1 Legal framework
1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern project finance transactions in your jurisdiction?
The following laws and regulations are relevant in the project finance context:
- Law 8,666/1993 sets out rules on government procurement and contracts;
- Law 8,987/1995 determines the terms of the concession regime and consent to provide government services;
- Law 9,074/1995 sets out rules on the grant and extension of concessions and consents to provide government services;
- Law 11,079/2004 sets out general rules on government procurement and public-private partnership (PPP) engagements within the scope of public administration;
- Law 12,712/2012 authorises the federal government to hold interest in funds to secure foreign exchange transactions or large-sized project financings;
- Law 12,743/2012 governs Empresa de Planejamento e Logística SA (EPL);
- Law 14,987/2013 authorises the executive branch to perform credit transactions with Banco Nacional de Desenvolvimento Econômico e Socia (BNDES), Caixa Econômica Federal (CEF), Banco do Brasil, the Inter-American Development Bank and the International Bank for Reconstruction and Development, among other international financial institutions, development support agencies, national and international private banks and multilateral agencies to secure loans and funding;
- Decree 8,428/2015 implements the procedure to express interest for the filing of projects, surveys, investigations or studies by private law individuals or legal entities, to be used by the government;
- Law 13,334/2016 establishes the Investment Partnership Programme (PPI);
- Law 11.529/2017 sets forth the terms on the interest held by the federal government in funds to support the organisation and development of concession projects and PPPs, among others; and
- Law 14,133/2021 governs government procurement and contracts.
1.2 Do any bilateral and/or multilateral international instruments have particular relevance for project finance transactions in your jurisdiction?
One of the main commercial instruments used in Brazil which allows for economic, trade and institutional development is the Mercosur Treaty, or the Southern Common Market Treaty – a far-reaching regional integration initiative which has its origins in the return to democracy and re-approximation of Latin American countries in the late 1980s. Founding member states include Brazil, Argentina, Paraguay and Uruguay – all signatory parties to the 1991 Asunción Treaty. The member states agreed on an integration model, with the central objectives of:
- establishing a common market for the free internal circulation of goods, services and production;
- establishing a common foreign trade tariff for other countries; and
- implementing a common trade policy.
1.3 Beyond normal governmental institutions, are there regulatory bodies that play a particular role in project finance in your jurisdiction? What powers do they have?
Special Office for the PPI (SPPI): Reporting to the Office of the President's Chief of Staff, the SPPI oversees, coordinates, reviews and supervises the PPI, and supports the necessary sectoral actions for its operation, enhancing and strengthening interaction between the state and private enterprise through partnership agreements for the development of public infrastructure and other denationalisation measures. Tied to the Ministry of Finance, the SSPI enjoys support from, and has partnerships with:
- the Ministry of Regional Development, the body in charge of urban-related issues;
- the National Confederation of Municipalities; and
- the National Mayors' Front.
Board of the PPI: This is comprised of:
- the president of Brazil;
- the minister of finance, the minister of infrastructure, mines and energy, the minister of the environment, and the minister of regional development;
- the president's chief of staff and members of the Government Office; and
- the chairpersons of BNDES, CEF and Banco do Brasil.
Among other things, the board:
- issues opinion on proposals submitted by competent bodies or entities in matters of interest of the PPI;
- oversees the performance of the PPI;
- defines priority services to enforce the PPP;
- regulates the execution of such contracts;
- authorises the commencement of the procurement process; and
- reviews the reports on contract performance.
Members of the board can attend meetings of ministers who are responsible for reviewing proposals, together with the highest-ranking officials of the regulatory bodies.
EPL: Tied to the Ministry of Infrastructure, this company provides services in relation to projects, studies and research concerning the development of infrastructure, logistics and transportation in Brazil.
1.4 What is the government's general approach to project finance in your jurisdiction? Is PFI/PPP a preferred model in your jurisdiction?
The federal government implemented the PPI to extend and strengthen the interaction between the state and private enterprise through the execution of partnership agreements and other denationalisation measures between direct (government bodies) and indirect government (independent agencies, government-owned companies, government-controlled private companies and government foundations), within the scope of the federal government, states, the federal district and municipalities. Development projects classified under the PPI are treated as national priority. The bodies, agencies and entities involved (eg, the Ministry of Regional Development, CEF, BNDES) enjoy support from international organisations and international cooperation and development agencies – such as the International Finance Corporation, the French Development Agency and the Inter-American Development Bank – in ensuring that all processes and actions necessary to organise, approve and develop projects take place efficiently and economically. The overarching aims are to:
- increase investment and employment opportunities;
- promote technological and industrial development according to the country's social and economic development targets;
- ensure the quality expansion of public infrastructure, with appropriate fees for all users;
- promote broad and fair competition in the establishment of partnerships and the provision of services;
- ensure the stability and legal safety of contracts, including a guarantee of minimum intervention in businesses and investments; and
- strengthen the regulatory role of the state and the independence of state regulatory bodies.
This model has been consolidated and adopted as the preferred model for the funding of infrastructure projects in Brazil.
2 Project finance market
2.1 How mature is the project finance market in your jurisdiction?
As project finance in Brazil is largely provided by government banks, the country does not have a project finance market as traditionally defined, where projects are financed exclusively by project cash flow and secured by the assets and receivables thereof.
Project finance in Brazil generally involves the funds of both investors and government, and requires additional bank or corporate guarantees (eg, pledges, fiduciary assignment of receivables, deposits into court).
Nonetheless, project finance is the best funding option for infrastructure projects in Brazil and affords significant protection, given the reduced availability of government funds.
As leading financing agents, Brazilian government banks – especially Banco Nacional de Desenvolvimento Econômico e Social (BNDES) and Caixa Econômica Federal – have deep expertise in extending loans for project finance in Brazil, which are generally offered to interested parties through specific and industry-related credit lines.
