Banking & Finance 2021 Comparisons

Brazil is constantly developing and improving its regulatory environment for businesses, with some of the most modern banking regulations amongst developing economies. Local financial institutions are robust, and supervision by the Central Bank of Brazil keeps the system stable even during difficult times.

More recently, the government has enacted a law granting more independence to the Central Bank of Brazil, in order to clearly define the principles guiding its officers as a means to boost the objectives of the banking authority with a view to pursuing the stability of internal prices, the efficiency of the financial system and the creation of employment. The Economic Freedom Act (Lei da Liberdade Econômica) has also been enacted, intended to create a more favourable environment for economic relations, and an ongoing call for more clear laws for collateral and security interests has generally been supported by court decisions. All of those factors, amongst others, have managed to reduce the systemic default rates of borrowers and maintain an interesting environment for the local financing entities and individuals.

Default rates increased in Brazil during the worst periods of the COVID-19 pandemic. As a counter-measure, the government injected funds into the economy by means of cash transfer programmes for low-income families to maintain some level of economic activity and consumption, and to support micro and small businesses. The federal government also exempted tax on credit transactions until the end of 2020 and postponed the payment obligations of states and municipalities towards the federal government and state-owned banks (such as BNDES). Banks in general launched voluntary programmes for clients to postpone their payments.

Due to the COVID-19 pandemic, currency devaluation and political instability, among other factors, there has been an increase in high-yield transactions in the local market, with innovative structures and conditions. It has become more common to have convertible and exchangeable debt transactions, both bilateral and through the capital markets, mezzanine financing, pre-IPO loans, debt securitisation and USD local lending, among others. With those came second-degree and subordinated collateral structures, as well as collateral over surplus and subject to the release of a first-degree lien.

The local loan market is still heavily dependent on state-owned banks and large private institutions. Over the last few decades, however, there has been an increased number of capital markets transactions underwritten mostly by private institutions, including international banks, as well as financing start-ups. More recently, there has been an increase in the market share of alternative players, such as investment funds and securitisation entities, especially for transactions intended to be placed to the general public. Given this change in the market, there is constant evolution in the structures and types of instruments adopted, collateral, etc, including with a view to accommodating multiple financing sources, such as multilaterals, capital markets, typical state-owned financing and commercial banks.

There have been numerous adaptations over the years to reflect the needs of investors and borrowers. Recent examples include USD lending backed by USD local receivables, various services provided by financing start-ups, local currency lending by multilateral agencies, and intense activity on capital markets structures involving investment funds, securitisation, international placement of local instruments and foreign issuance of bonds.

There are numerous changes that have had or are expected to have a significant impact on the loan market. In recent years, a set of rules have been issued to regulate and initiate the activity of fintech entities, including on credit providing, securitisation, insurance and other services. More structurally, the tax reform is also expected to impact the financing market by implementing changes that could affect the tax planning of entities and individuals.

A bill creating a new type of infrastructure debt instrument and changing the current regulation under Law 12,431 is also intended to change the environment for funding in regulated sectors, especially those which are more reliant on state-owned funding provided by the BNDES, BNB and others. Among the other regulatory reforms that might also affect the loan market, there is the possible change to Ruling 476 of the Comissão de Valores Mobiliários (CVM), which regulates the largest number of debts contracted through the capital markets by local entities.

Following a worldwide trend, there has been an increase in ESG and sustainability-linked funding in Brazil. With a view to reaching the greatest number of investors, Brazilian companies have been adopting ESG and sustainability agendas across all their activities and transactions. Financial institutions have also been developing robust ESG policies, and demanding that clients adhere to them by inserting clauses in the corresponding loan documentation.

Over recent years, an increasing number of green bonds have been issued by local companies, especially in the context of infrastructure debenture issuances. Experience indicates that a larger number of investors are expecting to see commitments relating to ESG and/or sustainability practices in debt instruments. What was once a requirement more commonly viewed in specific sectors has now been implemented in various industries (including mining, oil and gas and agribusiness) and by different types of companies.

