Project Finance 2018

Last verified on Thursday 31st August 2017

Brazil

Pablo Sorj and Marina Anselmo Schneider
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados

    General

  1. 1.

    How common is project finance in your jurisdiction? In what sectors is project financing most common?

  2. Project finance in Brazil has grown quite fast in the recent past. The Brazilian Development Bank (BNDES) continues to play a dominant role in long-term financing in Brazil. For instance, the disbursements prospects for 2015 to 2018 regarding the infrastructure sector are 578.9 billion reais. Together with sewage, urban mobility and logistics, the power sector continues to be one of the leading sectors for project finance due to its very stable regulatory framework and cash flow generation, with renewable energy projects becoming more frequent.

  3. 2.

    What kinds of institutions typically act as sponsors and lenders in your jurisdiction? Why?

  4. As mentioned in question 1, BNDES continues to be the most relevant institution regarding long-term financing in Brazil. In 2016, BNDES’s total disbursements reached 88.3 billion reais, headed by the infrastructure sector, responsible for 25.9 billion reais, which highlights the size and importance of BNDES in the Brazilian economy.

    According to BNDES, the main sectors receiving disbursements in 2016 was the agriculture and livestock sector (total disbursements reached 13.9 billion reais,) and the electricity and natural gas sector (9.8 billion reais), to foster projects for implementation or maintenance of hydroelectric dams, renewable energy (biomass, solar, wind, small hydro power plants, cogeneration, among others renewable projects) and natural gas thermoelectric power plants.

    As a result of a tighter fiscal policy to control inflation, in April 2017, the Brazilian government proposed a provisional measure (Provisional Measure No. 777, dated 26 April 2017) to replace BNDES benchmark interest rate for loans (TJLP). Upon final approval by the Brazilian Congress, the new BNDES long-term rate (TLP) should be increased to be closer to market rates and therefore boost the participation of local private capital markets to finance infrastructure projects.

    In addition, BNDES has recently changed its credit policy to require project companies to come up with multiple sources of financing, including commercial banks, export credit agencies and project bonds (debentures). BNDES also decided to reduce its participation in some projects, such as projects involving power generation using coal and fuel oil due to the Brazilian commitment on COP 21.

    The other two big state-owned banks, Caixa Econômica Federal and Banco do Brasil, have stepped up to the challenge of providing long-term financing for projects and have increased their market share. Therefore, we expect an increase of multi-source financings, with BNDES reducing its stake in the overall financing (as it is already happening).

    Other institutions that typically act as project finance lenders include local development banks, such as Banco do Nordeste do Brasil (BNB), the Banco Regional de Desenvolvimento do Extremo Sul (BRDE), the InterAmerican Development Bank, export credit agencies, receivables investment funds (FDIC) that invest in infrastructure receivables and credit instruments and FI-FGTS (an investment fund of the public pension fund FGTS), and some Brazilian and international commercial banks.

    BNDES and Caixa Econômica Federal have the greatest share of financing due to government incentives and attractive rates. Nevertheless, risks undertaken by BNDES are often shared with private banks through indirect lending (B-loan structures) and surety agreements issued by commercial banks in favour of BNDES.

    In an effort to foster the private sector to finance Brazilian infrastructure, Brazilian legislators enacted Law 12,431 on 27 June 2011 (Law 12,431), which established a set of tax incentives for Brazilian and foreign investors in connection with certain debentures issued in the local market. This has been a good tool of financing utilised for project finance in Brazil.

    Typical sponsors in Brazil for project finance include project companies, investment arms of construction groups, oil and gas service providers and private equity funds with an infrastructure investment focus.

  5. 3.

    What structures are most common?

  6. The structure of the projects may vary depending on the type of asset and sector. Projects that require a concession from the government resemble a build-own-operate-transfer (BOOT) structure, while projects that do not require a concession are usually structured as build-own-operate (BOO). The number of public-private partnerships (PPPs) has increased in recent years, and they are expected to become an increasingly common structure.

  7. 4.

    Does local law require (or is it advisable) that the project company be organised under the laws of your jurisdiction? What is the typical legal form of a project company and why? Does local law require that any of the project company’s equity be held by local investors?

  8. As a general rule, project companies should be incorporated in Brazil. Pursuant to article 1,134 of the Brazilian Civil Code, a foreign company needs an authorisation from the federal government to operate in Brazil through a branch.

    Typically, sponsors form a sociedade anônima, which is similar to a corporation. Although both the sociedade anônima and the limitada, which is similar to a limited liability company, provide for limited liability for the sponsors, the former is more suitable for projects as it allows greater flexibility in terms of financing and corporate governance. Under Brazilian law, all corporate forms are subject to veil piercing in certain circumstances; mainly in cases of deviation from the company’s purpose (such as abuse of trust and misappropriation) and mixing the assets of the partners and the entity.

    Except for certain specific sectors and industries, foreign investors can hold all the equity of the project company. Sectors where foreign ownership is restricted include nuclear energy, domestic airline companies, health services, media companies, border and rural property.

    Foreign Investment

  9. 5.

    Please describe the foreign investment regime in your jurisdiction.

  10. Generally, foreign capital enjoys the same legal treatment as domestic capital. Notwithstanding the above, foreign capital must be duly registered with the Central Bank of Brazil's Information System (Sisbacen). Sisbacen’s Electronic Statement Registration (RDE) system provides for the collection of data identifying the parties involved and stating the nature of any transactions involving foreign capital.