Additionally, the participation of private banks, pension funds and insurers (institutional investors), and of the capital markets, is increasing in this market, whether through the establishment of infrastructure funds or the promotion of the issue of bonds and other debt instruments.
Multilateral and support agencies – especially the International Finance Corporation, the Inter-American Development Bank, the Andean Development Corporation, the International Bank of Reconstruction and Development and the Japan Bank for International Cooperation are also relevant players in this market, especially in relation to the funding of infrastructure projects.
Brazil's project finance market thus continues to evolve and is becoming increasingly sophisticated. This should result in reduced obligations to provide additional securities and should broaden the scope of engagement.
2.2 On what types of project and in which industries is project finance typically utilised?
Project finance is largely used in Brazil to fund innovation and infrastructure projects, which generally involve substantial investments, long-term execution periods and the gradual return of the invested funds. The industries in which it is typically utilised include:
- transportation (highways, railways, waterways and airways);
- oil and gas;
- housing and education;
- criminal justice;
- urban mobility;
- public lighting; and
- basic sanitation.
2.3 What significant project financings have commenced or concluded in your jurisdiction over the last 12 months?
According to BNDES data, the top project financings organised in Brazil over the last 12 months were as follows (www.bndes.gov.br/wps/portal/site/home/transparencia/consulta-operacoes-bndes/maiores-clientes):
- UTE GNA II GERACAO DE ENERGIA SA (power): BRL 3.93 billion
- CONCESSIONARIA DE RODOVIAS PIRACICABA PANORAMA SA (transportation): BRL 3 billion
- MANTIQUEIRA TRANSMISSORA DE ENERGIA SA (power): BRL 2,763,868,000
- MARLIM AZUL ENERGIA SA (power): BRL 2,060,258,660
- COMPANHIA DE GÁS DE SAO PAULO COMGAS (oil and gas): BRL 2 billion
- CHIMARRÃO TRANSMISSORA DE ENERGIA SA (power): BRL 1.76 billion
- NOVO ESTADO TRANSMISSORA DE ENERGIA SA (power): BRL 1. billion
- GRALHA AZUL TRANSMISSAO DE ENERGIA SA (power): BRL 1,480,617,000
- CONCESSIONARIA DAS RODOVIAS INTEGRADAS DO SUL SA (transportation): BRL 1,235,198,000
- ECO135 CONCESSIONARIA DE RODOVIAS SA (transportation): BRL 996,350,000
3 Finance structures
3.1 What project financing structures are most commonly used in your jurisdiction?
The most common project financing structures in public-private partnerships (PPPs) and concession projects in Brazil are:
- loans obtained from public banks; and
- bonds and other debt instruments issued in the capital markets.
The main public bank that provides loans for PPPs and concessions in Brazil is Banco Nacional de Desenvolvimento Econômico e Social (BNDES), which has different lines of credit for infrastructure projects, especially in the following sectors:
- toll roads;
- public street lighting;
- urban mobility; and
Caixa Econômica Federal (the federal savings bank) also has lines of credit for infrastructure projects in Brazil.
For bonds and other debt instruments, the issuance of infrastructure debentures is the main alternative for project finance structuring that relies on capital market solutions. Debentures are bonds issued by companies representing a debt instrument with no collateral that can be traded either on the stock exchange or privately.
3.2 What are the advantages and disadvantages of these different types of structures?
BNDES is the bank that most commonly features in project financings in Brazil. It offers long-term loans for infrastructure projects in different industry sectors. The main advantage of loans obtained from BNDES and other public banks in Brazil is the subsidised interest rates, which are lower than the interest rates of private banks and the capital markets.
Another benefit of these subsidised lines of credit is the long-term payment schedule: BNDES loans are usually granted with a grace period equivalent to completion of the projects and a repayment period of more than 20 years.
The main disadvantages of this structure are:
- the collateral required by public banks in order to grant loans; and
- the limited participation of public banks in projects – for example, for BNDES loans, the loan amount is usually capped at 80% of the investment.
Public banks – especially BNDES – require different collateral guarantees to secure the loan. Such guarantees are usually required for the duration of the loan contract and include different and cumulative types of guarantees, such as:
- banking or corporate guarantees;
- pledges over shares of the lender or the lender's shareholders;
- fiduciary cession of credit rights; and
- deposit in escrow accounts.
The release of banking or corporate guarantees is granted by public banks only after the completion phase of the project.
With regard to the issuance of bonds and other debt instruments, the main advantage is the easy access to, and large volume of, financial resources in circulation in the capital markets. The interest of investors and investment funds in such debt instruments – especially debentures – is growing.
Another advantage is that no collateral is required in order to issue such bonds. Therefore, for the issuance of debentures, the operational limits of companies and company shareholders are not compromised by collateral or guarantees.
The main disadvantages are the high interest rates and short repayment schedules associated with bonds and other debt instruments in comparison with public banking loans. For debentures, the usual term for repayment is around 10 years and interest rates are often fixed at the basic rate (SELIC) or inflation (IPCA) with a spread.
3.3 What other factors should parties bear in mind when deciding on a project financing structure?
Currently, BNDES and other public banks offer lines of credits with subsidised interest rates, which makes this project finance structure extremely competitive. However, the policies of BNDES tend to align these subsidised interest rates with the private interest rates available on the market (often linked to SELIC or IPCA), and to increase the limits on the bank's participation in such projects as a strategic way of increasing private banking and capital markets participation in the structures of such projects.
Additionally, the structuring of loans provided by public banks usually involves a negotiation phase of six months to one year, which usually necessitates the involvement of private equity or a bridge loan to meet the initial investment needs of concessions and PPP contracts.
With regard to bonds and other debt instruments, it is important to highlight the possibility of issuing qualified infrastructure debentures, which benefit from reduced income tax rates (these can be reduced to 0%, for natural persons and 15% for companies).
