Estif Aparicio and Cecilio Castillero of Arias Fábrega & Fábrega (ARIFA) look at the opportunities Panama presents to investors

Many energy, public infrastructure and other projects have been financed in Panama in recent years. In the energy sector, in 2014 Construtora Norberto Odebrecht, Panama branch closed a receivables purchase syndicated facility granted to finance the design, procurement and construction of the third power transmission line of the country for the State-owned Empresa de Transmisión Eléctrica. Also, in 2014, AES Changuinola issued $470 million in registered bonds to refinance its original project finance syndicated facility contracted back in 2007 to finance the construction of a 223MW hydroelectric facility. This transaction represents the largest bond offering in Panama’s history placed solely with local investors.

In 2014, the consortium integrated by Constructora Norberto Odebrecht and Fomento de Construcciones y Contratas, closed a $211 million cross-border receivables purchase facility granted for the design and construction of a two-km extension of the first line of Panama City Metro System. In 2012, a syndicate of international banks had granted to the same consortium a $354 million non-recourse collection rights facility to finance consortium works related to the design and construction of the first subway line in Panama City, the only its kind in Central America. In addition, and in connection with the same project, the Republic of Panama financed another portion of the construction of the subway through $362 million syndicated credit facilities guaranteed by COFACE and CESCE.

In 2013 Unión Eólica de Panamá, entered into a $71 million syndicated facility to finance the construction of the phase one of a wind power generation project. When completed, the entire project in Penonomé will have an installed capacity in excess of 300MW, the largest of its kind in Panama. In 2012 Hydro Caisán issued $130 million in registered bonds for the construction of a 67.2MW run-of-the-river hydroelectric project in the Chiriquí Province of the Republic of Panama. In 2011, Generadora Pedregalito, one of the largest hydroelectric projects developed by Panamanian investors, closed a $60 million public bond issuance in the Panamanian Stock Exchange.

In 2007, Bahía Las Minas Corp, the largest thermal generation company in Panama and a subsidiary of Suez Energy, issued $175 million multi-series senior secured notes to finance a coal conversion project.

In addition, there have been multiple smaller financings for run-of-the-river hydroelectric projects, such as the $27.5 million registered bond issuance by Generadora Alto Valle, the $22 million loan facility entered into by Hidroeléctrica San Lorenzo, the $7.5 million financing of the Macano hydroelectric project and the engineering, procurement and construction (EPC) contract with Construtora Norberto Odebrecht for the construction of the Dos Mares hydroelectric project.

Companies operating in other industries have also financed substantial infrastructure projects in recent years. In the telecommunications industry, in 2008 Digicel borrowed $170 million to finance the deployment of its new cellular network. 

In 2009, the administration elected that year, launched the most aggressive public infrastructure program ever undertaken by any government. Thus, in 2011 $70 million facilities were granted to Concesionaria Madden-Colón, a concessionaire of the Panama-Colon toll-road, to finance the construction of the last tranche of the Madden-Colon highway connecting Panama City with Colon City, the two terminal cities of the Panama Colón.

In 2008, the Brazilian construction company Odebrecht financed the design and construction of Panama City’s landmark $183 million coastal highway (Cinta Costera) with a non-recourse collection rights purchase facility, and in 2011, 2012 and 2013, Odebrecht financed additional works related to the design and construction of Cinta Costera through non-recourse collection rights purchase facilities totaling more than $600 million. 

Arias Fábrega & Fábrega acted as counsel to the arrangers, underwriters, lenders, borrowers or issuers in each of the abovementioned infrastructure projects. Some of these transactions were structured as simple syndicated loans or unsecured senior notes. Others involved complex instruments with highly structured collateral packages.

Non-recourse collection rights purchase facilities

As mentioned above, most of the largest public infrastructures projects have been financed through non-recourse collection rights purchase facilities. The first of this facility was granted in connection with the Cinta Costera project referred above. Under this financing structure, the lenders purchase at a discount credits (collection rights) payable under the construction contract to the contractor by the Panamanian government or any instrumentality thereof, which collection rights may be evidenced by documents named partial payment account certificates (cuentas de pago parcial), no objection certificates (certificados de no objeción) or, in certain cases, simple invoices. Each partial account payment certificate, no objection certificate or invoice states the specific amount payable to the contractor or its assignees as a result of either performed by the contractor and approved by the government during a certain period. The certificates (but not the invoices), once issued, constitute irrevocable payment obligations of the Republic of Panama independent from the construction contract itself. This type of financing has been used for several of the Panama’s most important infrastructure projects.

