101/2005). This law provides a legal framework for companies facing financial distress to initiate reorganisation proceedings, which can include debt restructuring, asset sales and other measures aimed at preserving the business and protecting creditors’ interests.

Companies typically file for judicial reorganisation when they encounter financial difficulties. If approved by the court and creditors, a plan is developed to repay debts and stabilise the company’s operations. This process aims to prevent liquidation and allow the company to continue operating, while addressing its financial challenges.

When an insolvency process begins in Brazil, the lender’s rights to enforce its loan or any security or guarantee are typically affected. The automatic stay or “stay of execution” comes into effect, preventing creditors from initiating or continuing legal actions against the insolvent debtor. During this period, the lender’s ability to take legal action to recover the debt or enforce security interests is temporarily suspended.

Instead, creditors become participants in the insolvency process, subject to the decisions and negotiations under the court’s supervision, and their claims are addressed in accordance with the priorities and terms set forth in the reorganisation or liquidation plan. This legal framework is designed to provide a fair and orderly process for addressing insolvency, while protecting the interests both of debtors and of creditors.

The payment of debts follows the following order of preference:

• (1) extraconcursal credits – these have priority over all other creditors, including those with privileges;
• (2) labour credits – initially, payments are made for labour-related obligations, capped at 150 times the minimum wage per creditor, as well as those arising from workplace accidents, with consideration for the minimum wage in effect on the payment date;
• (3) credits with real guarantees – payments are made for amounts related to real property rights of guarantee, such as mortgages, pledges and anticresis, limited to the value of the encumbered asset;
• (4) tax credits – tax credits, regardless of their nature and the time of assessment, except for extraconcursal credits and tax fines; and
• (5) general unsecured credits – credits originating from ordinary obligations without real guarantees, the balances of credits not covered by the proceeds from the sale of assets allocated to their payment, and the balances of labour-related credits that exceed the established limit.

In Brazil, lenders face several risk areas if the borrower, security provider or guarantor were to become insolvent. These risks include:

• potential delays and challenges in debt recovery;
• the devaluation of collateral assets;
• the hierarchy of creditor payments during insolvency proceedings;
• the possibility of avoidance actions; and
• uncertainties surrounding asset sales.

Cross-border considerations and the effectiveness of contractual provisions, as well as legal costs and regulatory changes, further complicate the lender’s position in insolvency scenarios. To mitigate these risks, thorough due diligence, well-structured financing agreements and ongoing monitoring are essential, along with engagement of legal and financial experts versed in Brazilian insolvency and bankruptcy law.

In Brazil, certain entities, including financial institutions and co-operatives, are excluded from regular bankruptcy proceedings.

Instead, they are subject to specialised insolvency procedures, governed by specific legislation, such as the Brazilian Bankruptcy Law and the Brazilian Central Bank’s regulations. These procedures are designed to address the unique characteristics and systemic importance of financial institutions and co-operatives, with the objective of preserving financial stability and protecting depositors and creditors.

In Brazil, there may be restrictions, controls, fees and taxes associated with insurance policies over project assets, particularly if the project involves specific sectors or significant values. The insurance industry is subject to regulation, and the specific requirements and fees can vary depending on the type of insurance and the nature of the project. Taxes such as the insurance premium tax (IOF) may apply to insurance policies.

In Brazil, insurance policies over project assets can be structured to make payments to foreign creditors, though this depends on the specific terms and conditions outlined in the policy. Typically, insurance policies can be customised to meet the needs of the policyholder, and beneficiaries can be designated accordingly.

When foreign creditors have an insurable interest in the project assets and are named as beneficiaries in the policy, they can receive payments in the event of a covered loss or claim. The specific details and eligibility of foreign creditors to receive payments should be determined by reviewing the terms and provisions of the individual insurance policy.

The payments of interest made to foreign lenders are subject to withholding tax in Brazil. The withholding tax rate for interest payments to foreign lenders has been generally set at 15%, but could vary depending on the specific terms of tax treaties between Brazil and the lender’s country of residence. Payments of principal, on the other hand, are typically not subject to withholding tax.

Lenders making loans to entities incorporated in Brazil should take into account various tax considerations, including:

• the withholding tax on interest;
• the financial transaction tax (IOF), which can affect the cost of borrowing;
• potential stamp duty on certain loans, and other indirect taxes that might apply to certain aspects of loans; and
• corporate income tax (IRPJ) and social contribution on net profit (CSLL) implications.

Additionally, transfer pricing and thin capitalisation rules, tax treaties and currency exchange regulations should be considered, as they may affect the tax treatment and overall cost of lending.

Brazil has usury laws and regulations that limit the amount of interest that can be charged on loans. The specific limits on interest rates can vary depending on:

• the type of loan;
• the nature of the transaction; and
• the prevailing economic conditions.

The Central Bank of Brazil typically establishes guidelines for maximum interest rates that financial institutions can charge on various types of loans. Additionally, certain financial transactions may be subject to even stricter usury rate limitations. Certain jurisprudential decisions limit the charging of interest.

There is no specific legislative provision regarding project finance. It is important to note that, as applicable to any financial agreement, loans structured via project finance must comply with general banking regulations enacted by the Brazilian Central Bank, and funds and bonds must comply with regulations enacted by the Comissão de Valores Mobiliários (CVM).

Project agreements are all governed by Brazilian law. Most projects in Brazil are user-pays PPPs that do not require any funding from the public authority and are traditionally known as “concession schemes”. Correspondent project agreements are governed by Federal Legislative Acts No 8.987/1995 and No 9.074/1995. Government-pays PPPs and user-pays PPPs that require partial government funding are governed by Federal Legislative Act No 11.079/2004 and by the aforementioned – this covers the general rules.

Specific industries must observe the law of the corresponding sector:

• the telecommunications sector is governed by Federal Legislative Act No 9.472/1997;
• the electricity sector is governed by Federal Legislative Act No 9.427/1996;
• federal roads, federal railways and ocean and inland ferries are governed by Federal Legislative Act No 10.233/2001;
• natural gas is governed by state-level regulation;
• basic sanitation is governed by Federal Acts No 11.445/2007 and No 12.305/2010, even though these services fall under municipal responsibility; and
• urban mobility is governed by Federal Act No 12.587/2012.

It is important to remember that the general legislative acts regarding “concessions” and PPPs also apply to all industries regarding fundamental project agreement provisions.

Financing agreements in Brazil are typically governed by a combination of Brazilian law, including:

• the Civil Code;
• the Commercial Code; and
• specific financial regulations.

In the context of project finance, domestic law in Brazil typically governs matters such as:

• the creation and perfection of security interests;
• real estate transactions;
• permits and licences;
• regulatory compliance;
• land use and environmental regulations;
• taxation; and
• labour-related issues.

Additionally, contract law and dispute resolution procedures fall under domestic law, often subject to Brazilian courts or arbitration processes within the jurisdiction, and influenced by the legal framework and regulatory requirements of Brazil’s domestic legal system.