4 Industry players and ownership requirements
4.1 Who are the key players in project financings in your jurisdiction? Do any restrictions apply in this regard (eg, foreign ownership)?
The key players in project finance in Brazil are the following public banks:
- Banco Nacional de Desenvolvimento Econômico e Social (BNDES);
- Caixa Econômica Federal (CEF); and
- Banco do Nordeste do Brasil (BNB).
These banks are subject to no restrictions in relation to the financing of companies controlled by foreign companies or funds. In recent years, as a result of the issue of debt instruments with tax incentives (see question 4.2), pension funds, investment funds and private banks in general have become important players in project finance.
4.2 What role does the state play in project financings in your jurisdiction?
The state previously played a more important role in project financings involving public banks (BNDES, CEF and BNB). The state used to provide the resources for these banks to finance priority projects, and this still happens to a lesser extent today. Currently, the state is seeking to encourage the capital markets to finance projects by granting tax incentives to investors that purchase debt securities linked to such projects.
4.3 Does your jurisdiction have nationalisation or expropriation laws in place? If so, what are the implications in the project finance context?
Brazil has no laws that expressly provide for the expropriation or nationalisation of companies. There is a general law – Decree 3,365/1941 – which deals with the expropriation of any property by the state. This law includes an exhaustive list of the circumstances in which the state can declare a certain asset as necessary for public utility through a decree issued by the chief executive. Expropriation will be effected only upon prior indemnification.
5 Regulatory and documentary requirements
5.1 What regulatory approvals are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?
In Brazil, project finance is understood as a type of financial engineering that requires all current and future risks to be calculated and distributed among the parties to the project. Such financial engineering is specifically tailored to each project and cannot simply be copied from one project to another. There are also requirements relating to specific securities for each project, in light of the risks associated therewith.
There is no need for regulatory approval of project financings in Brazil. However, it is necessary to establish a strong framework of securities and strong contractual mechanisms to mitigate the actions of the parties to the project.
Moreover, depending on the industry (eg, energy, oil and gas, highways and ports), there are specific regulatory bodies whose specific rules and regulations must be complied with. These include:
- the National Electric Power Agency;
- the National Land Transportation Agency;
- the National Civil Aviation Agency; and
- the National Waterway Transportation Agency.
5.2 What licences are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?
There are several regulatory bodies whose specific rules and regulations must be complied with for the purpose of project financing.
In general, project financings do not require permits and licences. However, depending on the purpose of the project, it is likely that banks will not approve long-term financing without the proper operating and environmental licences. Moreover, with respect to concessions for the use of natural resources (oil and gas, power) or government services (infrastructure), the mandatory procurement process must also include the licences required by law.
5.3 What documentation is typically involved in a project financing in your jurisdiction?
The documents may vary depending on the purpose of the project financing. In general, the following documentation is involved:
- articles of incorporation of the specific purpose company;
- shareholders' agreement;
- concession agreement;
- loan agreement with the bank that will provide the funding;
- security agreements (eg, pledge, mortgage, fiduciary transfer);
- agreements with suppliers;
- document on bonds;
- corporate documents proving the issue of bonds and/or secured bond certificates;
- collateral agreements; and
- underwriting agreements.
5.4 What registration or filing requirements apply for project financing documents to be valid and enforceable?
The project documents, including the finance documents, are subject to general contract provisions, except for debt instruments, which require prior registration with the Brazilian Securities and Exchange Commission.
5.5 Is force majeure understood as a legal concept in your jurisdiction?
Yes, Article 393 of the Civil Code (Federal Law 10,406/2002) recognises the existence of an act of God or force majeure in the necessary fact whose effects cannot be avoided or prevented.
6.1 What types of security interests and guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)? In particular, is the concept of a security trustee recognised (and if not, how are guarantees or security taken for multiple lenders)?
According to Brazilian law, three forms of security can be granted by a debtor or a third party that is willing to grant a guarantee for the debtor's benefit:
- Personal security: A person or legal entity guarantees the debtor's obligations by means of personal security and is liable to the creditor if the debtor does not comply with its obligations. There are two forms, as follows:
- Fiança is most commonly used in written form through a unilateral or bilateral agreement, executed by two witnesses or before a notary public, to be deemed as an extrajudicial executive title and thus to be the subject of execution proceeding before the competent courts; and
- Aval is created by the signature of the aval grantor on the face or on the back of the promissory or other negotiable instruments.
- Security in rem: One or more assets are set aside as collateral. There are several forms, as follows:
- A mortgage is a right over real estate assets granted by a debtor in favour of the creditor to secure the repayment of a specific debt.
- A pledge follows the same logic as a mortgage, but the assets offered consist of the delivery of moveable property. Under Brazilian law, all types of moveable assets may be subject to pledge, including receivables, fungible and non-fungible assets.
- Antichresis is a security through which the debtor transfers the possession of real estate to the creditor, which receives the profits arising from the collateral according to the amount of the debt.
- Fiduciary assignment is a form of guarantee used when the debtor effectively transfers its property rights over a given asset (eg, moveable or immoveable assets or the rights thereunder, or credit instruments) to the creditor. Restitution to the debtor is conditioned on satisfaction of the secured obligation. Fiduciary assignment is a good alternative to consider, as if the debtor is declared bankrupt, the creditor can recover the asset without having to join the bankruptcy proceedings.
Normally, in infrastructure projects, a performance bond or surety bond is used. This security is issued by an insurance company to guarantee completion of the project by the borrower and ensure that the borrower fulfils its obligations to guarantee completion of the project.
An agent or a trustee can also represent a group of lenders and/or specific lenders through a proper mandate granted by a specific agreement. However, according to Brazilian law, it is not possible to allow a person to claim third-party rights in a court of law. In this sense, in the case of judicial enforcement, each lender must act as a separate claimant.
6.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests?
To perfect these different types of security interests, they must be in the form prescribed by Brazilian law and must satisfy the necessary formalities as outlined below.