Concession agreement

Some public services in Panama are provided under concession agreements granted to private companies by the Panamanian government. Generally speaking, concession agreements are of three types: (i) concession agreements enacted by special legislation (contratos-ley); (ii) concession agreements entered into by the government under the general public concession regime or (iii) ordinary concession agreements granted by government agencies under the regulatory framework applicable to the energy, telecommunications, ports, toll-roads, mining and oil industries.

The largest infrastructure projects in Panama, such as Texaco’s former refinery, Petaquilla’s copper mine, the Balboa, Cristobal and Manzanillo container ports, and the Panama Canal railway have all been awarded under special legislation. The advantage of concession agreements enacted by special legislation is that the terms of the concession can be tailored to the specific requirements of the project. For lenders, this may include, among other things, specific recognition of step-in rights in the event of default, exemptions from various taxes, including but not limited to withholding tax, and more certainty with respect to the creation and enforcement of security interests.

Government control and termination rights

Infrastructure projects in Panama usually involve investments in regulated industries. Such is the case with the energy, telecommunications, ports, toll-roads, mining and petroleum storage, transportation and refining industries. Lenders must be aware that the government of Panama and its regulatory agencies exercise influence on companies operating in these industries.

Lenders must be particularly aware of the Panamanian government’s right to terminate concessions. By law, the government of Panama always reserves the right to unilaterally terminate a concession for reasons of public interest (rescate administrativo) upon payment of fair compensation. The details of what constitutes public interest, what is fair compensation and which process is to be followed varies from contract to contract.

In addition, the government of Panama also reserves the right to terminate a concession in case of a breach of its terms by the concessionaire and in the event of insolvency or bankruptcy of the concessionaire. As in the case of the unilateral termination of a concession, the details of what constitutes a breach of contract, what compensation, if any, is due to the concessionaire, and which process is to be followed also change, to some extent, from one concession agreement to the next.

As the concession is in most cases the most important asset of the concessionaire, lenders must take care to understand the circumstances under which the concession can be terminated and the way in which termination payments are calculated and paid. It is critical that whatever termination payment the concessionaire is entitled to receive, independently from the cause for termination of the concession, be assigned to the lenders or otherwise encumbered. Consents, filings and proper formalities must be obtained and followed for the assignment and/or encumbrance of these termination payments to be valid and enforceable against the government and be excluded from the bankruptcy of the concessionaire.

Some concessions, such as Petaquilla’s copper mine and the Panama Canal Railway’s railroad, have granted lenders limited rights to step in, operate the concession, cure defaults and identify potential purchasers for the concession before the government terminates the concession. However, the general legal framework applicable to most concessions does not contemplate step-in rights in favour of lenders. In infrastructure projects of a size and nature that require step-in rights, concessionaires should seek a concession agreement enacted by special legislation.

Lenders should also review the good standing of the concession and the concessionaire, as the government generally reserves substantial rights to audit performance of the concessionaire under the concession agreement and violations of such terms may constitute causes for termination.

Collateral package

In recent years, the financing of most of the infrastructure projects in Panama, other than public infrastructure projects, has included a comprehensive and complex security interest package. Security packages have ordinarily included a combination of a mortgage or an assignment of the concession, an assignment of concession termination payments, a pledge of the stock of the concessionaire, a pledge or similar security interest on collection, capex and debt service reserve accounts, a mortgage on real property, a chattel mortgage on movable assets, an assignment of insurance payments, an assignment of accounts receivable and an assignment of material contracts, such as power purchase agreements.

In turn, the financing of most public infrastructure projects, has been made under non-recourse receivables collection purchase facilities entered into by the banks and a contractor that has been awarded by the government or any instrumentality thereof. In these facilities the lenders have been generally willing to purchase the receivables from the contractor without requiring any collateral from the contractor and just relying on the creditworthiness of the Panamanian State, now one of the few investment-grade sovereigns in Latin America.

Although, in general terms, Panamanian law favours the creation, perfection and enforcement of these security interests, lenders should be aware of certain limitations.

Concession agreement

Generally speaking, infrastructure concession agreements can be mortgaged under Panamanian law, although a recent opinion from the Procurador de la Administración has casted some doubts as to the enforceability of mortgages constituted over power generation concessions.

Prior consent from the government is in most cases necessary to create a valid mortgage on a concession. In addition, the filing of a mortgage agreement with the Public Registry is required for the validity and perfection of the mortgage.

Although a properly constituted mortgage will grant the mortgagee a first priority security interest on the concession, lenders should be aware that foreclosure on the concession must be carried out through judicial proceedings and, before the concession can be transferred upon foreclosure, the government must approve the new concessionaire. Thus, lenders can expect the foreclosure of a concession mortgage to be a lengthy process that will involve substantial government participation.