    Under Brazilian law, there are two major types of investments that non-resident investors (NRIs) may carry out that are, respectively, regulated by (i) Law 4,131, dated 3 September 1962 (Law 4,131) and (ii) Resolution 4,373 of the Brazilian Monetary Council (CMN), dated 29 September 2014 (Resolution 4,373). Law 4,131 and Resolution 4,373 have different requirements and exceptions that have to be taken into consideration depending on the nature of the foreign investment.

    Law 4,131 regulates direct equity investments in Brazilian companies or through the establishment of a branch of a foreign company (provided prior authorisation is obtained from the federal government in the case of the latter). Except as regards the establishment of a branch, NRIs directly investing in the equity of Brazilian companies (4,131 investors) do not need any specific authorisation to make such an investment (except in case of certain regulated sectors).

    Resolution 4,373 (and related Central Bank of Brazil, Brazilian Securities and Exchange Commission (CVM) regulations) regulates investments made in the Brazilian financial and capital markets. NRIs registered under the mechanisms provided by Resolution 4,373 can invest in the local financial and capital markets (4,373 investors). In general, 4,373 investors have access to the same investment opportunities in the financial and capital markets as Brazilian residents.

    For the purposes of making investments under Resolution 4,373, investors must be registered with the Brazilian Securities and Exchange Commission (CVM) and comply with the requirements listed in its relevant resolution.

    Despite the equal treatment principle described above, NRIs investing in the local capital markets may enjoy a more favourable tax treatment. In addition to the favourable treatment offered to NRI investments made under Resolution 4,373, and in an attempt to boost investments in infrastructure, legislators enacted Law 12,431 dated 27 June 2011, which established that earnings by NRIs resulting from investments in publicly traded bonds and securities issued by non-financial Brazilian corporations for the purpose of financing projects (and acquired on or after 1 January 2011), will benefit from zero withholding tax. Please see question 8 for some conditions regarding this tax benefit.

  11. 6.

    Are there any restrictions on payments abroad or repatriation of capital by foreign investors?

  12. As explained in more detail in question 5, foreign investments and loan transactions are subject to registration with the Central Bank of Brazil. As a general rule, once registered, any remittance of funds having an economic purpose and supported by appropriate documentation can be performed both to and from Brazil.

    Some remittances, however, may be subject to withholding taxes. Gains on the sale or redemption of shares are currently subject to progressive rates ranging from 15 per cent (on capital gain below 5 million reais) up to 22.5 per cent (on capital gain exceeding 30 million reais). Tax treaties may function to reduce withholding. Regarding repatriation, there is no minimum holding period in Brazil for foreign capital. Dividend distributions and returns of registered capital are not restricted, regardless of being subject to specific tax treatment.

  13. 7.

    Is it permissible for a project company to maintain offshore foreign currency (eg, US dollar) accounts?

  14. As a general rule, Brazilian entities are permitted to maintain offshore foreign currency accounts on their own name and enter into foreign exchange transactions to remit funds from Brazil to these accounts and from these accounts to Brazil. There is no limit on the amount of funds that may be maintained in offshore foreign currency accounts or on the term for repatriation of such funds. Funds and assets maintained abroad by Brazilian entities have to be informed to the Central Bank of Brazil annually, for amounts greater than US$100,000 (or the equivalent in other currencies), or quarterly, for amounts greater than US$100 million (or the equivalent in other currencies).

  15. 8.

    What recent measures has your government implemented to make projects in your jurisdiction more attractive to foreign investors? Has this involved making government or other local sources of co-financing more available for projects?

  16. As mentioned above, Brazilian legislators enacted Law 12,431 on 27 June 2011 (Law 12,431) that establishes a set of tax incentives for foreign investments in, inter alia, infrastructure, intensive economic production and research.

    Pursuant to Law 12,431, there are two types of investments available to foreign investors that are eligible to benefit from a zero withholding tax (WHT). They relate to:

    • earnings resulting from investments in publicly traded securities acquired on or after 1 January 2011 and issued by non-financial Brazilian corporations for the purpose of financing investments; and
    • earnings resulting from investments in publicly-traded project bonds issued by (a) special purpose vehicles (and acquired on or after 1 January 2011) or (b) companies that hold a concession, a permission or an authorisation to render public services, with the intent to develop infrastructure projects deemed federal priorities, as regulated by Decree 7,603, of 9 November 2011.

    Interest rates must be linked to price indexes or the reference rate and the investments must meet the following requirements:

    • foreign investors may not be resident in low tax jurisdictions (namely, jurisdictions that do not tax income or that tax it at a rate lower than 20 per cent);
    • the average term shall be greater than four years;
    • the issuer may not repurchase securities within the first two years after issuance;
    • the buyer may not resell the securities;
    • coupon payment intervals of at least 180 days;
    • trading may take place only on regulated markets; and
    • there must be in place a simplified procedure demonstrating the allocation of resources in investment projects.

    Brazilian entities that invest in such securities will also benefit from a reduced WHT, but at a 15 per cent rate.

    Law 12,431 extends this beneficial tax treatment also to earnings obtained through specific investment funds exclusively held by foreign investors and who invest at least 85 per cent of the fund’s assets in publicly traded bonds and securities issued by non-financial corporations for the purpose of financing investment projects.

    Also in connection with funding through investment funds, withholding tax is reduced to zero in the case of income obtained by foreign investors or Brazilian individuals in specific investment funds regulated by CVM (investing at least 85 per cent in project bonds) or in investment funds investing at least 95 per cent in those specific investment funds regulated by CVM.

    Project and financing documents

  17. 9.

    Will any of the financing or project agreements need to be registered or filed with any government authority or otherwise need to comply with local formalities to be valid or enforceable? Even if not necessary for enforceability, is there any special advantage in complying with local formalities?