Security in rem (mortgage, pledge and antichresis) and fiduciary assignment must comply with the following requirements, among others, in order to perfect the security interest created thereby:
- They must be executed in writing;
- They must be executed by both creditor and debtor and attested by two witnesses;
- They must contain, at a minimum, information pertaining to the amount, maturity and interest rate (where applicable) of the underlying obligation, as well as a description (including particulars) of the collateral; and
- They must be registered with the appropriate Brazilian public registry of the domicile of the debtor (eg, the Registry of Deeds and Documents in the case of common pledges and fiduciary assignment, and the Real Estate Registry in case of mortgages or fiduciary assignment of real estate). Registration is a mandatory requirement for the perfection of a security interest.
Further, in order to ensure the enforceability and admissibility in evidence of any documents or instruments that must be furnished to a Brazilian court, documents or instruments prepared in a language other than Portuguese (whether signed abroad or not), together with a sworn translation into Portuguese, must be registered with the Registry of Deeds and Documents in Brazil.
6.3 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?
Yes. As outlined in question 6.1, under Brazilian law, collateral arrangements in rem, guarantees (mortgage, pledge and antichresis) and personal security can have as their object moveable or immoveable assets or the rights thereto, and credit instruments. All types of contractual protections are available to lenders to the extent that these are not prohibited by law.
6.4 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how? In particular what types of notice and control (if any) are required?
Yes, under Brazilian law, it is acceptable to take collateral security over cash deposited in bank accounts, which is usually formalised through a fiduciary assignment or a pledge over the accounts. The perfection of security over cash must meet the legal formalities outlined in question 6.2. Registration with the Registry of Deeds and Documents is mandatory.
Another requirement for perfection is the delivery of notice regarding the creation of the security to the bank where the cash is deposited. An escrow account agreement is commonly entered into with the financial institution to establish the terms and conditions for use of the cash deposits.
6.5 Is it possible to take security over major licences (particularly in the extractive industry sector)?
Under Brazilian law, it is not possible to take security over major licences in any sector, including the extractive industry. Security can be granted only using one of the forms prescribed by statutory law.
6.6 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest or the taking of a guarantee?
Usually, regardless of the types of assets that are given as collateral, registration fees (for registration with either the Real Estate Registry or the Registry of Deeds and Document) are calculated as a percentage of the amount being secured by the collateral, limited by a cap. Notarisation fees are also payable. The notarisation and registration fees do not vary by region. Fees are also charged by the judiciary in order to commence a lawsuit in the event of a default which necessitates an enforcement action. Such fees may vary by region.
6.7 What are the respective obligations and liabilities of the parties under security documents?
The parties' obligations and liabilities vary according to the type of security interest. Generally, the security documents provide that the borrower has committed to pay the relevant amount or to perform its obligations to avoid default. In this sense, the borrower is obliged to fulfil the contract with the counterparty; and the lender is obliged to maintain the guarantee and be ready in case the borrower defaults. Usually, the lender's responsibility is limited to the previously defined proportion of the full responsibility assumed by a particular contract.
Furthermore, where the project that is subject to the security concerns (directly or indirectly) the public administration, public concessions or any other matter that is subject to specific regulation, it should be submitted to the scrutiny of the relevant public agency, which may impose restrictions or general conditions. In particular, assets that are deemed essential to the company's operations may be excluded from serving as collateral (see question 6.8).
6.8 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security or must enforcement action be pursued through the courts?
The procedures and requirements to enforce security agreements depend on the type of security. In general, security governed by Brazilian law cannot be enforced through a standalone document or agreement. In case of default of the secured obligation by the debtor/guarantor, the creditor can enforce only on completion of a specific process to collect or claim the breached obligations.
Except for the fiduciary agreement, all other types of security interests require enforcement by the judiciary through the filing of a lawsuit against the debtor. Special judicial proceedings are available that ensure swift payment through expropriation of the asset until a final decision has been issued by the court.
However, public assets – such as public utilities and government infrastructure – cannot be expropriated in case of default. Under Brazilian law, the lender can step into a public-private partnership (PPP) to avoid non-performance of the contract or the bankruptcy of the debtor by refinancing and restructuring the project.
6.9 What other considerations should be borne in mind when perfecting a security interest or taking the benefit of a guarantee in your jurisdiction?
In addition to the issues outlined in question 6.2, in relation to the registration formalities, it should be borne in mind that when perfecting a security interest or taking the benefit of a guarantee in Brazil, the security agreement must contain:
- a detailed description of the assets; and
- the main financial terms and conditions of the obligation being secured, including:
- the amount of the debt;
- the repayment dates; and
- the applicable interest rate.
6.10 What other protections are available to a lender to safeguard its position in connection with security or guarantees?
Security agreements are protected once they have been duly registered with the relevant notary public in the competent jurisdiction. Other usual forms of contractual protections include step-in rights and affirmative and restrictive covenants.
Under the Federal PPP Law (11,079) and the Federal Concession Law (8,987), the remedy of step-in rights was introduced to the Brazilian legal system. In effect, the laws make it possible to include, in PPP and concession contracts, the "requirements and conditions under which the public partner will authorize the transfer of control of the special purpose company to its financiers, with the aim of promoting its financial restructuring. and ensure the continuity of service provision".
The covenant is a guarantee that is focused on good management and the integrity of assets, based much more on the credibility of the debtor than on any comfort that a real or personal guarantee might bring. There is a commitment to ensure the necessary dynamism for the financial sector, freeing it from the boundaries of operating limits. Covenants are perfectly compatible with the other traditional guarantees that are normally used in Brazil. They may be equated to the right to do and not to do, as provided for in the Civil Code as ancillary obligations. There are well-defined provisions in the Corporate Law (6,404/76), and frequent examples in the case of the issuance of debentures. There are also forecasts in certain legislative instruments, especially those referring to the financial markets.
