Project finance has been the preferred form of financing for infrastructure projects in Brazil. The Brazilian project finance market has remained active through recent economic and market fluctuations.
Over the last couple of decades, the vast majority of infrastructure projects have been funded by the government-owned Brazilian Development Bank (BNDES) and other public sector banks and related institutions. These include Banco do Brasil, Caixa Econômica Federal (CEF) and FINEP (which finances scientific research, technological development and innovation) as well as the regional development banks, particularly Banco do Nordeste, which is responsible for managing and implementing the Constitutional Fund for Financing the Northeast of Brazil. Many of these institutions went through a phase of government-mandated rapid growth.
BNDES and the regional development banks, particularly Banco do Nordeste, are wholesale banks, with no branches and limited footprint. As a result, they operate to a significant degree through a network of accredited financial institutions, with several commercial banks offering Brazilian Development Bank products. The financing operations are individually assessed and approved by the public banks, but the accredited private financial institutions assume the credit risk until the financial completion of the proposed projects, completely or in part.
At the end of 2017, in reaction to unprecedented questions over its scope in the Brazilian market, BNDES started to re-evaluate its long-standing role as one of the sole providers of funding for infrastructure projects in Brazil.
The main change promoted by BNDES was the way that its interest rate is formulated. BNDES created the new market-based rate (TLP) that will replace the long-term corporate lending rate (TJLP) as a benchmark for loans granted by the bank. By adopting this measure, BNDES is trying to reduce subsidised lending, apply stricter criteria for financing and achieve a steep increase in the benchmark interest rate it has long used.
By stepping aside, the Brazilian government is seeking to open the space for private capital to help stimulate investment, which is seen as key to paving the way for sustainable growth in the long term, and project developers will have to look for alternative sources for new projects. This is proving to be a new phase for Brazil’s long-term credit market.
The question that remains is how to create institutional and market conditions capable of attracting private capital.
Brazil has a large local institutional investors base, and the local debt capital markets and private sector banks have the potential (and demand) to fund long-term infrastructure projects. The Brazilian debt capital market is emerging as a promising new source for financing infrastructure projects. Infrastructure debentures (debentures with the tax incentive) have been widely used both as a complementary source of financing and, in certain cases, the source of funding for certain projects. During the last year, certain projects were financed exclusively through an infrastructure debentures offering, which are now comprising longer maturity dates (15, 18 or over 20 years).
The appetite of investors to such kind of papers is connected both with the more optimistic economic environment in the country and the continued reduction of official interest rates in the county to minimum historic levels. But the capital markets alone have not proved sufficient to attract the amounts of capital needed for large projects.
In addition, several sources of external debt financing are available to fund projects in Brazil, but currency risk has been a critical feature for foreign investments – infrastructure projects in Brazil are highly exposed to the value of the Brazilian real, as tariffs for most public utilities and services are denominated in local currency, and hedging contracts are usually limited to short-term transactions. Some infrastructure projects financed internationally in the country over the past decade encountered significant distress after currency fluctuations widened the gap between their reais-denominated revenues and dollar-denominated debt.
In order for such institutions to expand the participation in the Brazilian long-term lending market, certain challenges will have to be overcome.
The new approach of the Brazilian government presents challenges for future infrastructure projects in Brazil. But the hope is that the changes will encourage a deeper and more competitive project finance market.
Primary sponsors of infrastructure projects in Brazil have generally been domestic construction companies, foreign international infrastructure companies, service and equipment providers, and private equity funds.
Infrastructure projects in Brazil have been funded almost exclusively by BNDES and other public banks – including Banco do Brasil, Caixa Econômica Federal and FINEP as well as the regional development banks, particularly Banco do Nordeste – through project finance transactions.
Multilateral institutions, export credit agencies and institutional investors are also active in Brazil’s project finance market. Most commercial banks in Brazil operate on-lend BNDES/BNB credit lines or provide bank guarantees for such public banks, which normally cover all payment obligations of the borrower until the financial completion of the project (ie, covering construction risks, and physical and financial completion). Commercial banks have also focused on bridge loans and/or other short-term loans.
Debentures have been widely used as a complementary source of funds for infrastructure projects, in addition to traditional BNDES funding covering the largest portion of the project finance structure. During the last year, as an initial response to BNDES' new approach, certain projects were financed exclusively through an infrastructure debentures offering, which are now comprising longer maturity dates (15, 18 or over 20 years).
The overall regulatory system with respect to infrastructure in Brazil is based on the Constitution and several Brazilian laws and regulations, including the Concessions and PPP Laws. Each infrastructure sector (ie, energy, roads, rail, ports, airports, water) is regulated by specific laws. Public services in Brazil can only be undertaken by private parties using concessions, contracted through public auction. Exemptions are only accepted in specific situations (ie, authorisations). Each infrastructure sector has its own regulatory authority.
Public-private partnerships (PPP) were introduced into Brazilian federal legislation in 2004 through Federal Law 11,079/04 (the PPP Law) in order to enable the federal government and authorities from different levels to overcome infrastructure gaps countrywide. Formerly, infrastructure projects were implemented through public concession, regulated by Federal Law 8,987/95 and Federal Law 9,074/95, applicable to the provision of public services.
The PPP Law sets forth general provisions for public-private partnerships and created two additional forms of concession: sponsored concession and administrative concession, both designated public-private partnerships. A sponsored concession is the concession of public services or public works, as provided by Law 8,987/95, with a financial contribution from the grantor authority to the private party (concessionaire) in addition to tariffs charged to the final users. An administrative concession involves the supply of services of which the government is either the direct or indirect user. Since there is no service provided to the final user, administrative concession does not encompass tariff revenues, but only a financial contribution from the grantor authority.
Due to the compensation paid by the grantor authority, public-private partnerships are suitable for projects that are not financially sustained by the project's own revenues alone, expanding the horizons of concessions’ usage and making them attractive to private investors.
Despite the large usage of public-private partnerships, the PPP Law sets forth restrictions related to the project value, contract term and object. PPP are allowed only for projects with a contract value of at least BRL10 million, a minimum term of five years and a maximum term of 35 years.