  18. In general terms, except for documents creating a security interest (for which please see the questions regarding collateral security below), there is no requirement that financing or project agreements be registered with any government authority to be valid and enforceable in Brazil. It is not unusual, however, for lenders, such as BNDES, to require that the loan agreement be registered before the Registry of Deeds and Documents in Brazil in order to give notice to third parties.

    Any documents in a foreign language to be admitted before Brazilian courts or any other Brazilian public authority will have to be translated into Portuguese by a public sworn translator. Additionally, if the documents are executed outside Brazil, the signatures of the parties to these documents must be notarised by a public notary licensed as such under the law of the jurisdiction where the signing takes place, and the signature of such a public notary must be apostilled (the Apostille Convention has been in force in Brazil since 14 August 2016) or authenticated by a consular official of Brazil. These documents must then be registered with the competent Registry of Deeds and Documents in Brazil.

  19. 10.

    Are there any advantages in having the project company issue promissory notes that are governed by local law in addition to the credit agreement governed by New York (or other law)?

  20. Yes, promissory notes issued under and governed by Brazilian law may allow lenders to execute them through expedited procedures as well as avoid the validation process of foreign judgments, which may be a lengthy process in Brazil.

  21. 11.

    Must any agreements (finance or project) be governed by local law?

  22. Under Brazilian law, typically there is no restriction as to the governing law of the financing or project; however, Brazilian law is widely used for project documents (such as the construction contract, supply agreement, offtake agreement, etc) and finance documents with Brazilian lenders. Agreements with government authorities and documents providing for the creation of security interests over property located in Brazil may need to be governed by Brazilian law.

    Foreign lenders typically request New York law as the governing law for the financing documents and documents concerning any collateral located outside Brazil, such as offshore accounts. 

    On the other hand, security documents concerning collateral located in Brazil should be governed by Brazilian law.

    Collateral security

  23. 12.

    May a collateral agent act as the sole secured party for the benefit of a group of lenders whose composition may change from time to time?

  24. As a general rule, security must be granted in favour of all lenders. However, lenders may appoint a collateral agent to act on their behalf as an attorney-in-fact. The power of attorney must clearly state the matters entrusted and the scope of the authority.

  25. 13.

    May a security interest be granted with respect to all of a project company’s assets? Are any types of property considered personal in nature (eg, permits that are granted to an entity that has satisfied certain specific requirements) or "of public interest" such that granting a security interest therein (or foreclosure thereon by the lenders) would not be permissible?

  26. As a general rule, it is not possible in Brazil to grant a global security interest over all of a project company’s assets (an “enterprise charge”).

    Brazilian law stipulates certain formalities for a project company to grant security interest over its assets, which may include equity interests, real estate, equipment, machinery, rights (including IP rights) and receivables.

    For after-acquired property, depending on the nature of the asset, security documents usually contain an obligation for the parties to amend the security document in order to include the acquired property as collateral.

    Some assets in Brazil, such as those deemed essential for the rendering of a public service, may not be subject to liens or attachments. Also, the transfer of control of certain regulated companies or the assignment of concession or authorisation may require the prior notification or consent of the competent authority. Additionally, regulatory agency prior approval may be required for the creation of lien over shares, receivables and rights for certain sectors, such as power (ANEEL) and transportation (ANTT). 

  27. 14.

    What costs are associated with registering collateral security interests in your jurisdiction? Are such costs determined with respect to the obligations secured or the approximate value of the property?

  28. Costs associated with notarising or registering collateral security depend on the type of security granted and the state in which the collateral is registered. Usually, the fees vary according to the value of the secured obligations and the number of pages and parties to the document.

  29. 15.

    Does your jurisdiction require lenders to stipulate the value of their collateral security in the relevant security documents? If so, what happens if at the time of foreclosure the property is worth more? Must such amount be stated in local currency even if the financing is in a foreign currency? If so, what protections may be implemented against devaluation of the local currency?

  30. Generally, it is not necessary to stipulate the value of the collateral in the relevant security document. However, in order for the security document to be effective, Brazilian law requires some information regarding the secured obligations: the amount of the debt, the secured obligation’s estimated value or its maximum value; the repayment date and the interest rate, if any.

    As an exception, security over real estate through a fiduciary transfer (see question 19) has the requirement of pre-determining an appraisal value of the real estate in the relevant security agreement. Such appraisal value sets a minimum sales price at a first auction to be conducted by the secured party in case of foreclosure on the collateral. 

  31. 16.

    Does each item of collateral (eg, equipment) need to be individually identified (whether by serial number or otherwise) in the security document to grant a valid security interest in that item? Or would a general description of the types of collateral covered be sufficient?

  32. Yes. Brazilian law requires the collateral to be individually identified in the security documents. Nevertheless, a pledge on a fluctuating pool of assets is also possible, provided that the assets can be identified (eg, by means of specific location of the assets).

  33. 17.

    How do lenders satisfy themselves with respect to the absence of other liens on their collateral? Are liens centrally recorded or searchable? May contractors file mechanic liens? If so, are lien waivers enforceable?

  34. Confirming the absence of other liens on given collateral can be a challenging exercise as liens are not centrally recorded. It is necessary to search for liens in the Registry of Deeds and Documents in places where the collateral is located and in the company’s head offices.

    The Brazilian land registration system is grounded on real estate record files which are controlled and maintained by Real Estate Registry Officers, each one having jurisdiction over a certain region (either a parcel of a city or several cities, depending on the region). Such real estate record files contain all relevant information regarding the real estate such as ownership title, liens and encumbrances, built area, limits and boundaries of the real estate.