6.11 Are direct agreements with contractual counterparties well understood in your jurisdiction?
Some infrastructure projects include as an appendix a tripartite agreement aimed at establishing a direct relationship between the lenders and the counterparties to the contract. Such agreements are sometimes referred to as consent deeds, direct agreements or side agreements.
This specific agreement, which is widely used in international practice, governs the direct relationship of the project's financial agents with the power grantor, with the aim of:
- allowing for the exchange of information on the performance of the concessionaire;
- providing for a cure period for financial agents to cover obligations for which the concessionaire is liable; and
- operationalising the temporary administration or assumption of control of the concessionaire's shareholding by financial agents, to promote its restructuring and ensure continuity of service.
Essentially, the tripartite agreement specifies the circumstances under which the project lender may step in to remedy a default of the concessionaire.
7.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?
Accommodation endorsement and personal surety are considered as ‘personal guarantees'. In both cases, the guarantor appears as a third party that must satisfy the default of the debtor with all its assets.
In the case of a personal guarantee, once the bankruptcy of the principal debtor has been declared, it is possible to enforce against the guarantor.
On the other hand, if the credit is secured by collateral, in the event of default by the principal debtor, the (moveable or immoveable) assets that have been offered as collateral will be the subject of foreclosure.
If the property given in guarantee belongs to the bankrupt, foreclosure cannot be immediate and must take place within the framework of bankruptcy proceedings – mainly because the property will be used to settle all debts of the bankrupt. The creditor will be included the second class of creditors and will receive payment of its claim once the labour legislation liabilities have been paid. The creditor will even have the right to vote in the deliberative assemblies. However, the value of its claim may suffer some type of compulsory discount.
There is an exception to this rule where the formalised collateral appears as a ‘chattel mortgage'. In this case, if the debtor is declared bankrupt, the creditor can recover the property and will not be affected by the bankruptcy.
7.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?
Several situations can result in the termination of transactions, including:
- formal errors in the preparation of the documents that constitute the debt;
- the creditor's default;
- the recognition of fraudulent dealing or fraud against creditors; or
- the sale of bankrupt assets or assets under bankruptcy to favour a particular creditor.
In the first two cases outlined above, there is no correlation with a declaration of bankruptcy or with fraudulent acts; it is enough to demonstrate irregularities in the transaction and possible reciprocal breaches of obligations by the parties.
Negotiations can also be terminated if the debtor sells its assets during the course of proceedings in order to circumvent the payment obligation to be determined in such proceedings. Under Brazilian law, this constitutes fraudulent dealing.
Fraud against creditors is another ground for the termination of negotiations under Brazilian law. This situation arises where a debtor which is insolvent or on the verge of insolvency disposes of its assets in order not to be held accountable for the assumed obligations.
The Bankruptcy Act provides that a transaction entered into by a debtor which is bankrupt or under judicial reorganisation that aims to benefit one creditor to the detriment of others is null and void. This is also considered a crime, which is punishable by imprisonment of the participants in the act and a fine.
8 Project contracts
8.1 Are project contracts in your jurisdiction typically governed by local law?
With regard to the regulation of project finance contracts in Brazil, as yet there is no specific legislation that deals with this specific financial structure.
However, numerous federal laws and certain rules regulate the sectors in which project finance is commonly utilised. For example, the rules governing public services that can be delegated under the terms of the Federal Constitution 1988 include the following:
- Federal Law 8,666/1993 regulates bids and contracts signed with the public administration;
- Federal Law 8,987/1995 governs the regime of public service concessions and permissions provided for in the Federal Constitution;
- Federal Law 9,074/1995 establishes rules on the grant and extension of public service concessions and permissions; and
- Federal Law 14,133/2021 governs bidding procedures and administrative contracts. While this law came into force on the date of publication (21 April 2021), the rules that previously applied in this regard, set out in Federal Law 8,666/1993, will be repealed over the next two years.
8.2 What remedies are available to a project company for breach of the project contract?
There are currently no specific regulations in Brazil that deal with project finance contracts. Thus, the most important rules are those governing the sector in which the relevant project is being implemented, as well as the applicable solutions and penalties in case of non-compliance, along with the responsibilities established in the contract itself.
For example, in case of non-compliance with the established terms, it is possible to provide for:
- pecuniary penalties;
- intervention by the financing entity; and
- termination of the contract.
8.3 Are liquidated damages provisions in project contracts enforceable?
Under the Civil Code (Federal Law 10,406/2002), an indemnity clause included in a contract, called a compensatory penal clause, is chargeable and enforceable, and court precedent guarantees such enforcement.
The inclusion of a compensatory penal clause with a determined indemnity amount is optional, and allows the parties to set the monetary amount that must be paid to the innocent party should other party totally or partially fail to comply with its obligations under the contractually established terms.
8.4 Are there any public policy considerations which need to be taken into account when assessing the enforceability of project contracts?
Public policies are programmes, actions and decisions taken by governments (national, state or municipal) with the direct or indirect participation of public or private entities that aim to ensure the rights determined in the Federal Constitution.
Under this definition, it is clear that public policies may be considered as projects, programmes and activities that are carried out by the government. In this sense, it is understood that projects, contracts and public tenders are all instruments for the implementation of public policies.
Thus, it is understood that the laws that regulate legal business and the guidelines set out in the contract must be observed in assessing the feasibility of a project.
9 Project risk
9.1 What risks typically arise in project financings in your jurisdiction and how are these best mitigated?
In general, risks can be divided into:
- financial risks (eg, interest rates, exchange rates);
- environmental, equity and civil liability risks (eg, environmental damage, business interruption);
- construction and operational risks (eg, failure in operations, value of materials, technological risks); and
- political, legal and regulatory risks (eg, force majeure, regulation).
Such risks may be mitigated by:
- taking out insurance that covers such risks;
- structuring the project finance contract to divide the risks between the contractual parties; and
- availing of security operations such as hedging with forward and futures contracts, interest rate swap contracts and interest rate cap (ceiling) contracts.
