The majority of infrastructure projects in Brazil are sponsored by domestic construction companies, foreign international infrastructure companies, service- and equipment-providers, and private equity funds.
Historically, infrastructure projects in Brazil have been funded almost exclusively by the National Bank for Economic and Social Development (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.
Multi-lateral institutions, ECAs and institutional investors are also active in Brazil’s project finance market and their market share has been growing in the last years. Commercial banks and specialised investment funds are also important investors, mainly in debentures and other debt capital markets instruments normally used for financing infrastructure projects (both as main source of external fund or as a complementary source of funds together with credit lines from public banks), highlighting the continuous increase in the volume of infrastructure debentures deals, which exempt Brazilian individuals and foreign investors from income tax that would be due with respect to interest payments.
In addition, most commercial banks in Brazil operate on-lend BNDES credit lines (such as FINAME) or provide bank guarantees for those public banks providing long term loans for infrastructure projects, 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.
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 public-private partnership (PPP) laws.
Public services in Brazil may be rendered directly by the government (normally though government-owned companies) or private parties holding concessions for a specific service and tenor, always contracted through public auction. Exemptions are only accepted in specific situations (ie, authorisations or permissions granted to private entities which fulfilled all conditions set forth by law).
Each infrastructure sector (ie, energy, roads, rail, ports, airports, water) is regulated by specific laws and has its own regulatory authority, responsible for supervising the concessionaires and the quality of the public services. Federal government ministries also play an important role by determining and co-ordinating national policies related to strategic sectors and selecting projects considered as a priority for the country and, therefore, eligible for issuing infrastructure debentures, such as the Ministry of Infrastructure (responsible for railroad, road, water and air transports, including ports, airports, etc), Ministry of Mines and Energy, Ministry of Communications and Ministry of Regional Development.
PPPs were introduced into Brazilian federal legislation in 2004 through Federal Law No.11,079/2004 (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 No. 8,987/1995 and Federal Law No. 9,074/1995, applicable to the provision of public services.
The PPP Law sets forth general provisions for PPPs and created two additional forms of concession: a sponsored concession and an administrative concession, both designated public-private partnerships. A sponsored concession is the concession of public services or public works, as provided by Law No. 8,987/1995, 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, an 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 extensive use of PPPs, the PPP Law sets forth restrictions related to the project value, contract term and object. PPPs 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.
Another measure adopted by the Brazilian government to increase and strengthen the role of the private sector in infrastructure projects was the creation of the Brazilian investment partnership programme (programa de parcerias de investimentos, or PPI) introduced by means of Law No. 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 expand and improve the country's infrastructure.
To this end, the PPI has created a centralised monitoring mechanism, facilitating the transparency and planning of infrastructure projects.
In 2021, Law No. 14,133 was approved creating new rules regarding public auctions and procurement proceedings and administrative contracts. Despite the fact that the new law is already in place, it will only fully replace old Law 8,666 from 1993 after two years (1 April 2023), and in the interim, the public authorities may elect to use the new or old regime for contracting with private parties.
It will take time for the real effects of the new law to be discerned once it becomes mandatory and is tested in real cases. However, certain improvements will need to be made in relation to the following:
Key Project Finance Issues and Risks
Like normal international practice, a clear understanding of the legal framework applicable to the sector/concession, evaluation of the risk allocation matrix provided by the concession documents and analysis of the assets/rights available for a security package (including perfection and enforcement requirements to be observed) are key elements for investing in any infrastructure deal in Brazil.
To a certain degree, the strength of the sponsor (both financial capabilities and technical expertise) 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 and offtake risk, and third parties – include:
Typical Funding Techniques Available
Financing structures commonly used in project finance transactions in Brazil include commercial lending facilities, multi-lateral lending facilities and capital market offerings for purposes of funding energy or infrastructure projects.
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). Bank guarantees are normally issued in the form of a surety letter (cartas de fiança).
For loans granted by commercial banks, 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). Capital markets debt instruments, such as debentures, promissory notes and commercial notes (new debt instruments created by Law No. 14,195, from August 2021). Local project bonds (debêntures de infraestrutura), with the benefits of Article 2 of Law No. 12,431/2011) are largely used and for their issuance the indenture (escritura de emissão) is the main document providing for the terms and conditions of the debt, covenants and events of default.