    Therefore, it is necessary to perform a search in the Real Estate Registry Office, which has jurisdiction over the real estate property, in order to confirm the absence of liens on the guarantor’s real estate properties. Legal counsel usually performs the relevant legal due diligence, as there is no title insurance in Brazil.

    Certain assets require specific registrations (in the case of a pledge or fiduciary transfer over shares, an appropriate annotation in the company’s corporate books). In such cases, it is also possible to confirm the absence of other liens by reviewing the applicable registration.

    Brazilian law does not specifically provide for mechanic liens used to secure a payment obligation. However, the Brazilian Civil Code provides that creditors whose claims arise from the supply of materials, funds or services in connection with an insolvent entity’s construction shall enjoy special privilege in an insolvency or bankruptcy scenario and will therefore receive their debt in accordance with the statutory payment order established by Brazilian bankruptcy law (see question 19).

  35. 18.

    What steps must a lender take to foreclose on a collateral security interest in your jurisdiction? How does a beneficiary of a guarantee provided by a local entity or granted under local law enforce such guarantee? Are any self-help remedies available? Is a public or private sale permissible or required? Is a judicial sale necessary? May lenders participate as buyers in any such sale, including by bidding the debt owed by the project company to them in lieu of cash? May any such sale (private or public) be for foreign currency? Is foreclosure on a pledge of the ownership interests of the project company more efficient and less time-consuming than a foreclosure on individual assets of the project company?

  36. The steps a lender must take to foreclose on a collateral security interest in Brazil depend on a number of factors. In certain cases, such as fiduciary transfer and pledges, Brazilian law allows the lender to proceed with extrajudicial foreclosure of the asset. The most common method of enforcement, however, is judicial enforcement.

    Self-help remedies are not available in Brazil and, except in very limited circumstances, the lender may not keep the collateral in satisfaction of the debt (it must sell the asset given as collateral). 

  37. 19.

    What creditors would enjoy a higher statutory priority with respect to the collateral security than the lenders?

  38. Pursuant to Brazilian bankruptcy law, creditors are classified according to the nature of the debt owed. In this capacity, amounts raised in liquidation proceedings must be used to pay the debts of the bankrupt company. The following debts rank higher than secured lenders:

    • post-bankruptcy debts, including:

    a. the judicial administrator’s fees and labour claims for services rendered after the declaration of the bankruptcy;

    b. fresh funds’ provided to the bankruptcy estate by creditors;

    c. expenses related to the liquidation proceedings and sales of assets;

    d. court costs relating to unsuccessful lawsuits and proceedings involving the bankruptcy estate; and

    e. obligations taken on during a judicial recovery (pursuant to Brazilian bankruptcy law) or after the bankruptcy declaration, and applicable taxes;

    2. labour claims in general (up to a maximum amount equal to 150 times the minimum wage per employee), including indemnification for workplace accidents.

    In addition to the order of payments described above, Brazilian bankruptcy law provides that labour claims relating strictly to wages due within the three-month period prior to the bankruptcy decree shall be paid as soon as there is available cash, each such payment being limited, in each case, to a maximum amount equal to five times the minimum wage per employee.

    As an exception to the above, fiduciary transfers such as the transfer of legal title over assets as a security interest (alienação fiduciária) and/or assignment of credit rights (cessão fiduciária) are not subject to reorganisation or bankruptcy proceedings under Brazilian law and may be enforced by the creditors thereof. 

  39. 20.

    Would the lenders incur any liabilities upon foreclosure relating to project assets (as opposed to equity)?

  40. In the absence of fraud, generally, lenders are not responsible for any of the company’s liabilities arising from foreclosure.

  41. 21.

    What legal restrictions exist with respect to the operation of the project post-foreclosure by the lenders or their designee?

  42. In general terms, there are no legal restrictions with respect to ownership or operation of the project post-foreclosure by the lenders or their designee, but please refer to the answer to question 4 for limitations on foreign ownership. Project companies in regulated sectors may require specific authorisations for a change of ownership.

  43. 22.

    Would the agreement by a project company’s equity holders to make capital contributions to the project company (or directly to the lenders in satisfaction of the debt) be enforceable by the lenders (assuming such rights have been collaterally assigned by the project company to the lenders) in bankruptcy proceedings of the project company?

  44. There is a lack of judicial precedents regarding the enforceability of equity support agreements in general. The agreement by a project company’s equity holders to make capital contributions to the project company should be enforceable by the lenders in a judicial recovery proceeding of the project company, unless the competent court authorises its non-payment on the grounds it could affect the business activity of the company and, consequently, the success of the restructuring proceeding. Whether the funds will flow directly to the lenders will depend, among other things, on how the agreement was drafted, and the structure in place.

    Dispute resolution

  45. 23.

    Can a project company organised under local laws validly submit to the jurisdiction of a foreign court?

  46. Except in connection with matters under which a Brazilian court would have exclusive jurisdiction, a project company organised under Brazilian law can validly submit to the jurisdiction of a foreign court by inserting a forum selection clause in the agreement.

    Brazilian courts have exclusive jurisdiction over (i) actions related to real estate property located in Brazil and (ii) succession actions related to assets located in Brazil and (iii) divorce, legal separation or cancellation of civil union when the assets are located in Brazil.

    Since 2016, with the entry into force of the New Code of Civil Procedure, Brazilian courts will not have jurisdiction over actions involving forum selection clauses when the Parties have expressly chosen the exclusive jurisdiction of a foreign court. However, this provision is new and has not been tested many times in courts so far. The case law on the matter, based on the previous Code, states that if the Brazilian courts have concurrent jurisdiction, the forum selection clause will not bar an action to be brought in Brazilian courts, but rather limit the options on the concurrent jurisdiction.