In the context of the financial crisis that has been impacting Brazil in recent years, the country needs fresh infrastructure investments in order to overcome its recession. Public-private partnerships and concessions are therefore playing a relevant role. One of the measures adopted by the Brazilian government to increase and strengthen the role of the private sector in infrastructure projects is the creation of the Brazilian investment partnership programme (programa de parcerias de investimentos, or PPI), introduced by means of Law 13,334/16. The PPI’s purposes include increasing investment opportunities, creating jobs and stimulating technological and industrial development in line with the country's social and economic development goals, in order to put Brazil back on the development track.
To this end, the PPI has created a centralised monitoring mechanism, facilitating the transparency and planning of infrastructure projects. With the aim of attracting more investors (specifically foreign players), the PPI has also implemented innovations in the bidding process, such as the following:
It is clear that the Brazilian government is aware that public-private partnerships and infrastructure projects have to help the country to recover economically and definitively lift it out of recession, and it is adopting different measures to promote public-private partnerships and the infrastructure sector.
To a certain degree, the strength of the sponsor and the extent of existing commercial relationships with such a sponsor may dictate the ability of a project to raise funds and influence the relevant financing terms, although a detailed risk analysis will also be relevant.
Some of the topics and issues that would need to be considered in arriving at the optimal structure and risk allocation for projects in Brazil – in addition to the typical risks of an international project finance transaction, including construction risk, operational risk and offtake risk, and third parties – include delays caused by failure to obtain authorisations, licences and permissions from public authorities; compliance issues; labour liabilities; civil, tax and pension liabilities; civil, administrative and criminal liability for environment damages; changes to the service specifications imposed by public authorities; operational restrictions caused by a decision or omission of the public entities; creation or extinction of project tariffs; and changes in tax legislation that impact on the costs of works, operation and maintenance.
Financing structures commonly used in project finance transactions in Brazil include commercial lending facilities, multilateral lending facilities and capital market offerings for purposes of funding energy or infrastructure projects.
A common credit instrument used by special purpose vehicles to raise capital is known as a Bank Credit Note (Cédula de Crédito Bancário, or CCB). A CCB is a long-form credit note that allows the debtor to specify in the document the terms and conditions agreed upon with the lender, similarly to promissory notes in most common law jurisdictions.
The use of shareholder capital as a source of funding is common in Brazil, including in situations where, for example, equity investors might be required to ensure the maintenance of certain ratios under the terms of a project financing or in the case of cost overrun. Financing in Brazil is not provided on a limited recourse basis, which means that it is usual for lenders to require a parent guarantee or contingent equity and/or some form of completion guarantees from the sponsors, at least until the completion of the project. Shareholders may consider extending shareholder loans or subscribing for shares. A shareholder loan will have to be subordinated to the external financiers.
Brazilian development banks negotiate with the client on the terms of financing, entering into a direct Credit Agreement with them, but they usually require a bank guarantee to be provided by a network of accredited financial institutions to cover the risks of payment during the construction, commissioning and ramp-up (the period required to reach long-term average availability or usage).
The Credit Agreements contain the usual provisions relating to representations, covenants and events of default to cover the project, project documents and related matters. The Credit Agreements typically provide for scheduled amortisation of principal by instalments for cash flow reasons, beginning after a grace period (construction period). The payment of interest will be capitalised during this time.
To the extent a capital structure will consist of a mix of public banks loans (backed by guarantees from commercial banks), infrastructure debentures offerings and shareholder capital, special attention will need to be paid to how these instruments interact.
The security package in project finance transactions in Brazil will normally include at least share security over the borrower, collection and collateral accounts through which revenues are to pass in accordance with a payment waterfall, borrower assets, including concession agreements, and insurances.
Under Brazilian law, security arrangements are usually created by a pledge, a fiduciary sale/assignment or a mortgage. A pledge consists of the delivery of transferable movable assets by a debtor to its creditor. A fiduciary sale/assignment is a type of security interest pursuant to which the ownership of the underlying asset is transferred to the creditor, while the direct possession remains with the guarantor, being liable for duties of the bailee in relation to the asset. A mortgage is a security created over any real estate property and must be executed in a public deed.
Security agreements and deeds of mortgages are formal documents that must comply with certain requirements: (i) be in writing; (ii) be executed by both the creditor and debtor and attested by two witnesses; (iii) contain the main financial terms and conditions of the obligation being secured (amount, repayment dates, maturity and interest rate of the underlying obligation); and (iv) contain a detailed description of the collateral.
Brazilian security agreements need to be registered either with (i) the Registry of Deeds and Documents or (ii) the Real Estate Registry. Mortgages/fiduciary sale/assignment of real property and some specific types of pledge are registered with the Real Estate Registry, while all other types of collateral are registered with the Register of Deeds and Documents. Other registrations may be required depending on the type of assets being granted as security, such as shares.
As a general rule, under Brazilian law, each asset granted as security must be duly individualised in the relevant security agreement. In this sense, the floating charge concept is not generally accepted in this jurisdiction.
However, there are mechanisms recognised by the Brazilian regulation that can be used in order to achieve the effect of a floating charge. For example, if a company intends to grant as collateral all its future receivables derived from commercial agreements or new equipment, it is possible to establish in the security agreement periodic amendments related to the section that individualises the assets (commercial agreements, equipment, etc), thereby adding new assets acquired since the last amendment.
As an exception to the general rule, the Brazilian Corporation Law (Law 6,404/76) expressly authorises the creation of a floating charge by Brazilian companies in connection with the issuance of debentures. In this case, a floating charge ensures the debenture holders a general privilege over the assets of the company, although such charge does not prevent the negation of the assets by the company. If the debentures guaranteed with a floating charge are issued abroad, a previous authorisation from the central bank of Brazil is required.
The registration fees in Brazil are charged by the Real Estate Registry or Registry of Deeds and Documents based on a percentage of the amount being secured by the assets, limited to a cap. The fees for registering real estate security are based on a state fee table (so will depend on the location in which the security agreement must be registered). The registration fee for registering a financing agreement is also based on a state fee table.
Each asset needs to be duly individualised in the relevant security agreement.
Generally, there are no restrictions in connection with the granting of security or guarantees. Please note the previous comments on the main aspects relating to the creation of a security interest over assets.
Before entering into the relevant security agreement, lenders usually carry out due diligence on the company and on the assets that are being granted as security. This due diligence comprises the search of the appropriate registry of deeds and documents (or with the appropriate real estate registry, as the case may be) for liens.