Using shareholder capital as a source of funding (or as a guarantee to cover cost overruns and/or other risks associated with the project under equity support agreements) is common in Brazil for all the aforementioned structures. The equity investors, for instance, may be required to maintain a certain ratio, as part of a financing agreement or in cases of cost overruns, for example.
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 country could become a technological leader in renewable energy and environmental solutions, transportation and logistics (ports, airports and toll roads) and oil and gas (with programmes, such as “Gas para Crescer” and the Revitalisation of Onshore Oil and Gas Exploration and Production Activities (REATE), the Brazilian government intends to attract foreign investment and increase competition in the sector).
In Brazil, project finance transactions typically include the following security measures:
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, who is 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, including that they:
As a general rule, under Brazilian law, each asset granted as security must be duly individualised in the relevant security agreement. In this respect, the floating charge concept is not generally accepted in this jurisdiction.
There are, however, mechanisms recognised by 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 any assets acquired since the previous amendment.
As an exception to the general rule, Brazilian Corporation Law (Law No. 6,404/1976) 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 this 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.
Brazilian security agreements must be registered with either the Registry of Deeds and Documents or the Real Estate Registry. Mortgages, fiduciary sales, assignments of real estate, and some specific types of pledges 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 asset being pledged as security, such as shares.
Each asset needs to be duly individualised in the relevant security agreement.
As general rule, there are no restrictions in connection with the granting of security or guarantees. The previous comments on the main aspects relating to the creation of a security interest over assets should also be noted.
Prior to entering into the relevant security agreement, lenders usually conduct due diligence on the company and on the assets that are being used as security. The due diligence process includes 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 have been pledged as security and the terms of the original security agreement. As a general rule, a simple release letter issued by the creditor/lender, together with its subsequent registration with the registry where the original security agreement was filed, should suffice.
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 security agreement (including the possibility of enforcing the security extra-judicially, which is a standard provision in Brazilian law security agreements).
According to the Brazilian Code of Civil Procedure, a creditor may invoke a general collection lawsuit to enforce collateral and/or guarantees whenever the claim is based on an instrument for a certain, liquid and payable obligation (ação de execução). This instrument may be judicial (ie, a final court decision in a lawsuit) or extra-judicial.
A creditor that has a fiduciary guarantee may obtain the assigned credits and exercise other rights granted to it under the loan for the sale of the real estate through either judicial or out-of-court actions.
In a company shares pledge, enforcement of the claim requires the filing of a lawsuit to collect the claim and enforce the guarantee previously granted (by means of the compulsory conveyance of the shares by the creditor or the sale of the asset given as collateral to a third party). In this case, the proceeds of the sale apply in the payment of the debt.
The compulsory conveyance of the shares by the creditor, or the judicial sale, must comply with the shareholders' agreement or partners' agreement, as well as the provisions of the Brazilian Code of Civil Procedure.
It is important to note that there are limited circumstances in which the lender may keep the collateral as payment, in particular:
Moreover, as mentioned above, the pledging creditor may proceed with the extra-judicial sale of the shares or other assets of the borrower if this is permitted under the contract or has been previously and irreversibly authorised by the debtor through an irrevocable power of attorney.
The same procedure will occur in a mortgage enforcement scenario.
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.
Furthermore, 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 govern those obligations.
By the same token, Law No. 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 any 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, in practice, 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.
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.
Under the Arbitration Act (Law No. 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.
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.
It is important to know 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 or bilateral agreements in effect in Brazil.
Lastly, enforcement might generally be affected by laws relating to or affecting the rights of creditors under a loan or security agreement, such as insolvency, bankruptcy, liquidation and other laws of general application.
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 or lenders does not require any special approval by the Brazilian regulatory authorities. However, to enable the remittance of amounts abroad (ie, the 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, the main financial terms relating to the loans must be registered with the Central Bank of Brazil under the module of the 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 flow into Brazil. This registration with the Central Bank 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 the purposes of closing currency-exchange contracts in connection with the inflow of funds into Brazil. The registration of the financial transaction is necessary in order for the Brazilian borrower to be able to remit abroad the funds related to payments made 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 or investments in the Brazilian financial and capital markets).