    Brazilian courts have concurrent jurisdiction over (i) defendants domiciled in Brazil; (ii) obligations performed in Brazil; (iii) actions arising out of facts that occurred in Brazil; (iv) alimony and child support actions, when the creditor is domiciled in Brazil or the defendant has assets in Brazil; (v) actions involving consumers domiciled in Brazil; and (vi) when the parties submit to the jurisdiction of Brazilian courts.

    Parties can also validly submit their disputes to arbitration, when the dispute relates to transferable patrimonial rights. In fact, a project company organised under Brazilian law is always allowed to submit to the jurisdiction of an arbitral tribunal seated outside Brazil.

    Notwithstanding the above, in order to enforce any foreign judicial decision or arbitration award rendered abroad within Brazil, such decision or award must be first confirmed in the Superior Court of Justice by a recognition procedure. Therefore, procedural requirements and formalities will have to be satisfied prior to their enforcement in Brazilian courts (see question 25).

  47. 24.

    Is service of process by mail recognised in your jurisdiction or would the project company need to appoint a process agent? If so, does the project company need to grant the agent a power of attorney?

  48. Brazilian law sets forth that service of process shall be carried out in one of the following ways:

    • preferably by mail, in case which the court issues the writ of summons and sends it to the defendant;
    • by a court official/clerk who shall serve the relevant party in person at the place of his or her domicile; or
    • by public notice published in the Official Gazette under specific conditions, such as in the event service of process by mail or court official fails.

    In foreclosure proceedings, the service of the process must be performed by a court official.

    If the debtor is a foreign entity, it will be served through its legal representative in Brazil with powers to be served, which is a necessary requirement for operation in Brazil. Service of process does not need to be made personally to the legal representative; it is valid to serve the company in its corporate address, including in the lobby of the commercial building where it is located.

    The legal representative shall have powers to receive service of process in name of the foreign entity. These powers must be given via a power of attorney.

  49. 25.

    Are foreign judgments and arbitral awards enforceable in your jurisdiction? If so, does any process of ratification or additional review need to be carried out in the local court system as a condition to such enforcement? Do sovereign or quasi-sovereign entities (eg, a counterparty to a major project document to which the project company is a party) have the capacity to arbitrate as a matter of local law?

  50. Foreign judgments and arbitral awards are enforceable in Brazil without re-examination of the merits, but must first be previously confirmed by the Brazilian Superior Court of Justice. In order for confirmation to be granted, the decision must comply with certain requirements:

    • the court or arbitral tribunal rendering the decision must have jurisdiction to decide on the matter;
    • Brazilian courts must not have exclusive jurisdiction on the matter;
    • where a Brazilian court has jurisdiction, there is no other legal proceeding involving the same parties, cause of action or claim brought in Brazil that has reached the status of res judicata;
    • all formalities required for the decision’s enforceability under the laws of the country where it was issued must be fulfilled, such as proof of valid service of process;
    • the decision may not be subject to appeal, and, as such, must be protected by res judicata;
    • the decision must be authenticated by a Brazilian consulate in the country in which it was issued, except in case such judgment was rendered by a competent court of a signatory country of the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents dated of 5 October 1961, in which case such authentication by a Brazilian consulate will not be required;
    • the decision must be accompanied by a sworn translation in the Portuguese language; and
    • the decision must be in accordance with Brazilian national sovereignty, public policy, human dignity and morality.

    In case of foreign arbitral awards, the Superior Court of Justice will also analyse if the decision is in accordance with the provisions of the Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention).

    Sovereign or quasi-sovereign entities have the capacity to arbitrate disputes involving transferable patrimonial rights, however, depending on the type of contract or the industry sector involved in the dispute, it might be required that arbitration (i) is conducted in Portuguese and in Brazil; and/or (ii) is governed by Brazilian law.

    Miscellaneous

  51. 26.

    Is subordination of debt recognised under the law of your jurisdiction?

  52. Taking into consideration the legal characteristics of contractual subordination of debt (namely, private law agreements entered into in good faith by legitimate creditors – and not contrary to the public order), we have good legal grounds to believe that a Brazilian bankruptcy court would recognise the payment order set out in an intercreditor agreement. However, there are no precedents to date on the recognition of these agreements by Brazilian bankruptcy courts.

    Nevertheless, it is worth noting that even if a bankruptcy court decides to disregard an intercreditor agreement for the purposes of ranking and paying debts, it would still be possible to carry out the objectives stated therein. Accordingly, since the proceeds would most likely be released by the bankruptcy court directly to the administrative paying agent under the structure, the agent would still be able to distribute the funds among the creditors according to the subordination provisions.

  53. 27.

    Are there laws in your jurisdiction that regulate how tariffs payable to a service provider (eg, a power plant or pipeline company) must be calculated? If so, please describe briefly.

  54. Yes, there are regulations that govern the tariffs payable for the provision of certain services that have been transferred to the private sector through a concession or PPP, such as utilities and toll roads. As these services are deemed essential to the public, the general rule is that the tariffs shall be reasonable and accessible while providing a return on the investment for the private party.

  55. 28.

    Do environmental, tax or other liabilities relating to the project extend beyond the project company to the direct or indirect owners of the project company or to the lenders?

  56. The general rule is that the direct or indirect owners of the project company are not liable for obligations relating to the project. However, all Brazilian corporate forms may be vulnerable to the "piercing of the corporate veil" in certain circumstances (see question 4).

    There has been a lot of discussion in Brazil regarding whether lenders should be held liable for environmental liabilities of the project company, based on the argument that lenders exercise an influence over the project company and should, therefore, monitor the company’s compliance with environmental legislation.