To provide typical banking products and offer credit to the public in general, entities must obtain authorisation from the Central Bank of Brazil. Certain regulated entities are prohibited from providing financing, such as brokers, certain types of investment funds and others. Apart from that, there are generally no specific requirements for non-banks to provide credit, although certain restrictions may apply, such as limitations on interest rates and the use of certain instruments.

Foreign lenders are not restricted from granting loans to Brazilian entities, but a specific registration with the Central Bank is required in order to repay such loans.

The granting of security or guarantees to foreign lenders is substantially equivalent to the granting of such rights to domestic lenders, and Brazilian law does not impose any specific requirements on foreign lenders solely because of the granting of such rights. There is, however, one exception worth mentioning: for fungible assets (ie, assets that are interchangeable for assets of the same type and nature), there are ongoing court discussions on whether creditors that are not domestic financial institutions nor holders of domestic securities are eligible to benefit from the fiduciary assignment (propriedade fiduciária) type of collateral. While these creditors have the ability to benefit from pledges (penhor), there are also alternatives on the structuring of security packages that allow parties to circumvent restrictions until final case law is created.

The outflow or inflow of funds to or from abroad, respectively, by a Brazilian resident or a legal entity headquartered in Brazil must be made through the execution of a foreign exchange agreement with a local broker or bank authorised to operate in the foreign exchange market. Every foreign exchange agreement for the purchase or sale of foreign currency has to be classified in accordance with the nature of the underlying transaction. Also, depending on the type thereof, a transaction may need to be submitted for registration with the Central Bank of Brazil through different modules and systems, such as the RDE-ROF (for financial transactions), RDE-IED (for foreign direct investments) and RDE-Portfolio (for investments through the local capital markets). Local investment abroad that meets certain requirements also needs to be informed annually to the Central Bank of Brazil by means of the DCBE (Declaração de Capitais Brasileiros no Exterior).

Generally, there are no restrictions on the borrower’s use of proceeds from loans or debt securities. Restrictions only apply when there is a tax benefit associated with the loan (exports, infrastructure, R&D, etc).

Agent and trust concepts, which are typical in countries that adopt the common law system, are not fully recognised under Brazilian law, although examples are found in capital markets (agentes fiduciários, securitizadoras,etc) and contractual structures may provide similar comfort. A bill is currently being discussed that aims to introduce the fiduciary/trust agreement and a regime for the administration of third-party assets in Brazil.

There are no specific mechanisms for loan transfers under Brazilian law; they are typically regulated under bilateral agreements. Bank instruments and securities deposited with a central depository are traded in over-the-counter (OTC) markets, and bank loans are contractually transferred from one creditor to the other. The transferee benefits from the associated security package originally granted under the loan instruments, except in the case of novation.

Debt buy-back mechanisms in Brazil are typically regulated and negotiated under bilateral agreements, except for specific debt buy-back restrictions on debt securities issuances under capital markets in Brazil, such as under Law 12,431, which imposes restrictions on the time and price for debt buy-back of infrastructure bonds issuances. Fees or penalties may be levied to mitigate creditors'/investors' losses arising from the debt buy-back prior to the final term of the instrument.

The concept of “certain funds” with respect to acquisition finance transactions in general is not provided for under Brazilian law. Public acquisition offers of publicly traded shares, regulated by the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM), are required to be intermediated by a brokerage institution, a securities distributor or a financial institution with an investment portfolio, which will be responsible for the information provided to the market and to CVM in the offering context. Among other obligations, the intermediary financial institution is required to guarantee the financial settlement of the offering and payment of the purchase price.