Foreign capital duly registered with the Central Bank of Brazil may generally be repatriated to its country of origin at any time without prior authorisation.
It is permissible for a project company to maintain offshore foreign currency accounts. Under 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 USD1 million (or its equivalent in other currencies), the holder must disclose any such investments to the Central Bank (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 should be noted, 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. However, in order to be admissible in evidence and enforceable in the Brazilian courts some formalities are required.
For security agreements governed by Brazilian law, it should be noted 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 the bankruptcy of the debtor.
Restrictions and Authorisations Regarding Land Use
The ownership of land per se does not require any specific licence, but the exploration of natural resources does require a variety of authorisations or concessions from public authorities.
Certain uses of water resources are subject to authorisation from official agencies.
In relation to mineral resources, according to the Federal Constitution of Brazil states that mineral reserves are segregated from surface areas and belong to the federal government. As a result, the federal government has the authority to legislate about mineral resources, deposits, mines and the rules for the commercial exploration of these resources on Brazilian territory.
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, Section 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.
Domestic and Foreign Entities
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 No. 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 No. 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 No. 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:
INCRA Normative Instruction 76
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 for normal lending transactions, but such a notion is regulated for debentures and securitisation transactions. It does, however, recognise the concept of an agency relationship, under which a collateral agent may hold the benefit of the security on behalf, and for the benefit, of the lender.
It is normal in Brazil to use formal collateral agents, 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 inter-creditor agreements.
The creation of a security (in rem guarantee) over a certain asset or right gives priority to the holder of that security and provides protection against potential claims or enforcement actions from other creditors 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, any 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).
In the case of fiduciary security in which different degrees are not allowed by law, exclusive priority will be given to the holder of the 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.
In general terms, public concessions or the right to render and explore a public service are only granted to companies incorporated in Brazil (and, in most of the cases, organised as special purposes vehicle).
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 No. 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:
Normally, project companies are incorporated as corporations (SAs), since this is the type of entity required by the bidding rules and regulations issued by the various public agencies associated with the various infrastructure sectors. Due to the fact that SAs can have more professional management (ie, a board of directors, a board of officers) and can issue securities, they are an advantage in raising funding for the implementation of a project.
Judicial Reorganisation Availability
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:
Judicial Reorganisation Procedure
With the filing of the judicial reorganisation petition, it is mandatory to include the following:
If the foregoing 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. The judge may also order an immediate stay of any actions and executions involving credits subject to the effects of the Judicial Reorganisation Proceeding filed against the debtor for a period of 180 days (stay period), among other things. In accordance with Law No. 14.112/20, which recently amended the BBL, the 180-day period is extendable for another 180 days, provided that the debtor does not give any reason for failing to vote on the reorganisation plan during the first stay period.
The debtor has 60 days, counted from this processing decision, to file its judicial reorganisation plan.
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 its permanent assets without judicial authorisation. According to Law No 14.112/20, the debtor under judicial reorganisation is prohibited from distributing profits or dividends to partners and shareholders until the approval of the reorganisation plan.
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. According to Law No. 14.112/20, the general meeting of creditors may be virtual or replaced by a consent of creditors who meet the required quorum for the approval of 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 and binds the debtor and all the creditors subject to the effects of the judicial reorganisation proceeding (Article 59 of the BBL). However, if the reorganisation plan is rejected, the judge orders the debtor's liquidation. The BBL provides that the judicial supervision of a judicial reorganisation proceeding will be for a maximum two-year period, but the proceeding may be terminated prior to that period, regardless of the grace period and the consolidation of the general list of creditors.