The release of guarantees depends on the type of assets that were granted as security and the form of the original security agreement. As a general rule, a simple release letter executed by the creditor/lender should suffice, with subsequent registration of such letter with the registry in which the original security agreement was filed.
A secured lender can enforce its collateral in the event of partial or total default. The conditions for enforcement of collateral are defined in the agreement. Usually alternatives to an extrajudicial negotiation between the creditor and the debtor are exhausted before the creditor enforces its collateral.
Under the Brazilian Code of Civil Procedure, a creditor may make use of a general collection lawsuit to enforce collateral and/or guarantees whenever their claims are based on an instrument for a certain, liquid and payable obligation. This instrument may be judicial (eg, a final court decision in a lawsuit) or extrajudicial. The Brazilian Code of Civil Procedure expressly acknowledges as enforceable instruments, for instance, bills of exchange; promissory notes; invoices; bonds; contracts guaranteed by a mortgage, pledge, antichresis or other security interest; as well as any private document executed by the debtor and by two witnesses that provides a certain, liquid and payable obligation.
A creditor that has a fiduciary guarantee shall use either judicial or out-of-court actions to receive the assigned credits and exercise other rights granted to it under the loan for the sale of the real estate. In this case, it is important to note that Law 9,514/1997 provides the methods and out-of-court procedures for this specific type of guarantee as the following:
It is important to note that if the real estate is sold, the creditor will discharge the debtor of any remaining amount.
In a company shares pledge, enforcement of the claim requires the filing of a lawsuit to execute the claim and the guarantee previously granted (by means of the adjudication of the grantor or the sale of the asset given as collateral to a third party). In this case, the proceeds of the sale apply in the satisfaction of the debt.
The effective adjudication or sale in court of the company shares must comply with the agreement of shareholders or partners of the issuing company, as well as the provisions of the Brazilian Code of Civil Procedure, which requires that other shareholders have the pre-emptive right to acquire the equity interest in question and, failing this, protects the company's interest in acquiring its own shares or quotas or liquidating them.
If the proceeds obtained by the sale or liquidation of the equity interest are higher than the amount of the debt, the remaining amount must be returned to the debtor. On the other hand, the debtor will remain responsible for the payment of the amount charged by the creditor, which means that the enforcement lawsuit will continue.
It is important to note that there are limited circumstances in which the lender may keep the collateral as payment, in particular:
Also, the pledging creditor may proceed with the extrajudicial sale if this is contractually permitted or has been previously and irreversibly authorised, by proxy, by the debtor.
The same procedure will occur in a mortgage enforcement scenario.
Lastly, under the Brazilian Code of Civil Procedure, it should be noted that in a judicial procedure, the unsuccessful party may pay the winner’s legal fees, which will be set by the judge at between 10% and 20% of the amount at stake in the lawsuit.
Brazilian law recognises the autonomy of parties in their choice of the law applicable to an international contract. Under the Brazilian Code of Civil Procedure, Brazilian courts do not have jurisdiction to preside over actions when, in an international agreement, the parties agree on an exclusive foreign jurisdiction, and this argument is raised by the defendant in the defence.
Also, Article 9 of the Law of Introduction to the Norms of Brazilian Law provides that the law of the country in which the obligations are established shall apply in order to qualify and govern such obligations.
By the same token, Law 9,307/1996 (the Arbitration Act) promotes the autonomy of parties, whether in domestic or international contracts, to choose the applicable law in the arbitration agreement. According to the Arbitration Act, parties may even determine the general principles of law or customs to be applied in their relationship. It is important to note, however, that such choice of law or general principles shall not undermine public order.
The clear right of parties to choose the law applicable to a contract represents Brazilian law's alignment with the law in force in several countries. This has positive consequences for international legal and commercial relationships.
Lastly, it is important to note that, as a practical matter, Brazilian courts do not easily apply foreign laws in judicial proceedings. The practice is, rather, more commonly seen in arbitration proceedings in respect of the presentation of legal opinions regarding the interpretation of material law.
A foreign decision is only enforceable in Brazil after the ratification or the granting of exequatur to the rogatory letters, or the recognition of a foreign judgment by the Brazilian Superior Court of Justice, unless otherwise provided by law or treaty. The ratification or the exequatur or the recognition of a foreign judgment by the Brazilian Superior Court of Justice is strictly limited to the analysis of formal requirements. Issues relating to the merits of the case shall not be reviewed by the Brazilian Superior Court of Justice.
Hence, Article 17 of the Law of Introduction to the Norms of Brazilian Law provides a limit that must be observed by the Brazilian Superior Court of Justice: “The laws, acts and judgments of another country, as well as any declarations of will, will not be effective in Brazil when they offend national sovereignty, public order and morality.”
In addition, it is important to note that, as set forth in Article 963 of the Brazilian Code of Civil Procedure Law, the following are indispensable requirements for the ratification of a decision:
Furthermore, it is important to note that only the Brazilian judicial authority is competent to hear actions relating to real estate situated in Brazil (as set forth in Article 23, Item I of the Brazilian Code of Civil Procedure and Article 12, first paragraph of the Law of Introduction to the Norms of Brazilian Law). However, any decision of a foreign judge relating to real estate located in Brazil, despite its lack of competence to do so, in no way implies offence to the authority of the Brazilian judicial branch, or any harm to national sovereignty.
Finally, Article 15 of the Law of Introduction to the Norms of Brazilian Law and Article 5 of Resolution 9 of the Brazilian Superior Court of Justice state that for any foreign decision to be enforceable:
It should be noted that the decision must in any case be notarised, but if its legalisation takes place in any of the signatory countries of the Hague Convention (allowing for the mutual recognition of Brazilian documents abroad and foreign documents in Brazil), such decision does not need to be consularised – the apostille is enough to accomplish the necessary formality.
Under the Arbitration Act (Law 9,306/1996), a foreign arbitral award shall be recognised or enforced in Brazil in accordance with international treaties effective in domestic law, in particular the New York Convention. Such a decision must be confirmed by the Brazilian Superior Court of Justice.
The recognition or execution of a foreign arbitral award can be denied by the Brazilian Superior Court of Justice when the defendant proves that:
The recognition of a foreign arbitral award will also be denied if the Brazilian Superior Court of Justice finds that:
It is for the Brazilian Judicial Authority, to the exclusion of all others, to hear cases related to real estate located in Brazil. In the case of a mortgage (a temporary, conditional pledge of property to a creditor as security for repayment of a loan) given in a foreign loan, the foreign lender is necessarily tied to Brazilian jurisdiction in order to enforce its collateral.