The mortgage of the concession agreement must be governed by Panamanian law. Regarding hydroelectric plants, concessions to use water resources in Panama are granted by the Panamanian Environmental Agency. At the moment, this agency is of the view that concessions for the use of water resources are not transferrable.

Shares of stock of the concessionaire

Shares of Panamanian companies can easily be pledged. Pledging shares of stock usually requires only the execution of a pledge agreement, the delivery to the pledgee of the share certificates with blank stock powers and an annotation of the pledge on the company’s stock register. No filings are required for the perfection of a stock pledge. Nonetheless, lenders must be aware that the legal framework applicable to most infrastructure concessions requires prior consent from the government in order to create a valid pledge on the shares of a concessionaire.

A properly constituted pledge will grant the pledgee a first priority security interest in the stock of the concessionaire. As opposed to a concession mortgage, the foreclosure of a pledge on the shares of the concessionaire need not be carried out through judicial proceedings. The shares can be disposed of through private or public sales as provided in the pledge agreement. However, as in the case of foreclosure of a concession mortgage, the legal framework applicable to most infrastructure concessions requires that the new owner of the shares be approved by the government before consummation of the foreclosure. At minimum, in the case of private sales, the pledge agreement must include a method for the fair appraisal of the value of the pledged property.

Collection and debt service reserve accounts

Pledging collection accounts, capex payment accounts, debt service reserve accounts and other similar accounts is possible in Panama. If the accounts are maintained at a bank in Panama, the security interest must be governed by Panamanian law and can be effected through the execution of a pledge agreement and the pledgee’s taking of control of the bank account and its funds. Control of the account is critical for the perfection of the security interest. This is regularly achieved through control provisions in the pledge agreement and by making the bank where the account is located a party to such agreement.

Another possible structure is to set up a collateral trust and open the bank account in the name of the trustee for the benefit of the lenders. If the accounts are not located in Panama, it is advisable that the security interest be governed by the laws of the jurisdiction where the accounts are located.

Real estate and chattel property

Real property, both land and improvements, owned by concessionaires can generally be mortgaged to secured lenders. A valid and perfected first priority mortgage can be established on real property by executing a mortgage agreement and filing it with the Public Registry. Foreclosure of a real estate mortgage can be effected solely through judicial proceedings. Consent from the government is generally not required to either create or foreclose a mortgage on real property of the concessionaire if the real property is not considered by applicable laws or the concession agreement to be an essential asset for the operation of the concession. If the property is considered to be an essential asset of the concession, such as the dams, tunnels and powerhouses of hydroelectric plants, the legal framework applicable to most concessions requires consent from the government to create and foreclose a mortgage on those assets.

A security interest on machinery, equipment and other movable assets can be created by way of a chattel mortgage. A valid and perfected first priority chattel mortgage can be established by executing a chattel mortgage agreement and filing it with the Public Registry. Following the enactment of the 2013 chattel mortgage legislation it is now possible to that the concessionaire agrees in the deed to extrajudicial foreclosure proceedings. Notwithstanding, government consent for the creation and foreclosure of the chattel property would generally be required or advisable if the assets are essential to the concession.

Both real property mortgages and chattel mortgages may cause significant filing fees. Recording fees are charged on the aggregate principal amount of the secured obligations as stated in the mortgage agreement. In order to minimise filing fees in cases in which the fair market value of the real property or the chattel property is significantly lower than the principal amount of the secured obligations, the mortgage agreement can be drafted to secure only the value of the collateral.

Another issue frequently faced by lenders and concessionaires is the addition of new assets to, and the release of damaged, depreciated, lost or sold assets from, the mortgage. Mortgage agreements typically provide for periodic reviews for the addition and release of assets although the new chattel mortgage legislation referred above, would appear to extend, as a matter of law, the mortgage rights to property newly acquired by the mortgagor without the need of further filings with the public registry, as long as the parties had agreed to such broader scope of the mortgage rights in the relevant deed. 

Material contracts

Creating a security interest on contracts is more difficult under Panamanian law. An assignment of a contract under Panamanian law does not create a security interest, but rather effects an outright transfer to the assignee of the rights and obligations of the assignor under the contract. In addition, unless the contract so provides, the consent of the other party to a contract is expressly required for the valid assignment of the contract.