9.2 How significant is political risk in project financings in your jurisdiction? How is this best mitigated?
Political risk is usually of medium impact and mainly concerns government actions that may have effects such as the following:
- the potential to terminate or otherwise affect a contract;
- the imposition of fees that would significantly reduce the value of receivables; or
- restriction of the benefits initially established in a contract.
The scenarios that tend to cause such political risks usually involve changes in government representatives or government policy, and hence in support for the project.
Despite the political risks, the judiciary has a history of sustaining the effects of political acts. In more mature sectors with their own regulatory agencies, there is a history of the prevalence of technical decisions.
10.1 What types of insurance arrangements are typically put in place for project financings in your jurisdiction?
The insurance arrangements that are typically put in place for project financings concern guarantee insurance – a type of insurance in which the insurer takes over the compensation paid to the government and hires a different contractor to perform the project agreement. Such insurance also covers the payment of amounts due to penalties and damage.
10.2 If local insurance is required, can local insurers assign offshore reinsurance contracts in your jurisdiction?
Local insurers can assign offshore reinsurance to reinsurers under the Brazilian regulatory framework. According to Article 4 of Complementary Law 126/07, it is possible to assign offshore reinsurance contracts to local, admitted and occasional reinsurers, as follows:
- Local reinsurers are companies based in Brazil and supervised by the Superintendence of Private Insurance (SUSEP) as though they were insurers.
- Admitted reinsurers are foreign reinsurers which:
- are recognised by their home supervisor (whether pure reinsurers or not);
- have a representative office in Brazil;
- are registered with SUSEP; and
- fulfil specified requirements relating to issues such as financial strength, credit rating and financial guarantees.
- Occasional reinsurers are foreign reinsurers that:
- are recognised by their home supervisor;
- are registered with SUSEP; and
- fulfil requirements relating to issues such as financial strength and credit rating.
According to the Brazilian regulatory framework, insurers and local reinsurers must:
- not cede more than 50% of the premiums issued in each calendar year (considering the total number of operations);
- avoid excessive fronting and intra-group transactions, including for risks in Brazil; and
- subject their disputes to the jurisdiction of the Brazilian courts, except where there is an arbitration clause (according to specific legislation).
The Brazilian regulatory framework governing insurance is set out in the following instruments:
- Complementary Law 126/07 (reinsurance, co-insurance and foreign exchange insurance);
- Decree-Law 73/66 (reinsurance operations);
- Decree 6,499/08 (occasional reinsurers' cession limit);
- Resolution CNSP 168/07 (reinsurance operations (main resolution));
- Resolution CNSP 227/10 (local reinsurers' minimum capital requirements);
- Resolution CNSP 396/20 (local reinsurers' additional capital based on underwriting risks);
- Circular SUSEP 517/15 (local reinsurers' technical reserves and retention limits);
- Resolution CNSP 173/07 (reinsurance brokers);
- Resolution CMN 4,444/15 (insurance and reinsurance investments of technical reserves);
- Resolution CMN 3,525/07 (foreign currency accounts);
- SUSEP Circular S 527/16 (admitted reinsurers' representative offices); and
- SUSEP Circular 249/04 (internal controls).
10.3 What other forms of insurance feature in the project finance market in your jurisdiction?
Other forms of insurance that feature in the Brazilian project finance market include the following:
- Patrimonial risks insurance: This involves the provision of a complete and personalised loss prevention and patrimonial risk management service, to protect against patrimonial damage and business interruption.
- Business interruption insurance: This replaces income lost if business is halted due to direct physical loss or damage, such as might be caused by a fire or a natural disaster. This type of insurance also covers operating expenses, a move to a temporary location if necessary, payroll, taxes and loan payments.
- Civil responsibility insurance: This covers the payment of compensation that may be civilly due by law to third parties for events deriving from the risk or activity described in the particular conditions and under the limits set, in the absence of guilt or negligence.
- Engineering risks insurance: This covers civil works such as the construction of infrastructure and buildings in general, as well as an array of industrial works, including installation, assembly, commissioning and tests, expertise risk analysis and risk prevention by renowned engineers.
11.1 What taxes, royalties and similar charges are levied in the project finance context in your jurisdiction?
No taxes, royalties or similar charges are specifically levied on project financings in Brazil. The applicable taxes are the same as those which apply to similar funding transactions.
11.2 Are any exemptions or incentives available to encourage project finance in your jurisdiction?
Federal Law 12,431/2011 established so-called ‘fostered bonds', which are debt instruments issued by specific purpose companies or their controlled companies to finance infrastructure projects. Under the law, relevant investors can benefit from tax exemptions and different applicable income tax rates.
Additionally, specific projects located in certain Brazilian regions may benefit from regional incentives authorised by the Brazilian Constitution and by federal laws. Several tax benefits are available for priority projects in certain areas of North and Northeast Brazil, provided that they are approved by 31 December 2023.
11.3 What strategies might parties consider to mitigate their tax liabilities in the project finance context?
Companies must thoroughly assess the nature of the contract that gives rise to the funding needs and the main specificities thereof. The tax liabilities may vary depending on:
- the contract type (eg, if it refers to a concession or a public-private partnership);
- the type of activity; and
- the type of compensation.
The recording method of the assets and the repayment thereof will also be based on the nature and risks involved in the contract.
12 Governing law and jurisdiction
12.1 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?
The Civil Code (Federal Law 10,406/2002) normally applies to business financings and guarantees. There are specific instances of moveable and immoveable property being transferred after acknowledgment of the debt payment, which comply with Federal Law 9,514/1997.
12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?