Attention should be paid to the fact that a lawsuit filed before a foreign court does not operate lis pendens, and that the filing of such a suit does not prevent Brazilian courts from hearing the same action or those related to it, unless there are provisions to the contrary in international treaties and bilateral agreements in effect in Brazil.
Lastly, enforcement might generally be impacted by insolvency, bankruptcy, liquidation and other laws of general application relating to or affecting the rights of creditors under a loan or security agreement.
Under the current foreign exchange regulation in force in Brazil, individuals or legal entities resident in Brazil are allowed to enter into loan agreements with foreign lenders (individuals or legal entities, related or unrelated, financial institutions or not) whereby the Brazilian resident agrees to borrow a certain amount of money from the foreign lender, and the foreign lender agrees to lend this amount of money to the Brazilian resident. In addition, most of the terms and conditions of the loan agreements (such as fees, commissions, interest rate, default rate, security, covenants, events of default and collateral) may be freely negotiated between the parties.
Under Brazilian regulations, the granting of guarantees by Brazilian companies in favour of foreign companies/lenders does not require any special approval by the Brazilian regulatory authorities. However, to enable the remittance of amounts abroad (ie, conversion into foreign currency of any amount of reais realised upon enforcement of a security), certain approvals may be required.
If Brazilian companies enter into loan agreements with foreign lenders as borrowers, then the main financial terms relating to the loans must be registered with the central bank of Brazil under the module of Registry of Financial Transactions (Módulo de Registro de Operações Financeiras, or ROF) of the central bank of Brazil's data system, and the funds must inflow into Brazil. This registration with the central bank of Brazil allows borrowers to make payments of principal, interest, cost, fees, expenses and commissions in relation to the loan.
Registration in the ROF shall be completed by the Brazilian borrower prior to disbursement of the loan, since this is a requirement for purposes of closing currency exchange contracts in connection with the inflow of funds into Brazil. After the inflow of funds, a schedule of payments related to the transaction must also be registered in the ROF. The registration of the financial transaction and of the relevant schedule of payments are necessary in order to enable the Brazilian borrower to remit abroad the funds related to payments under the loan agreements (eg, principal, interest, fees and commissions).
In addition, other registrations may be required depending on the type of investment in Brazil (eg, direct investment in Brazilian companies, investments in the Brazilian financial and capital markets).
As a general rule, foreign capital duly registered with the central bank of Brazil may be repatriated to its country of origin at any time without preliminary authorisation.
It is permissible for a project company to maintain offshore foreign currency accounts. Under the Brazilian foreign exchange regulations, Brazilian residents are allowed to maintain offshore accounts, provided that, if the assets and rights located abroad are of a value equal to or greater than USD100,000 (or its equivalent in other currencies), the holder must disclose such investments to the central bank of Brazil (declaração de capitais brasileiros no exterior) on an annual basis, in addition to the disclosure to the federal revenue authorities of any assets, rights and income earned abroad.
As a general rule, financing or project agreements do not need to be registered or filed with any government authority in order for them to be valid or enforceable.
It is notable, however, that specific concession agreements signed with certain public authorities may require the concessionaire to seek the prior approval of the granting authority for certain kinds of financing or project documents, and that such approval shall be obtained not as a condition for the validity or enforceability of the document, but to avoid penalties at the concession level.
Foreign agreements between parties (ie, financing agreements signed with foreign lenders and governed by non-Brazilian law) will be valid regardless of any registration in Brazil. In order to be admissible in evidence and enforceable in the Brazilian courts, however, some formalities are required:
For security agreements governed by Brazilian law, it is notable that the registration of the agreement with the appropriate Registry of Deeds and Documents is a condition for the creation of the security and is necessary to ensure the validity of the agreement against third parties and to ensure priority over the asset/right subject to the security in the case of bankruptcy of the debtor.
The ownership of land per se does not require any specific licence, but the exploration of natural resources does require different types of authorisations or concessions from public authorities.
Certain uses of water resources are subject to authorisation from official agencies: the National Water Agency (Agência Nacional de Águas, or ANA) for federal waters and state agencies for state waters, as outlined in Federal Law 9,433/97, Federal Decree 24,643/34 and specific state laws.
In relation to mineral resources, according to the Federal Constitution of Brazil, mineral reserves are segregated from the surface area and belong to the federal government. Therefore, the federal government is competent to legislate on mineral resources, deposits, mines and rules for the commercial exploration of such resources in Brazilian territory.
Research and exploration of mining resources may only be carried out by Brazilian nationals or legal entities incorporated, headquartered and managed in Brazil. In other words, a foreign company would not be able to research, exploit and/or explore Brazilian mineral reserves directly from abroad. However, Brazilian law no longer differentiates a company headquartered in Brazil by the nationality of its shareholders. Companies with shareholders who are Brazilian nationals or legal entities are to be treated on an equal basis to those whose shares are held by foreigners. There are, then, no restrictions whatsoever regarding the holding of the capital stock of Brazilian companies acting in mineral research and exploration by foreign individuals or legal entities. A Brazilian company whose capital stock is 100% held by foreign entities or individuals could act in the research and exploration of minerals without any restrictions.
The ownership and use of rural lands by foreign investors is subject to some restrictions, which may impact the implementation of rural infrastructure projects by companies controlled by foreign entities. Federal Law 5,709/1971 imposes certain limitations on the acquisition of rural properties by foreigners. Pursuant to Article 1, §1, such limitations are also applicable to Brazilian companies whose shareholders, individuals or legal entities, residing or established abroad, hold the majority of the capital stock.
The Brazilian Constitution of 1988 eliminated the differences between legal entities with domestic capital and legal entities with foreign capital, so that a company organised in Brazil with a head office and principal place of business in Brazil is deemed a Brazilian company, regardless of the nationality of its shareholders. Opinion AGU/LA-04/94, issued by the Federal General Attorney, supported such an understanding, and therefore no limitations were imposed by Law 5,709/1971. A couple of years later, another opinion (Opinion AGU GQ-181/1997) was issued by the Federal General Attorney, which confirmed that the above-mentioned restriction on foreign companies was not supported by the Brazilian Constitution of 1988. Notwithstanding this, on 23 August 2010, the Federal General Attorney issued Opinion LA-01, which approved Opinion AGU 01/08, changing the prior consolidated position again and setting forth that Law 5,709/1971 should be applicable to Brazilian companies controlled by foreigners. In addition, Opinion LA-01 stated that the concept of "majority of corporate capital" must be interpreted according to the broader concept of "corporate control" set forth in the Brazilian Corporations Law.