In some transactions, material contracts (such as power purchase agreements) have been assigned subject to conditions (such as a default under the loan agreement or the indenture). However, this conditional assignment may be challenged and even undone in the event of the bankruptcy of the concessionaire. For these reasons, where possible, security interests over material contracts should be created and perfected under foreign laws that recognise the assignment of a contract as a way of creating a security interest. If a valid and perfected security interest under a foreign law is created on these contracts, Panamanian law should recognise it.

Finally, the legal framework applicable to some concessions requires that the assignment of certain material contracts be filed and/or approved by the regulatory agency. In these cases, the creation of a security interest and the assignment of these contracts may require notice and/or approval from the government.


Under current tax laws and regulations, interest paid by a concessionaire on loans or debt instruments, the proceeds of which are used by the concessionaire in its operations in Panama, is considered Panama-source income and is taxable in Panama. Some concession agreements enacted by special legislation and certain toll-road concession agreements include tax exemptions for interest payments to foreign lenders and foreign note holders. Such is the case with Panama Port’s container terminal and Petaquilla’s copper mine concessions.

However, in the absence of such special exemptions, as a general rule, when a foreign lender (i.e., a lender that does not have a tax domicile in Panama) lends money to a borrower in Panama, and the borrower is either a taxpayer (i.e., earns Panama-taxable income) or uses the proceeds of the loan for a business purpose in Panama, any interest paid by the borrower to the foreign lender is deemed to be Panama-source income and is subject to withholding. The borrower must withhold income tax at the applicable rate (which for corporations is 25%) on 50% of the interest amount paid to the foreign lender resulting in an effective withholding rate of 12.5%.

The payment of additional amounts and gross-up provisions for the benefit of foreign lenders and note holders is common and enforceable in Panama. To avoid the concessionaire having to pay additional amounts on account of withholding taxes, among other considerations, in some large transactions, involving international banks as arrangers and/or underwriters, the relevant debt instruments have been registered with the Panamanian Superintendence of the Securities Markets and placed through the Panama Stock Exchange to take advantage of a tax exemption accorded by law to registered debt instruments that has been sold through an exchange or other organised market. Typically, a 144-A/Reg S note offering targeting US investors would largely meet the disclosure requirements set forth under Panama Securities law.

This structure, pioneered by the $170 million Fortuna notes offer, has been successfully used in other transactions.

Choice of law and jurisdiction

The choice of a foreign law as the governing law and the submission by the concessionaire to the jurisdiction of foreign courts in a loan agreement or an indenture is valid under Panamanian law and it should be recognised and enforced by the courts of Panama. Nevertheless, lenders must be aware that although the loan or notes may be subject to a foreign law, the concession agreement and the security interest agreements that relate to assets located in Panama, such as mortgages on real property and pledges over bank accounts with banks located in Panama, will remain subject to Panamanian law and in any dispute arising from the concession agreement, unless the government has consented to arbitration, will be heard in the courts of Panama.


Estif Aparicio


Arias Fábrega & Fábrega (ARIFA)

Panama City


About the author

Estif Aparicio is an accomplished partner at Arias Fábrega & Fábrega (ARIFA). Mr Aparicio has worked on many of the most complex cross-border financial transactions in which the firm has participated in recent years. He has extensive experience in the areas of securities regulation; banking and finance; mergers, acquisitions and joint ventures; antitrust, trade and competition; and taxation.

From 2004 to 2006, Mr Aparicio worked for the Panamanian government as chief trade negotiator of all bilateral and multilateral free trade agreements. In this role, Mr Aparicio coordinated Panama’s participation in the Doha Round of the World Trade Organisation, successfully negotiating free trade agreements with the US, Singapore and Chile.

Before joining ARIFA, Mr Aparicio worked for Sullivan & Cromwell in New York, participating in capital markets, M&A and project finance transactions.

Mr Aparicio has a master of laws from the University of Houston Law Center and a bachelor of laws from the University of Panama.


Cecilio Castillero

Senior counsel

Arias Fábrega & Fábrega (ARIFA)

Panama City


About the author

Cecilio Castillero is senior counsel at Arias Fábrega & Fábrega (ARIFA). His practice focuses on international aspects of banking and finance; capital markets; and M&A.

Mr Castillero has extensive experience representing leading financial institutions with a deep understanding of the market’s practices and standards, and clients’ internal policies. His broad expertise includes setting up a variety of structures, including syndicated and bilateral, secured and unsecured, and domestic and cross-border financings. Mr Castillero also has outstanding deal management and organisational skills and extensive experience in coordinating multijurisdictional matters involving numerous parties and legal counsels.

Before joining ARIFA, he spent 10 years with the global finance group at Milbank Tweed Hadley & McCloy in New York.