    In 2014, the Central Bank of Brazil published Resolution No 4,327 establishing guidelines for financial institutions to implement a social and environmental responsibility policy. The aim of the Resolution is that risk assessment made by financial institutions must include social-environmental risks. This Resolution is currently under implementation, and notwithstanding that, there are no express provisions in the Resolution establishing liability of financial institutions for any social or environmental damage that may arise from financed projects.

    It is important to emphasise that this is a very controversial subject in Brazil and only few court decisions were issued so far, in which the possibility of liability for lenders was briefly mentioned but not totally addressed.

    Finally, it is worth noting that Law No. 12,846 dated 1 August 2013 (Brazilian Anti-Corruption Statute) entered into force on 29 January 2014, and imposed strict civil and administrative liability to legal entities for acts of corruption, bid rigging and obstruction of justice against Brazilian and foreign government entities and its assets. In the event that the project company, one of its direct or indirect owners, or third parties acting on their behalf, violated the Brazilian Anti-Corruption Statute, the controlling shareholders of the project company and other members of the project company’s project consortium could be held jointly liable for the payment of fines and damages imposed to the violator.

  57. 29.

    Are there any limitations (or incentives) with respect to importation of equipment or materials to be used in the project?

  58. There are tax incentives in relation to the importation of equipment and materials. They depend on the specifics of each project and are granted on a case-by-case basis.

    Additionally, certain public tender procedures and public bank policies have been establishing local content requirements, namely an obligatory percentage of specific equipment or material to be used in the project that shall be produced in Brazil. Requests for proposal for railroad concessions, for example, have included local content requirements. BNDES also has local content rules for the FINAME credit line, applicable for financing of machinery and equipment. 

  59. 30.

    What land issues might there be in connection with a project financing in your jurisdiction? Are there any restrictions on foreigners’ ownership of land or natural resources? How difficult is it to obtain rights of way (eg, in connection with a pipeline project that traverses many plots of land)?

  60. Under Brazilian law, some restrictions apply to foreign companies and individuals in relation to:

    • the acquisition of land and the creation of other in rem rights over rural real estate that is located within the border zone; and
    • ownership and occupation of rural land, although no restrictions apply to the creation of other in rem rights over rural land.

    There is an ongoing discussion both in the courts and in the executive branch on whether the above restrictions also apply to Brazilian companies whose majority shareholding is held by foreign companies or individuals, or that are controlled by these entities.

    Foreign companies and individuals are free to purchase, lease, possess, or create in rem rights over commercial, industrial (if not considered rural land), and residential real estate.

    According to Law No. 6,634/79 2 May 1979 (Law 6,634), the area comprising 150km from the border parallel to the division line of the Brazilian territory is considered an area of National Security (Border Zone). Decree No. 85,064/80 dated 26 August 1980, which rules Law No. 6,634/79, establishes the procedures for the practice of acts in relation to real estate within the Border Zone that require the National Defense Council’s prior consent.

    The Decree, which ruled the aforementioned Law, establishes that all transactions that, directly or indirectly, imply in the acquisition of rural real estate possession, domain or any other in rem right located in the Border Zone by a foreign entity or individual, or by a Brazilian company that has the majority of its corporate capital held by a foreign company or foreign individual non-resident in Brazil, requires the prior consent of the National Defense Council.

    Such consent is also required for the participation of a foreign entity or individual, at any title, in a company that owns, possesses or has any in rem right in relation to rural real estate located in the Border Zone.

    Failure to comply with such legal provisions related to the acquisition may cause: (i) the nullity of all acts related to the transaction and (ii) the application of a fine equivalent to 20 per cent of the total declared transaction value. In addition, in the event of participation of a foreign entity or individual, at any title, in the capital of a company that owns, possesses or has any in rem right in relation to rural properties located in the Border Zone, the entity shall be subject to dissolution.

    In this sense, the legislation on foreign capital in relation to rural real estate located in the Border Zone is stricter than that of any other rural real estate.

    The only exceptions for those rules are the possibility of establishing in rem guarantee in favour of financial institutes and those institutes receiving Border Zone real estate in payment of a loan which is difficult or uncertain to be paid.

  61. 31.

    Please describe any other relevant legal considerations relating to project finance in your jurisdiction.

  62. BNDES usually relies on its own form of loan agreement for project finance deals, which poses additional challenges in multi-source financing with foreign lenders that are used to foreign standards for loan and project documentation.

    Certain contractual arrangements, such as those establishing step-in rights and the conditional assignments of project contracts may be difficult to enforce as they are not widely used in Brazil.

    Public - private partnership (PPP)

  63. 32.

    Has specific PPP-enabling legislation been passed in your jurisdiction? If so, and if applicable, has it been passed at the federal, state or municipal level and is it sector-specific?

  64. The Brazilian Federal Constitution states that public services may be rendered either directly by the public administration or by means of assignment of such rights and obligations to private parties, under either long-term concession agreements or public-private partnerships (PPPs). PPPs are regulated by Law 11,079, of 30 December 2004 (the Federal PPP Act). States and municipalities may also enact their own PPP laws to govern state or municipal PPPs. The states of São Paulo, Rio de Janeiro and Minas Gerais, for example, have already enacted their own state PPP Acts (São Paulo State Law 11,688, of 19 May 2004, Rio de Janeiro State Law 5,068, of 10 July 2007 and Minas Gerais State Law 14,868, of 16 December 2003). At municipal level, several laws have also been enacted. The cities of São Paulo, Rio de Janeiro and Minas Gerais, for example, have already enacted their own municipal PPP Acts (Belo Horizonte Municipal Law 9,038, of 14 January 2005, São Paulo Municipal Law 14,517, of 16 October 2007 and the Rio de Janeiro Municipal Law 105, of 22 December 2009).