According to Law No. 14.112/20, the creditors may present an alternative plan if the judicial reorganisation plan proposed by the debtor is rejected or in the event that the reorganisation plan is not submitted by the debtor within the stay period. There are several requirements for the approval of an alternative plan by the creditors:
According to Law No. 14.112/20, which regulates debtor-in-possession (DIP) financing, payment of new financing is paid before cash refunds and "proceeding fees". The BBL also provides for the "immutability" of the effects of the decision approving the financing, since the priority (non-subject to the proceeding) of the amounts financed by the lender in good faith and the guarantees granted by the debtor will be maintained, even though the decision that approves the contracting of the financing is reformed. However, the BBL provides that "the guarantees provided, and the preferences will be kept up to the limit of the amounts actually delivered to the debtor". In addition, the BBL states that any person may provide a Dip financing, including partners and entities that are part of debtor's economic group.
Out-of-court reorganisation (recuperação extrajudicial) is also possible, whereby a debtor that meets the above-listed requirements for judicial reorganisation may propose and negotiate an out-of-court reorganisation plan with creditors. The debtor shall 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 more than half of all claims of each kind encompassed therein. In accordance with Law No. 14.112/20, which recently amended the BBL:
In this case, in addition to the normal out-of-court reorganisation documents, the debtor must also submit:
The judge shall, once the petition for ratification of the out-of-court reorganisation plan has been received, order the publication of an electronic notice inviting all creditors of the debtor to file their opposition to the plan.
This type of reorganisation proceeding is not applicable to the holders of tax, the amounts delivered in domestic currency to the debtor resulting from an advance on an export exchange contract, nor to those whose credits are not subject to the judicial reorganisation process.
In accordance with Article 49 of the BBL, all claims existing at the time of filing are subject to judicial reorganisation proceedings, even if they are 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, a 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, that 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, the creditor shall not be permitted to sell or remove from the debtor’s establishment any capital goods essential to the debtor’s business. The BBL also states that the judicial reorganisation will not affect creditors' rights of accelerating and offsetting debts related to derivatives and repos.
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 the event of a liquidation, 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 its rights over the collateral and request the restitution of the asset).
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.
Regarding the liquidation proceeding, after the restitution of assets, the BBL provides the following order:
After these, other creditors will be paid in the following order, as per Article 83 of the BBL:
If the borrower, security-provider or guarantor becomes insolvent, the main risk for lenders is that the claims prevailing at the time of the petition will be subject to the judicial reorganisation process. 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.
The debts are kept in foreign currency in a judicial reorganisation scenario, unless the creditors holding the relevant claims approve a different indexing parameter (Article 50, paragraph 2 of the BBL).
In a liquidation scenario, all debts will be converted into reais at the rate in effect at the date of the liquidation decree and, in the absence of collateral, the outstanding amounts will be treated as unsecured claims.
BBL does not apply to government-owned companies, 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 deemed equivalent to these (as stated in Article 2 of the BBL).
The Law No. 6,024/1974 provides financial institutions with the option of extra-judicial liquidation proceedings. The Law No. 9,656/1998 also provides healthcare plan companies with the same option. Insurance companies are regulated by the Superintendência de Seguros Privados (SUSEP) (the regulatory agency), which has the authority to decree and implement the liquidation of an insurance company (Decree-law 73/1966).
The BBL provides for transnational insolvency articles substantially adopting the UNCITRAL Model Law with some alterations. In summary, these rules aim to regulate co-operation between judges and other competent authorities in Brazil and other countries.
As a general rule, there are no specific restrictions, controls, fees and/or taxes on insurance policies covering project assets, and these policies are regulated by the same general rules that regulate the insurance industry in the country.
Notwithstanding this, there are certain restrictions regarding the contracting of 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 specify the situations in which individuals or legal entities in Brazil can contract insurance policies with foreign insurance companies. Among the permitted options are the coverage of foreign risks and the coverage of risks that do not have a 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.
The SUSEP’s Circular 603/2020 of the Superintendent of Private Insurance Superintendency, among other things, sets forth the operational procedure to be followed to provide evidence of the absence of local coverage by Brazilian insurers. According to this Circular, the 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 five insurers operating in the specific insurance sector in Brazil, all local insurers operating in that insurance sector should have been consulted.
Payments under insurance contracts covering project assets may be made to foreign creditors, both when those creditors are directly included as additional beneficiaries of the insurance, as well as when security is enforced 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 basis of any such remittance, to prove the legality of the transaction.