In summary, Opinion LA-01 considered that the restrictions on acquisition of rural lands by Brazilian companies controlled by foreign entities, set forth by Law 5,709/1971 and its regulation (Decree 74,965/1974), are still valid. It determined that Brazilian companies controlled by foreigners (either natural or legal) are restricted from:
Accordingly, INCRA Normative Instruction 76, dated 23 August 2013, regulated the acquisition and lease of rural lands by foreigners in accordance with Opinion LA-01.
In this context, Brazilian companies controlled by foreign entities are now subject to the following restrictions:
Brazilian law does not recognise the concept of a security trust. It does, however, recognise the concept of an agency relationship, by means of which a collateral agent may hold the benefit of the security on behalf of and for the benefit of the lender.
Formal collateral agents are normally used in Brazil, or all lenders are formally included as secured parties and security holders in Brazilian law security agreements. The rules for enforcement (ie, appointment of a leader among the creditors or the appointment of common advisers and the joint discussion of enforcement strategies) are regulated in intercreditor agreements.
The creation of a security (in rem guarantee) over a certain asset or right gives priority to the holder of such security and protection against potential claims or enforcement actions from other creditors in general that may affect the asset or right subject to the existing lien.
Legal priority and subordination are expressly recognised in the sense that security may be granted in different degrees to different creditors. This is true in the case of the pledge (penhor) and the mortgage (hipoteca). In accordance with Brazilian law, the first creditor to be granted a pledge or mortgage over a certain asset or right will be considered a first-priority creditor holding a first-degree security. Creditors that receive security over the same asset or right after the perfection of the first-degree security (subject to any negative pledge provisions that may be contractually agreed upon by the holder of the first-degree security and the security provider) will be considered as second-priority, third-priority creditors holding second-degree, third-degree security, etc.
Upon the release of most senior degrees of security, other security over the same asset or right will be automatically elevated to the immediately preceding degree (ie, on release of the first-degree pledge, the second-degree pledge will automatically be considered as a first-degree security).
The enforcement of security over an asset or right subject to different degrees of security depends on the holder of the first-degree security. If the first-priority creditor decides to enforce the security, the holders of subordinated degrees will only keep security over any remaining portion of the assets/rights after the enforcement and satisfaction of the senior debt or any amounts resulting from the enforcement and collection process that are in excess of the total amount of the outstanding senior debt.
The priority and degree of any pledge or mortgage will survive the insolvency or liquidation of the borrower.
In the case of fiduciary security in which different degrees are not allowed by law, exclusive priority will be given to the holder of security created first. If multiple creditors are granted the same fiduciary security at the same time (ie, in the case of syndicated loans), each will have the same priority over the security, pari passu. The terms, conditions and rules for the maintenance and eventual enforcement of the security, the use of proceeds resulting from enforcement and collection, and any kind of priority or subordination may be contractually agreed by creditors. In this case, contractual subordination will be valid among the creditors only, and before courts all of the creditors will be in pari passu conditions.
In general terms, public concessions or the right to render and explore a public service are only granted to companies incorporated in Brazil.
Although the participation of foreign companies in public auctions and bidding processes is allowed (and very common, especially in the case of foreign companies participating in consortia with other local or foreign companies), in practical terms the bidding announcements and specific rules of the different public agencies normally demand the incorporation of a local company organised in accordance with the laws of Brazil (a special purpose vehicle, or SPV) as a condition for the execution of the concession agreement or granting of the relevant permission or authorisation. In the case of PPP projects in accordance with Law 11,079/2004, the incorporation of the local SPV is mandatory.
Corporate entities incorporated and existing in accordance with the laws of Brazil are essentially regulated by the Brazilian Civil Code and by the Brazilian Corporation Law. There are several types of corporate entities guided by these laws, and the most widely used in Brazil are:
Project companies are normally incorporated as corporations (SAs), both because this is the type normally required by the bidding rules or regulations issued by the public agencies from the different infrastructure sectors and due to the fact that SAs can have more professional management (ie, board of directors, board of offices) and are allowed to issue securities in the market, an advantage in the process of raising funding for the implementation of a project.
As set forth in Article 48 of the Brazilian Bankruptcy Law, a judicial reorganisation proceeding may be requested by any debtor who, at the time of the petition, has been doing business regularly for over two years and meets all of the following requirements:
With the filing of the judicial reorganisation petition (as set forth in Article 51 of the BBL) it is mandatory to include the following.
If the above conditions and the documentation required are in accordance with the BBL, the judge shall authorise the processing of the judicial reorganisation proceeding and, by the same act, shall appoint the judicial administrator and order an immediate stay of actions and executions filed against the debtor for a 180-day period (stay period), among others.
The debtor has 60 days, counted from the above processing decision, to file its judicial reorganisation plan. The following, among others, are means of judicial reorganisation:
During the judicial reorganisation proceeding, the debtor may continue to conduct its corporate activities, under the supervision of the judicial administrator, but the debtor cannot dispose of or restrict any items or rights of their permanent assets without judicial authorisation.
It is important to note that the BBL orders the publication (in the official gazette and in a widely circulated newspaper) of the processing decision, the debtor’s list of creditors, the judicial administrator's list of creditors and of the judicial reorganisation plan itself, in order to reach the collectivity of creditors.
If any creditor files a motion against the plan, a general meeting of creditors will take place. During such a general meeting of creditors, the creditors can negotiate with the debtor and the debtor can make amendments to the reorganisation plan.
If the reorganisation plan is approved, the judge may order the judicial reorganisation of the debtor. The judicial reorganisation plan entails novation of pre-petition claims. On the other hand, if the reorganisation plan is rejected, the judge orders liquidation.
Out-of-court reorganisation is also possible, whereby a debtor that meets the above requirements of judicial reorganisation may propose and negotiate an out-of-court reorganisation plan with creditors. The debtor may file for court ratification of the out-of-court reorganisation plan, attaching its reasons and a document stating terms and conditions, signed by the creditors.
