Antonio Giglio and Marcelo Ikeziri of Demarest Advogados assess project finance in Brazil


In spite of being the seventh world's largest economy , there is still plenty of room for investment and improvement in Brazilian infrastructure.

Most of the bottlenecks can certainly be tackled by domestic and foreign private investors. In this scenario, project finance will play an important role in the next few years.

Below, the authors attempt to select and briefly present 10 relevant legal issues investors and players should know about project finance in Brazil, focusing on practical aspects and opportunities created by the current political and economic situation in the country.

1. Legal Treatment of Foreign Investment

Foreign investment has been welcomed in Brazil for a long time and still is an important source of capital for the development of the Brazilian economy.

Once duly registered with the Central Bank of Brazil, a foreign investor is granted the right to receive dividends and interest and to repatriate the investment. Profits paid by a Brazilian company to a foreign investor are not subject to withholding taxes. Foreign capital invested in Brazil may be repatriated at any time, and there is no minimum period for the investment.

2. Recent Legal Developments on Step-In Rights

As a general rule, Brazilian law provides that contractual provisions authorizing the lender to keep the assets offered as security upon a default by the borrower are null and void. As a result, in order to foreclose security the lender is obliged to sell the assets to a third party and use the proceeds therefrom in the repayment of the debt.

As far as concessions and private-public partnerships ("PPPs") are concerned, however, an important legal provision was enacted in Brazil by means of Law No. 13,097 of January 19, 2015, which amended the Brazilian Law of Concessions No. 8,987 of February 13, 1995, aiming to promote financial restructurings of operators and ensure the continuity of the services provided - secured lenders may now be granted by regulators the right to temporally assume control and/or the management of an operator.

In those case, the regulator will also have the ability to waive the requirement (among others) that lenders must evidence technical capacity to step-in and pursue the project, requirement which in practice would - prior to such important legal improvement - make step-in an unfeasible solution.

3. Acquisition of Distressed Assets

Brazilian Federal Law No. 11,101/2005 ("Bankruptcy Law") provides for the possibility of a company under the so-called judicial restructuring proceeding (similar to US' Chapter 11) to sell independent production units ("UPIs"). In such cases, the acquirer does not succeed the restructuring seller in respect of any of its liabilities, including labor and tax, relating to the purchased UPI.

This type of situation can create attractive opportunities both for distressed businesses and potential investors - while the former can actually reach potential and viable restructurings, the latter may pursue attractive projects with significant legal risk mitigation. Brazilian legislation ensures sufficient segregation of risk and with standard market project financing arrangements involved parties can ensure appropriate allocation of liabilities to relevant stakeholders.

4. Incentives for Private Long-term Funding

Though the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social - BNDES) still plays an important role as a long-term lender for relevant infrastructure projects, it is known that the Bank has a limited pocket when compared to the huge demand for long-term capital and a solid governmental program to tackle significant infrastructure bottlenecks.

Amidst a strict plan for fiscal adjustment, it is expected that the Federal Government will reduce disbursements and in compensation incentivize participation of private investors in the projects. For that purpose it is said that whenever a project supported by the official bank also counts on private investment, that same project will be entitled to reduced interest rates accrued in BNDES' project financings.

It is also expected that in new concession rounds to come the Federal Government should create more attractive guaranty and risk mitigation mechanisms for private investors.

Those important steps should shake the industry and open space for a number of new debt and equity issuances in the local capital markets, mainly of newly created tax-incentivized infrastructure bonds (see below in more detail).

5. Project Bonds

Besides the above initiatives in course, Project bonds may become an important source of funding for relevant infrastructure projects, as they allow access to a great investor base and provide tax benefits.

Brazilian-resident individual investors and non-resident investors of project bonds, as well as of certain real estate backed securities and investment funds recently became entitled to a special tax regime consisting in a zero-percent income tax rate on the yield resulting from those securities. The investor is also subject to a zero-percent rate for the so-called financial tax on exchange transactions (IOF-Câmbio).

It is important to note that non-resident investors must be situated in any jurisdiction other than those where income is not taxed at all or is taxed at a maximum rate lower than 20%. Sovereign funds are also entitled to the tax benefit. Corporate investors residing in Brazil are subject to a 15% income tax rate.

Funds raised through project bonds must be used by the issuer (i) in priority infrastructure investment projects or research, development and innovation; or (ii) to reimburse costs, expenses or debts relating to such priority projects, incurred 24 months prior to the end of the offer of the relevant securities.

In order for an investment project to be considered priority, a specific request must be submitted to the analysis and approval by the competent Ministry in Brazil.

Considering the special tax treatment, the issuer of the project bonds may be subjected to penalty in case the funds are not channeled to the relevant priority projects, equivalent to 20% of the amount raised and not properly used.

6. Fiduciary Security

Under Brazilian law, the following types of fiduciary lien are possible: (i) fiduciary transfer of non-fungible movable assets; (ii) fiduciary transfer of fungible assets – to domestic financial institutions only; (iii) fiduciary transfer of bank accounts; (iv) fiduciary transfer of real properties; and (v) fiduciary assignment of receivables.

In general terms, the advantage of fiduciary forms of security compared to traditional pledges and mortgages is that the lender typically enjoys greater protection in the event of a borrower’s bankruptcy (similar to United States Chapter 7 - liquidation). In addition, in the event of judicial recovery (recuperação judicial) (similar to United States Chapter 11), a lender secured by a fiduciary lien is not subject to the recovery plan.

Nearly any asset of the relevant project can potentially secure the financial undertakings but it is known that receivables and cash flows play the most important role for bank lenders in project finance. Whenever those are transferred to lenders on a fiduciary basis, lenders will be granted the advantages above as to foreclosure and bankruptcy remoteness.

7. Limited Recourse x Full Recourse

Despite the fact that structurally project financing in Brazil may be designed as a limited recourse transaction, i.e. meaning that no recourse to the assets of the borrower other than the project revenues and proceeds themselves, current practices still evidence that in many cases full recourse is required by lenders, not only during the pre-operational stage but also in the operational stage at least to a certain degree. It is a fact that credit and political risk has a lot to improve in Brazil so that lenders gain confidence sufficient to accept limited recourse structures.

8. Public Concessions

The Brazilian Federal Government has recently announced on June 9th, 2015 a new package of public concessions as part of the so-called Brazilian Logistics Investment Plan.

The main goal of this new round is to increase economic growth and the package include public concessions of airports, railroads, toll roads and ports. Investments as high as BRL 198.4 bn are expected for this package, being BRL 8.5 bn for airports, BRL 86.4 bn for railroads, BRL 66.1 bn for toll roads and BRL 37.4 bn for ports.

9. Anticorruption Law

On August 1, 2013, the Brazilian Anticorruption Law was enacted, based on the UK Bribery Act and the US FCPA. This new regulation provides guidelines for implementation of code of conducts and compliance programs related to anti-corruption. It is certainly an important piece of legislation to be taken into account when structuring infrastructure projects and financing in the country.

10. Golden Share

Lenders can assure the control of certain matters by holding a golden share of the SPE created to pursue the relevant infrastructure project. Basically, this is a sole share held by a lenders which class is different from those held by sponsors and the other shareholders.

A golden share may grant to the lenders the right to veto important matters and/or to elect members of the management of the SPE.

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1In terms of GDP, according to the World Bank.

Legal remark: the content of this article is intended to provide a general guide to the subject matters. Specialist advice should be sought about your specific circumstances.

Antonio Giglio
Demarest Advogados
São Paulo


Marcelo Ikeziri
Demarest Advogados
São Paulo