Within the scope of arbitration, the choice of jurisdiction and foreign law is valid. Outside the scope of arbitration, Federal Law 4,657/1942 establishes the criteria for applying foreign jurisdiction and law in cases involving marriage, divorce, inheritance and contracts. Irrespective of the choice of the parties, the foreign jurisdiction and law will not be effective, and thus will not be subject to enforcement in Brazil, if they offend national sovereignty, public order or good customs (Article 17).
12.3 Are waivers of immunity enforceable in your jurisdiction?
Generally, waivers of immunity can be enforced, except in relation to labour matters. Further, the attachment of assets of foreign states is admissible if they are not affected by diplomatic or consular legations.
12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?
A foreign arbitration award must be approved by the Supreme Court of Justice (STJ), with partial approval being possible. In 2002 Brazil ratified the New York Convention, which provides for the immediate execution of arbitration awards issued in signatory countries; in such cases, it is up to the defendant to prove that the award cannot be ratified. The procedure to be followed to enforce the foreign decision is set out in STJ Resolution 9, which provides that the request must contain the certificate or authentic copy of the full text of the foreign decision and all other indispensable documents, duly translated by an official translator and authenticated by a Brazilian consul.
For the judgment to be filed:
- it must have been entered by a competent authority;
- the parties must have been summoned; and
- it must not be possible to appeal the decision.
13 Foreign investment
13.1 What taxes and other charges are levied on foreign investors in the project finance context in your jurisdiction?
According to Article 1 of Federal Law 4,131/1962, the term ‘foreign capital' encompasses:
- all goods, machinery and equipment that enter Brazil with no initial disbursement of foreign currency in order to produce goods or services; and
- financial resources or money introduced to the country by individuals or legal entities that are resident, domiciled or headquartered abroad for application in economic activities.
The entry of foreign capital into Brazil is not subject to tax, except for transaction tax at a rate of 0.38%.
However, under the terms of Federal Decree 9,580/2018, income obtained from the following sources is subject to tax on income and earnings of any nature, at rates ranging from 15% to 22.5%:
- payment of interest on equity (Article 726);
- capital gains due to the sale of quotas or shares held (Article 153); and
- remuneration for services rendered to affiliates or controlled companies in Brazil (Article 744).
13.2 Are any incentives available to encourage foreign investment in the project finance context?
The Brazilian legal system has no specific legislation on project finance. Incentives for the use of project finance are provided for in several federal laws that regulate public services concessions. Of these, Federal Law 11,079/2007 is the most recent.
Article 4 provides that public-private partnerships (PPPs) must take into consideration:
- the "distribution of risks among the contracting parties";
- "financial sustainability"; and
- the "advantages offered to the project".
Article 8 outlines the methods of guarantees that may be used by the government, as follows:
- the linkage of revenues;
- the creation by law of special funds;
- the contracting of surety bonds with insurance companies that are not controlled by the government;
- guarantees provided by international organisations or financial institutions that are not controlled by the government;
- guarantees provided by a guarantee fund or a state-owned company created for this purpose; and
- other mechanisms admitted in the Brazilian legal system.
Finally, Article 9 provides for the creation of a specific purpose company in order to:
- achieve the object of the PPP contract;
- obtain financing; and
- structure guarantees.
13.3 What restrictions and requirements apply with regard to the remission of foreign exchange? Are local companies permitted to maintain offshore bank accounts?
Brazilian law allows local companies to maintain offshore bank accounts, as long as the existence of such accounts is reported to the Brazilian Federal Revenue (RFB). Brazilians with offshore bank accounts must inform the RFB of assets located abroad in their individual income tax declaration, regardless of the amount.
If the value of those assets exceeds $10 million, the individual must also report on a quarterly basis to the Central Bank of Brazil (BACEN), by submitting a declaration of Brazilian capital in the exterior.
13.4 What restrictions and requirements apply with regard to the import of plant and machinery?
The Foreign Capital Law (4,131/1962) and BACEN Resolution 3,844/2010 regulate the entry of foreign capital into Brazil.
Foreign capital that enters Brazil must be registered in the Information System of the Central Bank of Brazil through the Electronic Declaratory Registry (RDE) in the External Direct Investment Module. Registration must be effected before the financial capital enters Brazil. Among other things, the registration must identify the parties and the operations for which the foreign capital will be used.
Those responsible for the registration must:
- retain for BACEN all supporting documentation relating to the information declared in the RDE, updated and in order, for five years from termination of participation in the capital stock of the recipient legal entity in the case of foreign direct investment, or from the conclusion of operations; and
- inform BACEN, in the specified form and timeframe, of any direct payments abroad.
Where foreign capital takes the form of goods, machinery or equipment, the amount to be reported must be equivalent to:
- the value of the goods in the country of origin; or
- in the absence of satisfactory proof, the amount determined in the accounts of the company that will benefit from the foreign capital.
13.5 What restrictions and requirements apply with regard to foreign workers and experts?
Work undertaken by foreign citizens in the Brazilian territory is governed by the Migration Federal Law (13,445/2017), regulated by Federal Decree 9,199/2017.
To undertake work in in Brazil, a foreign consultant must:
- have a visa (temporary or permanent); and
- prove his or her qualifications and professional experience.
Article 56 of Federal Decree 9,199/2017 provides that authorisation to undertake remunerated activity in Brazil must be sought from the Ministry of Foreign Affairs and will depend on the approval of the National Immigration Council, which will consider, among other requirements foreseen in the applicable legislation, the recognition of diplomas and titles obtained abroad by the foreign consultant.
13.6 Is your jurisdiction party to bilateral investment and withholding tax treaties which might facilitate foreign investment?
Brazil has entered into bilateral agreements with the following jurisdictions: Angola, Argentina, Bolivia, Chile, Colombia, Cuba, Egypt, Ecuador, Guyana, India, Israel, Mexico, Panama, Paraguay, Peru, Saint Kitts and Nevis, the Southern African Customs Union, Suriname, Uruguay and Venezuela.