The debtor may further file for ratification of an out-of-court reorganisation plan that binds all creditors encompassed therein, provided it is signed by creditors representing over three fifths of all claims of each kind encompassed therein. In this case, in addition to the documents provided for the regular out-of-court reorganisation, the debtor must attach:
After receipt of the petition for ratification of the out-of-court reorganisation plan, the judge shall order the publication of a notice in the official press and in a widely circulated newspaper, or in the localities of the debtor’s headquarters and branches, calling all creditors of the debtor to file their oppositions to the out-of-court reorganisation plan. Creditors shall have 30 days from publication of the notice to challenge the out-of-court reorganisation plan.
This kind of reorganisation does not apply to holders of tax or labour-related claims or occupational accident claims, or to those whose credits are not submitted to the effects of the judicial reorganisation proceeding (creditors holding the position of fiduciary owner of real or personal property, financial lessor, owner or committed seller of real estate whose respective agreements include an irrevocability or irreversibility clause, including under real estate developments, or an owner under a sale agreement with title retention, whose claim shall not be subject to the effects of the judicial reorganisation, and the ownership rights over the item and the agreement terms shall prevail with due regard for the respective law).
The out-of-court reorganisation plan shall not contemplate accelerated payment of debts or unfavourable treatment of creditors not subject to the out-of-court reorganisation plan, and the debtor shall not file for ratification of an out-of-court reorganisation plan if a petition for a judicial reorganisation proceeding is pending or if he or she has obtained judicial reorganisation or ratification of another out of-court reorganisation plan within the last two years.
Finally, it is important to note that the petition for ratification of the out-of-court reorganisation plan shall not entail the suspension of rights, actions or executions, or the impossibility of the petition for decree of liquidation by creditors not subject to the out-of-court reorganisation plan (as set forth in Article 161, paragraph 4 of the BBL).
Under Article 49 of the BBL, all claims existing on the date of the filing are subject to the effects of a judicial reorganisation proceeding, even if not yet due. A lender’s right to enforce its loan and/or any security during the stay period is suspended.
In the case of a creditor holding the position of fiduciary owner of real or personal property, financial lessor, owner or committed seller of real estate whose respective agreements include an irrevocability or irreversibility clause (including under real estate developments), or of an owner under a sale agreement with title retention, said owner's claim shall not be subject to the effects of the judicial reorganisation, and the ownership rights over the item and the agreement terms shall prevail, with due regard for the respective law. However, during the stay period, it shall not be permitted to sell or remove from the debtor’s establishment any capital goods essential to the debtor’s business.
It is important to note that upon the disposal in the reorganisation plan of an asset in rem guarantee, suppression or replacement of the guarantee shall only be permitted with the express approval of the creditor holding the respective guarantee (set forth in Article 50, paragraph 1 of the BBL). This is also true if the reorganisation plan entails novation of pre-petition claims, binding the debtor and all the creditors subject to the reorganisation plan number, without prejudice to the guarantees and with due regard for the provisions of Article 50, paragraph 1 of the BBL.
In a liquidation case, upon declaration of the liquidation, ongoing lawsuits against the debtor are suspended. Creditors may not initiate new claims and may not continue pending lawsuits.
After the decree of liquidation, only the judicial administrator may represent the debtor. The judicial administrator may not negotiate with the creditors to reduce outstanding debt or the order of payments.
Lastly, any assets of the debtor that were given as collateral under a fiduciary assignment are not considered part of the liquidation estate (that is, the creditor may enforce the collateral normally).
The judicial reorganisation proceeding does not provide an order of payment. The only kind of claim for which the BBL provides an express rule is the labour-related claim, as provided in Article 54 of the BBL: “the judicial reorganisation plan shall not provide for a term of more than one year for payment of labour-related claims or occupational accident claims fallen due by the date of the judicial reorganisation petition.”
Regarding the liquidation proceeding, the BBL provides the following order (Articles 84 and 83, in this order).
If the borrower, security provider or guarantor were to become insolvent, the main risk for lenders is that the claims existing on the date of the petition become subject to judicial reorganisation. If this happens, the lender’s right to enforce its loan and/or any security is suspended during the stay period, and it will receive its credit within the collective insolvency proceedings.
Furthermore, all debts will be converted into reais at the exchange rate applicable on the date of the decision to declare the bankruptcy of the debtor, and in the case of insufficiency of the collateral, the outstanding amounts will be deemed unsecured claims.
The BBL does not apply to government-owned entities, mixed-capital companies, public or private financial institutions, credit unions, consortia, complementary pension fund entities, healthcare plan companies, insurance companies, special-savings companies and other organisations held by law to be equivalent to these (in Article 2 of the BBL).
Law 6,024/1974 provides financial institutions with the option of extrajudicial liquidation proceedings. Law 9,656/1998 provides healthcare plan companies with the same option. Insurance companies are regulated by SUSEP (the regulatory agency) and this entity has the prerogative to decree and carry out the liquidation of an insurance company (Decree-law 73/1966).
In general terms, there are no specific restrictions, controls, fees and/or taxes on insurance policies over project assets, and such insurance is regulated by the same general rules regulating the insurance industry in the country.
Notwithstanding this, there are certain restrictions regarding contracting insurance policies from foreign insurance companies. Complementary Law 126 of 2007 and CNSP Resolution 197 of 2008 ("Resolution 197") of the National Council of Private Insurance list the situations where individuals or legal entities in Brazil are allowed to contract insurance policies from foreign insurance companies. Among the allowed options are coverage of foreign risks and risk coverage for which there is no local alternative (Resolution 197, Part I of Article 6).
The absence of coverage in Brazil, according to Resolution 197, is evidenced by the refusal to cover the risk, obtained through consultations with the Brazilian insurance companies operating in the insurance sector appropriate to the risk, or by a negative letter issued by a union or trade association of insurance companies.
SUSEP’s Circular 392/2009 of the Superintendent of Private Insurance Superintendency, among other things, sets forth the operational procedure to be followed to provide evidence of absence of local coverage by Brazilian insurers. According to this Circular, SUSEP may at any time require the insured party, or the insurance broker who contracted a foreign insurance policy, to present the following documents:
If there are not ten insurers in Brazil operating in the specific insurance sector, all local insurers operating in that insurance sector should have been consulted.
Payments under insurance contracts covering project assets may be paid to foreign creditors both in the case that such creditors are directly included as additional beneficiaries of the insurance, and in the case of enforcement of security over credit rights under insurance contracts.