The payment of principal is not subject to withholding taxation in Brazil. According to Brazilian law, interest, as well as any other income deemed similar to interest payable to a non-resident lender by a Brazilian borrower in respect of loans is 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 a lower rate if a tax treaty exists between Brazil and the beneficiary's country that provides for this.
Pursuant to Section 24 of Law 9,430 (enacted on 27 December 1996), as amended by Law No. 11,727 (enacted on 23 June 2008), the definition of favourable tax jurisdictions includes countries and locations:
The list of favourable tax jurisdictions is set forth by Normative Instruction 1,037, enacted on 7 June 2010 and as amended from time to time.
Normative Instruction 1,037 also lists of 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.
Despite the general rule above, Brazilian law provides certain tax incentives for investments in securities related to infrastructure, agribusiness and real estate projects. Project finance interest payments under incentivised Infrastructure Debentures (local law debentures with the tax benefits provided for in Article 2 of Law No. 12,431/2011) are tax-exempt for individuals (natural persons) resident in Brazil and foreign investors, whereas a 15% WHT will apply to corporations that invest in such papers.
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 rate of 0%. 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 aforementioned 6%, 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%. In such a case, the new rate would only apply to future foreign exchange transactions.
Under loan agreements, the amount of interest payable may be limited to the interest rate established by Decree 22,626/1933 (the Usury Law). Brazilian courts are divided on the application of the Usury Law, however, the prevailing interpretation of the Usury Law adopted by the Brazilian courts is that loan agreements entered into by and between non-financial entities are limited to 1% interest per month (ie, 12% interest per year), plus monetary adjustment of the principal amount due.
In Brazil, project agreements (construction, operation and maintenance, supply, take-off, etc) are usually governed by Brazilian law, as they regulate the provision of services there, as well as payments within the country and in local currency. There are exceptions to this rule, for example, when one of the contracting parties is located abroad or if the scope of the agreement involves the importation of goods or services.
Brazilian law governs the financing agreements signed between Brazilian borrowers and Brazilian creditors. In general, financing agreements between Brazilian borrowers (ie, concessionaires and/or project companies) and foreign creditors are governed by foreign law (typically, US law or English law, or the law where the foreign lender was incorporated). If payment guarantees (corporate guarantees from sponsors, for example) are associated with international loan agreements, they may also be governed by non-Brazilian law, typically the same law as the loan agreement or the laws of the place of incorporation of the guarantee-provider.
The 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.
In Brazil, it is typical to have all the main project documents and financing agreements governed by Brazilian law, as mentioned in 9.1 Project Agreements. As local financial institutions continue to remain the main players in project finance transactions (including the BNDES and private banks), the majority of financing transactions in the country have been domestic in nature in recent years.
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.
Project Finance in Brazil Today
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 highlighted by a decade of economic growth that has increased the demand for services in a country with a growing middle class.
When compared to other BRIC countries (Brazil, Russia, India and China), Brazil has a low investment rate in infrastructure, with an average of 2.25% of 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 (Banco Nacional de Desenvolvimento Econômico e Social – BNDES) has historically been the main source of financing for infrastructure projects in Brazil. Due to the Brazilian fiscal crisis and a more liberal agenda, the 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 through the debt capital markets, multilaterals and export credit agencies.
The following were seen in 2020 and 2021:
Many “first-of-their-kind” financing structures have also been seen recently.
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 (fundo de investimento em direitos creditórios – FDICs) may increase in the next few years, as a major opportunity for new players in the Brazilian project finance market.
As projects are moving from single-source to multi-source financing, often with a major cross-border component, this requires not only deep knowledge of local and international project finance standards, but also the ability to navigate multiple cultures and bridge the gaps between the different parties involved in the transaction.
Role of the BNDES
Since the mid-1990s, private companies have been allowed to operate public services in Brazil by means of concession, permission or administrative authorisation. The BNDES has been the main source of capital to fund infrastructure projects in Brazil, mainly due to its subsidised interest rates.