Most of the commercial agreements were entered into by the Latin American Integration Association (ALADI). ALADI was established in 1980 by the Montevideo Treaty, which aimed to establish a common Latin American market characterised by the adoption of tariff preferences and the elimination of non-tariff restrictions.
Brazil also has a trade agreement with the Southern Common Market (Mercosul). This is an important economic bloc in Latin America formed by Brazil, Argentina, Uruguay, Paraguay and other countries. It was created in 1991 with the aim of increasing the supply of jobs and income, improving productivity and strengthening economic relations between nations.
Recently, Brazil concluded two important negotiations. The first related to an agreement concluded on 23 August 2019 between Mercosul and the European Free Trade Association (ie, Switzerland, Norway, Iceland and Liechtenstein), which aims to eliminate tariffs applied to imports in 100% of the industrial universe.
The second relates to the Bi-regional Association Agreement between Mercosur and the European Union, concluded on 18 June 2020, which is still pending approval.
Among other things, these agreements aim to:
- promote greater openness, transparency and legal certainty in the markets for services, investments and government purchases;
- reduce non-tariff barriers; and
- consolidate the agenda of good regulatory practices and establish modern disciplines in the areas of trade facilitation and intellectual property.
14 Environmental, social and ethical issues
14.1 What is the applicable environmental regime in your jurisdiction and what specific implications does this have for project financings?
In Brazil, the environment is protected by:
- the Federal Constitution;
- Federal Law 6,938/81; and
- regulatory rules issued by environmental protection bodies.
Article 225, paragraph 3 of the Federal Constitution provides that: "Conduct and other activities considered harmful to the environment will subject the offenders, individuals or legal entities, to criminal and administrative sanctions, regardless of the obligation to repair the damage caused."
Where projects are subject to an environmental regime or have some environmental characteristics, the rules on environmental licensing set out in Federal Law 9,985/2000 and the specific environmental laws of the relevant municipality or state must be observed.
Within the scope of commercial contracts, it is important to evaluate the object of the contract; if it deals with environmental issues, in-depth studies should be carried out to identify the risks and the pros and cons relating to the project. If any irregularities are identified, the contract may be considered null and void.
14.2 What is the applicable health and safety regime in your jurisdiction and what specific implications does this have for project financings?
In Brazil, health and safety are fundamental social rights protected under Articles 5 and 6 of the Federal Constitution and under Federal Law 5,252/93.
Companies established in Brazil with employees who are contracted under the regime set out in Federal Law 5,252/93 must adhere to regulatory norms which aim to prevent the occurrence of occupational illnesses and labour accidents. These rules are dynamic, in that they are drafted and regularly reviewed by specific commissions comprised of government representatives, employers and workers.
Failure to comply with the legal and regulatory provisions on occupational health and safety will result in the imposition of penalties on the employer, such as fines and employee indemnities.
In business contracts involving outsourced labour, it is important that the company which contracts the services ensures compliance with the rules on worker health and safety. If the service provider fails to adopt the measures required by law for the benefit of its employees, the contracting company may be held liable for possible fines and indemnities, as it is equally responsible for compliance with the rules aimed at the protection of workers.
14.3 What social and ethical issues should be borne in mind in the project finance context?
In commercial contracts, it is common to include sustainability clauses – that is, contractual provisions that determine how the parties should behave in carrying out the contract and fulfilling ancillary obligations.
In Brazil, issues relating to environmental protection, sustainability, human rights (eg, the prohibition of slave labour), piracy and anti-corruption provisions are usually considered.
To avoid impunity and irregularities in contracts, the compliance function has been established in order to ensure that the company operates in accordance with the established rules, in order to:
- guarantee ethical relations in businesses and institutions;
- minimise risks; and
- detect non-conformities in processes.
In general, if the ethical clauses are breached, the contract can be rescinded without penalty for the withdrawing party, regardless of whether it was formalised during a specified period.
15 Trends and predictions
15.1 How would you describe the current project finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The main public bank that provides loans for public-private partnerships (PPPs) and concessions in Brazil is the Banco Nacional de Desenvolvimento Econômico e Socia (BNDES). It has different lines of credit for infrastructure projects, especially in the following sectors:
- toll roads;
- public street lighting;
- urban mobility; and
The policies of BNDES tend to align subsidised interest rates with private interest rates available in the market (often linked to the basic rate or inflation), making the issuance of bonds – especially debentures – more attractive in the medium to long term.
It is expected that private participation in the structuring of project finance for concessions and PPP contracts will increase, especially through the issuance of debentures in the capital markets.
Investment funds and other private investors are also showing increased interest in the acquisition of shares in large infrastructure companies, which will increase available funding for the industry.
The advent of new legal frameworks – in particular, the new general law for government contracts (Federal Law 14,133/2021) – will also help to make terms and securities more flexible, and should thus lead to an increase in the number of project finance agreements utilised in Brazil, beyond the scope of concession projects and PPPs.
16 Tips and traps
16.1 What are your top tips for the smooth conclusion of a project financing in your jurisdiction and what potential sticking points would you highlight?
- Engage specialised legal and finance advisers to assist in the negotiation of loan conditions with public banks.
- Understand the usual schedules for negotiating and contracting loans with public banks, in order to secure the necessary capital to execute the concession/public-private partnership (PPP) contract until a long-term loan agreement has been finally executed.
- When contracting long-term loans with public banks, be aware of the requirement for bank or corporate guarantees from company shareholders and the constitution and maintenance of escrow accounts, at least until conclusion of the completion phase of the concession/PPP contract.
- When contracting long-term loans with public banks, be aware that it is difficult to change the previously defined use of the loan, or to reduce the amount of the loan or the applicable interest rates.
- When contracting long-term loans with public banks, confirm the nationalisation index required for some lines of credit, which must be maintained until termination of the contract.
- When issuing qualified infrastructure debentures, obtain the advance approval of the competent sectoral ministry in order to be entitled to an income tax reduction on income from the debenture.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.