  65. 33.

    What legal limitations, if any, are there (whether constitutional or otherwise) on PPP transactions in general or with respect to particular sectors? Are there any limitations on the contracting power of the state, the state’s ability to incur long-term fiscal obligations, or the extent to which certain government functions may be performed by the private sector?

  66. Any PPP agreement shall be preceded by public bids. Legal requirements for a PPP under the Federal PP Act include:

    • the term of the agreement will be between five and 35 years;
    • the value of the contract will be not less than 20 million reais; and
    • the PPP may not result in agreements with the sole purpose of hiring labour, supplying installation equipment or constructing public works projects.

    The execution of a PPP must also be preceded by a competitive bidding and its commencement is conditioned on the following:

    • authorisation from the relevant authority accompanied by a technical report, and demonstrating the convenience and timeliness of the partnership, and a presentation of the reasons that justify the choice of a PPP (the value-for-money test);
    • delivery of a financial impact estimation in the years in which the public-private partnership agreement will be in force;
    • delivery of an estimate containing the inflow of necessary public funds to perform the obligations undertaken by the public administration during the term of the agreement; and
    • the inclusion of the scope of the PPP in the multi-annual plan.

    Additionally, PPP agreements must also observe the limitations set forth in Law 8,666, dated 21 June 1993, and Law 8,987, dated 13 February 1995, as well as the regulations relating to the indebtedness of public entities.

  67. 34.

    Please describe the most significant PPP transactions that have been closed to date, including identification as to whether they were closed under existing or prior legislation?

  68. Among the most significant transactions that have been structured or completed to date are:

    • urban renewal – Porto Maravilha, in the City of Rio de Janeiro (municipal level);
    • metro – line 4 and line 6 of the São Paulo Metro and the Salvador Metro (state level);
    • water and sewage – Rio das Ostras (municipal level), System Water Producer Alto Tietê and São Lourenço – SP (state level) and Jaguaribe Ocean Disposal System – SP (state level) and City of Rio Claro (municipal level);
    • road concession – MG 050 (state level) and bridge and road to Paiva's Beach – PE (state level);
    • prison – Itaquitinga Integrate Ressocialisation Center PE (state level) Minas Gerais;
    • hospital – Hospital do Suburbio – BA and Couto Maia Institute – BA (state level);
    • stadiums – Fonte Nova – BA (state level) and Dunas – RN (state level), Pernambuco Stadium, Maracanã Stadium and Fortaleza Stadium (state level); and
    • public lighting – City of Caraguatatuba (municipal level), City of São João do Meriti (municipal level) and City of Belo Horizonte (municipal level).
  69. 35.

    Does your jurisdiction have a national or regional centre of excellence or other authority with responsibility for developing PPPs and best practices? If so, please describe this authority and its role.

  70. On the federal level, Law 13,334, dated 13 September 2016, established the Programme for Investments Partnerships (PPI).

    The PPI's main goals are to stimulate the development of studies in order to structure future PPPs contracts and to approach the public and private sectors in order to assure proper conditions for investments in infrastructure.

    On the state and municipal level, there are the PPP units that are public secretaries responsible for the development of PPPs projects. The most distinguished PPP units are those from the states of São Paulo, Bahia, Minas Gerais and Pernambuco.

    Also BNDES performs tasks regarding studies and development of PPPs projects.

  71. 36.

    What are the most common PPP financing structures in your jurisdiction and why?

  72. The most common PPP financing structures in Brazil are those involving government-owned banks, such as BNDES and other local development banks (ie, Banco do Nordeste do Brasil (BNB)).

  73. 37.

    What are the most common procurement processes for a PPP transaction in your jurisdiction?

  74. The competitive bidding process is the adequate and used procurement process for a PPP transaction.

    Such process is ruled by the provisions set forth in the Federal PPP Act and in Law 8,666, dated 21 June 1993 (the Public Bidding Process Act).

  75. 38.

    What do you see as the primary impediments and drivers, both legal and commercial, to the development of PPP in your jurisdiction?

  76. The main driver to the development of PPP in Brazil is the urgent need for private investment in critical infrastructure areas.

    Besides the political and ideological obstacles that PPPs face in certain regions, other challenges include:

    • the long time frame needed to structure and approve a PPP project;
    • the lack of experience of and coordination between public entities and agencies;
    • the financial capacity of public entities;
    • difficulties in structuring the guarantees for the payment by the public sector entity; and
    • risk sharing.

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Questions

    General

  1. 1.

    How common is project finance in your jurisdiction? In what sectors is project financing most common?


  2. 2.

    What kinds of institutions typically act as sponsors and lenders in your jurisdiction? Why?


  3. 3.

    What structures are most common?


  4. 4.

    Does local law require (or is it advisable) that the project company be organised under the laws of your jurisdiction? What is the typical legal form of a project company and why? Does local law require that any of the project company’s equity be held by local investors?


  5. Foreign Investment

  6. 5.

    Please describe the foreign investment regime in your jurisdiction.


  7. 6.

    Are there any restrictions on payments abroad or repatriation of capital by foreign investors?


  8. 7.

    Is it permissible for a project company to maintain offshore foreign currency (eg, US dollar) accounts?


  9. 8.

    What recent measures has your government implemented to make projects in your jurisdiction more attractive to foreign investors? Has this involved making government or other local sources of co-financing more available for projects?


  10. Project and financing documents

  11. 9.

    Will any of the financing or project agreements need to be registered or filed with any government authority or otherwise need to comply with local formalities to be valid or enforceable? Even if not necessary for enforceability, is there any special advantage in complying with local formalities?