The remittance of funds from Brazilian insurance companies to foreign creditors must follow the Brazilian central bank's requirements for any remittance of funds from the country, including the economic grounds of such remittance in order to evidence the legality of the transaction.
Payments of principal are not subject to withholding taxation in Brazil. Interest and any other income treated by Brazilian law as similar to interest payable by a Brazilian borrower to a non-resident lender in respect of loans are currently subject to withholding income tax (imposto de renda na fonte, or IRRF) at a rate of 15% or 25% (when the beneficiary is domiciled in a favourable tax jurisdiction) or at a lower rate if this is provided for in any applicable tax treaty between Brazil and the country of the beneficiary.
Pursuant to Section 24 of Law 9,430 (enacted on 27 December 1996), as amended by Law 11,727 (enacted on 23 June 2008), the definition of favourable tax jurisdictions includes countries and locations that do not impose any tax on income, that impose such tax at a maximum rate of less than 20%, or that have laws restricting disclosure of the owners of securities or not allowing for the identification of the beneficial owner of income attributed to non-residents. The list of favourable tax jurisdictions is set forth by Normative Instruction 1,037, enacted on 7 June 2010.
Normative Instruction 1,037 also provides a list of the so-called privileged tax regimes. Even though a loan from a person benefiting from a privileged tax regime does not trigger the application of the IRRF, it does subject the transaction to transfer pricing rules, thin capitalisation and other cross-border interest deductibility rules.
Pursuant to Decree 6,306 of 14 December 2007, the conversion of foreign currency into reais and the conversion of reais into foreign currency are subject to the Imposto sobre Operações Financeiras (IOF)/exchange tax. Currently, the IOF/exchange tax rate is 0.38% for most transfers of foreign currency into reais. According to Decree 6,306, the settlement of exchange transactions in connection with loans obtained by Brazilian companies, for both inflow and outflow of proceeds to and from Brazil, including foreign loans with an average term exceeding 180 days, is subject to IOF/exchange tax at a 0% rate. The rate is 6% on the inflow of funds to Brazil in connection with foreign loans with an average term not exceeding 180 days (foreign loans with an average term of more than 180 days that are partially or fully settled before this term are subject to IOF/exchange tax at the mentioned 6% rate, plus penalties and interest). The Brazilian government may increase the current IOF/exchange tax rate at any time, up to a maximum rate of 25%. Any such new rate would only apply to future foreign exchange transactions.
The amount of interest payable under loan agreements may be limited to the interest rate established by Decree 22,626/1933 (the Usury Law). The application of the Usury Law is fairly controversial within the Brazilian courts, but the prevailing interpretation of the Usury Law adopted by the Brazilian courts is the one that establishes that loan agreements entered into by and between non-financial entities are subject to a limit of 1% in interest per month (ie, 12% in interest per year), plus monetary adjustment of the principal amount due.
In addition, loans obtained by Brazilian companies from related parties resident overseas are subject to transfer pricing rules that limit the amount of the interest expense. Such rules also apply to international transactions carried out with individuals or companies, whether related or not, located in favourable tax jurisdictions and benefiting from privileged tax regimes.
Brazilian transfer pricing rules diverge from the OECD transfer pricing guidelines. Instead of adopting the arm’s-length principle, the transfer pricing methods are driven by predetermined profit margins. Brazil has developed an objective method based on predetermined profit margins that allows the taxpayer to mathematically determine and prove its pricing benchmark without having to go through a search for comparables.
Project agreements (construction, operation and maintenance, supply, take-off, etc) are usually governed by Brazilian laws, as such documents regulate the rendering of services in Brazil, payments in the country and in local currency. There are exceptions; for example, when one of the contracting parties is located abroad or if the scope of the agreement involves any kind of importation of goods or services.
Financing agreements signed by and between Brazilian borrowers and Brazilian creditors are governed by Brazilian law. Financing agreements signed by and between Brazilian borrowers (ie, the concessionaire and/or project company) and foreign creditors are usually governed by foreign laws (typically, US or English law, or the laws of the place of incorporation of the foreign lender). Any payment guarantees (corporate guarantees from sponsors, for example) associated with international loan agreements may also be governed by non-Brazilian law, typically the same governing law of the loan agreement or the laws of the place of incorporation of the guarantee provider.
Security documents shall be governed by Brazilian law since the assets and/or rights subject to the security are located in Brazil and/or the security provider (ie, the project company) is incorporated in Brazil.
As mentioned above, mortgages over real estate located in Brazil must be governed by Brazilian law. Pledge agreements must be governed by the laws of the country of the person/entity in possession of the assets. Accordingly, if the pledged assets are in possession of the project company (a Brazilian company), the relevant agreement must be governed by Brazilian law.
As mentioned in 9.1 Project Agreements, in Brazil it is typical to have all the main project documents and financing agreements governed by Brazilian law. Since local financial institutions are still the main players in project finance transactions (including BNDES and private banks), most of the financing transactions closed in the country over the last years have been purely domestic.
In the case of the participation of foreign lenders, international suppliers or construction companies, it is legally possible to have the main financing documents and project documents governed by non-Brazilian law.
The expansion of mass consumption demands a permanent effort to maintain, modernise and increase the infrastructure of a nation. In the case of Brazil, infrastructure bottlenecks have been dramatised by a decade of economic growth that has increased the demand for services, in a country with a moving frontier and a new population entering into the middle class.
When compared to other BRICs, Brazil has a low investment rate in infrastructure – an average of 2.25% of the GDP for the last two decades. This is usually explained by a low level of domestic savings, fiscal problems in the public sector and few options for long-term financing.
The Brazilian Development Bank (BNDES) has been the main source of financing for infrastructure projects in Brazil. Due to the Brazilian fiscal crisis and a more liberal agenda, BNDES is moving to a market interest rate and reducing its presence. As a result, sponsors have been looking at other sources of financing for infrastructure projects, mainly though the debt capital markets, multilaterals and export credit agencies.
In 2018 and early 2019, there have been projects raising 100% of their funding needs through debentures issued in the local capital markets, with IDB Invest providing BRL loans and issuing guarantees to debentures, and BRL bonds issued in the international capital markets backed by export credit agencies. 2018 and early 2019 saw many “first-of-its-kind” financing structures.