As part of efforts to reduce the Brazilian fiscal deficit 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 (taxa de juros de longo prazo – TJLP) with the taxa de longo prazo (TLP) for loans granted by the BNDES as of 1 January 2018. In 2018, the TLP was fixed at the same level as the TJLP and will gradually increase, from 2023 onwards, until it is calculated based on the official Brazilian inflation rate (Índice de Preços ao Consumidor Amplo – IPCA) plus the yield on government bonds (Notas do Tesouro Nacional Série B – NTN-B).
It is expected that the TLP will reach the interest rate on Brazilian government bonds in a few 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, the BNDES continues to play a major role in long-term financing in Brazil, although it has reduced disbursement estimates for the next few years. BRL64.3 billion was disbursed during 2021, representing a slight decrease compared to 2020 (BRL64.9 billion).
In view of the recent economic downturn, which has affected the financing ability of national development banks, the Brazilian government's efforts to attract investment in national infrastructure projects are largely associated with the attraction of foreign capital.
One of the aspects that currently prevents foreign financing of 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 with inflation.
Although long-term hedging could address the risk of currency mismatch, this method is not available in Brazil or, when it is, only at prohibitive cost. The government is currently studying alternatives to protect infrastructure projects from that mismatch through tax incentives and regulatory authorisations.
Given the historical lack of regulation on currency mismatch, it is still unusual for infrastructure projects in Brazil to be financed with foreign capital. Nonetheless, the Brazilian government is focusing its efforts on replicating the successful policies of 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 can be mitigated, in this case, 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 macro-economic adjustment policies.
Another possible measure is the adoption of a foreign currency indexation mechanism for part of the concessionaire’s revenues without transferring the risk to the users of the public service. In this case, the risk of a 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 the BNDES, in exchange for a percentage of the remuneration. In this scenario, even in the case of a higher devaluation of the BRL in relation to the USD, the existence of exchange reserves and increases in tax collection could operate as a natural protection mechanism for the Brazilian government. There would not be such a severe impact on the treasury, since project finance debts related to infrastructure projects are partially amortised over long periods.
Non-recourse project finance
As a rule, Brazil has yet to achieve non-recourse project financing 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 has been some discussion 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 2022, the BNDES funded a “first-of-its-kind” non-recourse financing of BRL6.9 billion for the construction and operation of Line 6 of the São Paulo metro. The BNDES’ risk during construction is partially covered by non-recourse bank guarantees, which is an innovative feature for BNDES-funded financings.
In the next few 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 traditional sources of financing, Brazilian public and private entities are also motivated to allocate resources to low-carbon infrastructure projects in order to comply with the ambitious environmental commitments made under the Paris Agreement. Because of this strategy, the BNDES has 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 have shown an interest in the Brazilian potential to develop the green agenda. National and foreign institutional investors representing around 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.
Bonds for infrastructure projects are also becoming more common, and may result in tax benefits for investors when the use of the 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 27 June 2011).
In addition, in 2018 the BNDES and the InterAmerican Development Bank released a partnership to set up a BRL1.2 billion infrastructure credit fund. The purpose of the fund is to foster investment in debt instruments in the transportation, energy and sanitation sectors, and in social infrastructure, such as health and education.
Finally, the above-mentioned changes made by Brazilian policymakers in response to the current macro-economic scenario are expected to increase the share of capital market and commercial banks in Brazilian project financing. Therefore, project finance in Brazil is expected to remain one of the main sources of funds, at the very least in the near future.
Capital markets – infrastructure private equity investment funds
With interest rates in Brazil reaching their lowest levels in history, sponsors are energetically looking for capital markets structures to finance infrastructure projects. In this context, several FIP-IEs were structured and issued in 2021, under Brazilian Law No 11,478 of 29 May 2007.
Investors in FIP-IE structures have some tax benefits (Brazilian-resident individuals are entitled to a zero income tax rate, both in the distribution of earnings via quota amortisation and in capital gains obtained with the sale of quotas, subject to some requirements), which makes the FIP-IE a popular product in the Brazilian capital markets.
At least 90% of a FIP-IE portfolio must be comprised of securities issued by companies (sociedades por ações) incorporated under the Brazilian law (eg, shares, warrants and debentures) and related to infrastructure projects in the following sectors:
The FIP-IE could be an alternative for projects that cannot tap the Brazilian capital markets through infrastructure debentures.