  12. 10.

    Are there any advantages in having the project company issue promissory notes that are governed by local law in addition to the credit agreement governed by New York (or other law)?


  13. 11.

    Must any agreements (finance or project) be governed by local law?


  14. Collateral security

  15. 12.

    May a collateral agent act as the sole secured party for the benefit of a group of lenders whose composition may change from time to time?


  16. 13.

    May a security interest be granted with respect to all of a project company’s assets? Are any types of property considered personal in nature (eg, permits that are granted to an entity that has satisfied certain specific requirements) or "of public interest" such that granting a security interest therein (or foreclosure thereon by the lenders) would not be permissible?


  17. 14.

    What costs are associated with registering collateral security interests in your jurisdiction? Are such costs determined with respect to the obligations secured or the approximate value of the property?


  18. 15.

    Does your jurisdiction require lenders to stipulate the value of their collateral security in the relevant security documents? If so, what happens if at the time of foreclosure the property is worth more? Must such amount be stated in local currency even if the financing is in a foreign currency? If so, what protections may be implemented against devaluation of the local currency?


  19. 16.

    Does each item of collateral (eg, equipment) need to be individually identified (whether by serial number or otherwise) in the security document to grant a valid security interest in that item? Or would a general description of the types of collateral covered be sufficient?


  20. 17.

    How do lenders satisfy themselves with respect to the absence of other liens on their collateral? Are liens centrally recorded or searchable? May contractors file mechanic liens? If so, are lien waivers enforceable?


  21. 18.

    What steps must a lender take to foreclose on a collateral security interest in your jurisdiction? How does a beneficiary of a guarantee provided by a local entity or granted under local law enforce such guarantee? Are any self-help remedies available? Is a public or private sale permissible or required? Is a judicial sale necessary? May lenders participate as buyers in any such sale, including by bidding the debt owed by the project company to them in lieu of cash? May any such sale (private or public) be for foreign currency? Is foreclosure on a pledge of the ownership interests of the project company more efficient and less time-consuming than a foreclosure on individual assets of the project company?


  22. 19.

    What creditors would enjoy a higher statutory priority with respect to the collateral security than the lenders?


  23. 20.

    Would the lenders incur any liabilities upon foreclosure relating to project assets (as opposed to equity)?


  24. 21.

    What legal restrictions exist with respect to the operation of the project post-foreclosure by the lenders or their designee?


  25. 22.

    Would the agreement by a project company’s equity holders to make capital contributions to the project company (or directly to the lenders in satisfaction of the debt) be enforceable by the lenders (assuming such rights have been collaterally assigned by the project company to the lenders) in bankruptcy proceedings of the project company?


  26. Dispute resolution

  27. 23.

    Can a project company organised under local laws validly submit to the jurisdiction of a foreign court?


  28. 24.

    Is service of process by mail recognised in your jurisdiction or would the project company need to appoint a process agent? If so, does the project company need to grant the agent a power of attorney?


  29. 25.

    Are foreign judgments and arbitral awards enforceable in your jurisdiction? If so, does any process of ratification or additional review need to be carried out in the local court system as a condition to such enforcement? Do sovereign or quasi-sovereign entities (eg, a counterparty to a major project document to which the project company is a party) have the capacity to arbitrate as a matter of local law?


  30. Miscellaneous

  31. 26.

    Is subordination of debt recognised under the law of your jurisdiction?


  32. 27.

    Are there laws in your jurisdiction that regulate how tariffs payable to a service provider (eg, a power plant or pipeline company) must be calculated? If so, please describe briefly.


  33. 28.

    Do environmental, tax or other liabilities relating to the project extend beyond the project company to the direct or indirect owners of the project company or to the lenders?


  34. 29.

    Are there any limitations (or incentives) with respect to importation of equipment or materials to be used in the project?


  35. 30.

    What land issues might there be in connection with a project financing in your jurisdiction? Are there any restrictions on foreigners’ ownership of land or natural resources? How difficult is it to obtain rights of way (eg, in connection with a pipeline project that traverses many plots of land)?


  36. 31.

    Please describe any other relevant legal considerations relating to project finance in your jurisdiction.


  37. Public - private partnership (PPP)

  38. 32.

    Has specific PPP-enabling legislation been passed in your jurisdiction? If so, and if applicable, has it been passed at the federal, state or municipal level and is it sector-specific?


  39. 33.

    What legal limitations, if any, are there (whether constitutional or otherwise) on PPP transactions in general or with respect to particular sectors? Are there any limitations on the contracting power of the state, the state’s ability to incur long-term fiscal obligations, or the extent to which certain government functions may be performed by the private sector?


  40. 34.

    Please describe the most significant PPP transactions that have been closed to date, including identification as to whether they were closed under existing or prior legislation?


  41. 35.

    Does your jurisdiction have a national or regional centre of excellence or other authority with responsibility for developing PPPs and best practices? If so, please describe this authority and its role.


  42. 36.

    What are the most common PPP financing structures in your jurisdiction and why?


  43. 37.

    What are the most common procurement processes for a PPP transaction in your jurisdiction?


  44. 38.

    What do you see as the primary impediments and drivers, both legal and commercial, to the development of PPP in your jurisdiction?


Other chapters in Project Finance 2018

  • Argentina
    Freshfields Bruckhaus Deringer
  • Brazil
    Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados
  • Chile
    Claro & Cia
  • Colombia
    Gómez-Pinzón Zuleta (Bogotá)
  • Panama
    Galindo, Arias & Lopez
  • Peru
    Payet, Rey, Cauvi, Pérez Abogados