In parallel, other government-owned entities (agencies or regional development banks) have increased their participation in financing projects. The market expectation is that the share of financing granted by development banks, commercial banks, capital markets, export credit agencies and receivables investment funds (FDIC) may increase in the next few years, bringing a major opportunity for the arrival of new players to the Brazilian project finance market.
As projects are moving from single-sourced to multi-sourced financings, many times with a major cross-border component, not only is deep knowledge of the local and international project finance standards required, but also the ability to navigate multiple cultures and bridge the gaps between the different parties involved in the transaction.
Since the mid-1990s, private companies have been allowed to operate public services in Brazil by means of concession, permission or administrative authorisations, and BNDES has been the main source of capital to fund infrastructure projects in Brazil, mainly due to its subsidised policy of interest rates.
As part of its efforts to reduce Brazilian fiscal deficits and redirect government subsidies, on 21 September 2017 the Brazilian Congress enacted Law No. 13,483 to confirm the replacement of the traditional BNDES subsidised interest rate (TJLP) by the Taxa de Longo Prazo (TLP) for loans granted by BNDES as of 1 January 2018. In 2018, the TLP was fixed at the same level of the TJLP and will gradually increase, from 2023 onwards, until it is calculated based on the Brazilian inflation rate (Índice de Preços ao Consumidor Amplo – IPCA) plus the yield on government bonds (Notas do Tesouro Nacional Série B – NTN-B).
TLP is expected to reach the interest rate on Brazilian government bonds in four years.
While the TLP may increase the cost of BNDES loans, it is expected that, broadly speaking, it will allow commercial banks and the capital markets to become more competitive and develop other sources of long-term financing.
Nonetheless, BNDES continues to play a major role in long-term financing in Brazil, although it has reduced disbursement estimates for the next few years. 2018 was the fifth consecutive year of decrease on disbursements, with only BRL69.3 billion being disbursed.
In view of the recent economic downturn that affected the financing ability of national development banks, the Brazilian government's efforts to recover investments in national infrastructure projects have been largely associated with the attraction of foreign capital.
One of the aspects that currently prevents foreign financing in Brazilian infrastructure projects is the foreign exchange risk to which infrastructure investors are exposed, considering that projects’ cash flows are denominated in BRL and adjusted by inflation.
Although long-term hedging could address the associated risk of currency mismatch, this is not available in Brazil, or is only available at prohibitive costs. The government is currently studying alternatives to protect infrastructure projects from such mismatch through tax incentives and regulatory authorisations. The expectation is that new policies on this matter will be enacted by the beginning of 2020.
Therefore, with the historical lack of regulation on currency mismatch, financing infrastructure projects in Brazil with foreign capital is still unusual. Nonetheless, the Brazilian government is focusing its efforts on replicating successful similar policies in other Latin American countries, and developing an alternative funding source for infrastructure projects. One possible alternative is the indexation of part of the tariffs paid by users of public services to a foreign currency or a basket of foreign currencies. The risk of a major devaluation of the Brazilian real, in this case, can be mitigated in the structuring of the financing conditions by means, for instance, of the stipulation of a grace period triggered by the currency devaluation event – considering that currency devaluation events are, as a rule, followed by macroeconomic adjustment policies.
Another possible measure is the adoption of a foreign currency indexation mechanism as part of the concessionaire’s revenues without transferring the risk to the users of the public service. In this case, the risk of foreign exchange variation (either positive or negative) is borne by the granting authority. Moreover, the Brazilian government can offer a long-term swap to investors, directly or by means of BNDES, in exchange for a percentage of remuneration. In this scenario, even in case of higher devaluation of the Brazilian realin relation to the US dollar, the existence of exchange reserves and the increase of tax collection could operate as a natural protecting mechanism for the Brazilian government. There would not be such a severe impact on the treasury, since project finance debts in infrastructure projects are partially amortised over long periods.
Non-recourse project finance
As mentioned, Brazil is yet to achieve non-recourse project finance for local projects. Infrastructure finance is usually guaranteed by corporate guarantees from sponsors until financial completion. Therefore, a creditor’s review of construction agreements and pre-operational issues is usually not extensive, and credit analysis for these risks is mostly based on sponsors.
Equity support agreements are also commonly used to guarantee contributions from sponsors in order to achieve completion. Some equity support agreements go beyond typical international practice and provide that sponsors must cover the amount of the debt.
Due to the influence of international sponsors and private equity players, there have been some discussions in recent years regarding the reduction of the amount of recourse against sponsors during the construction phase, which has led to an interesting debate about the optimal risk allocation among the parties involved in a project.
In the next months, the expectation is that international and private equity sponsors will continue to push for a more limited-recourse structure in Brazil. This will force lenders to be more creative and to identify, analyse and allocate project risks adequately.
Capital markets – green bonds
Along with the efforts to boost the capital and financial markets to replace the traditional sources of financing, Brazilian public and private entities are also motivated to allocate resources in low-carbon infrastructure projects in order to comply with the ambitious environmental commitments made under the Paris Agreements. Because of this strategy, BNDES issued a USD1 billion green bond to raise resources in the foreign market to fund eight wind power projects in Brazil.
Companies and commercial banks in Brazil are concerned about the Brazilian potential to develop the green agenda. National and foreign institutional investors representing a share of BRL1.8 trillion of assets in Brazil have signed the “Brazil Green Bonds Statement”, in which they commit to contribute to the development of the green bond market in Brazil. Since the first issuance in 2015, the Brazilian green bond market has reached USD5.13 billion and is ranked as the largest in Latin America and one of the largest in the world, with significant growth potential.
Bonds for infrastructure projects are also becoming more common, and may be subject to tax benefits for investors when the use of proceeds involves the construction of new works (greenfield or brownfield projects) and the project is within the requirements set out by the government for “priority infrastructure projects” (as per Brazilian Law No. 12,431 of June 27, 2011).
In addition, in 2018 BNDES and the InterAmerican Development Bank released a partnership to set up a BRL1.2 billion infrastructure credit fund, the idea of which is to foster investments in debt instruments in the sectors of transportation, energy, sanitation and social infrastructure, such as health and education.
Finally, the changes above by Brazilian policy makers in response to the current macroeconomic scenario are expected to further increase the share of capital markets and commercial banks in Brazilian project financing. Therefore, project finance in Brazil is expected to remain one of the main sources of funds, and there is no reason to believe that this will cease to be the case in the near future.