As a general rule, the payment of interest by Brazilian borrowers to foreign lenders is subject to the imposition of withholding income tax at a 15% rate or at an increased 25% rate if the lender is located in a low-tax jurisdiction, as defined by Brazilian legislation. A lower withholding income tax rate can be provided by double tax treaties (as it generally occurs with governmental agencies, which are tax exempt, or with lenders who are resident in Japan, which benefits from a 12.5% withholding income tax rate) or by multilateral agreements (such as the one that grants a tax exemption on interest remitted to the International Finance Corporation).

The Brazilian legal framework provides for withholding income tax exemptions on the remittance of interest under certain financing instruments other than loans, such as pre-export finance and infrastructure bonds, provided that specific legal requirements are met. Principal repayment is not subject to the imposition of withholding income tax. Withholding income tax is a tax burden to be incurred by foreign lenders, but parties may shift the financial burden to borrower under a gross-up mechanism. Although this arrangement cannot be opposed through the Brazilian tax authorities, it is enforceable in a private setting.

Apart from the withholding income tax on interest remittance, cross-border loans also trigger the imposition of Tax on Exchange Transactions (IOF/Exchange) on the FX transaction for the flow of funds into Brazil. The applicable rate depends on the average term of the loan: if the average term is higher than 180 days, then IOF/Exchange is imposed at a 0% rate, whereas loans with a shorter average term are subject to IOF/Exchange at a 6% rate. IOF/Exchange is a tax burden to be incurred by Brazilian borrowers, and the financial institution in charge of the underlying FX agreement is the party liable for collection. The FX transactions for the repayment of principal and interest remittance benefit from a 0% IOF/Exchange rate. IOF/Exchange can be increased up to 25% at any time by the Brazilian government but such increase cannot have retroactive effects and has never been implemented in practice.

The Brazilian Usury Law (Decree No 22,626, enacted on 7 April 1933) limits the amount of interest that can be charged to 12% per year. Despite such legal provision, Precedent No 596 of the Brazilian Supreme Court (Supremo Tribunal Federal), set on 15 December 1976, states that the provisions of the Usury Law do not apply to interest rates charged in transactions performed by financial institutions that are part of the Brazilian Financial System.

The assets typically available as collateral in the Brazilian market are credit rights and accounts receivables, fixed assets, equipment, real estate property and securities and/or other financial assets. Under Brazilian law, a pledge (penhor) is the security interest over movable assets and rights, while a mortgage (hipoteca) is applicable to real estate properties and other assets treated as fixed assets. Brazilian law also lists a specific, bankruptcy-remote type of security interest, which is the fiduciary property (propriedade fiduciária) or fiduciary transfer (cessão/alienação fiduciária).

Lenders in Brazil typically choose the fiduciary property/transfer in their transactions. Pledges and mortgages are rare and are only used in cases where the fiduciary transfer is not available or possible. Regardless of the type thereof, the security interest is created pursuant to the execution of a private instrument or public deed, which must provide reasonable detail on the assets or rights granted as security and on the secured obligations (eg, total amount of the debt, interest rate, payment dates). Those are the legal requirements for the creation of liens.

The security interest is perfected with the registration of the applicable agreement or deed before the competent registries (which may vary depending on the type of asset or right – eg, real estate registries for real estate property, registry of deeds and documents for movable assets and credit rights, central depositories of financial assets for certain financial assets). Failure to obtain such registrations may result in a security interest being declared ineffective before third parties or even null and void, depending on the type of asset or security interest. The costs and timing involved for such proceedings largely depend on the type of registration required (which depends in turn on the type of asset – liens over publicly traded stock can be done instantly in the stock exchange systems, but a registration of a mortgage over a real estate property usually takes weeks to be completed) and the location of the competent registry (larger cities tend to have more registries and are therefore usually quicker). Costs follow state legislation and vary according to the value attributed to the collateral and the amount of the secured obligations, as the case may be.

Generally, Brazilian law does not permit floating charges or liens over assets, and requires that the assets granted as collateral are reasonably described in the respective security agreement. However, there are specific provisions expressly provided by law where such types of security interest are allowed, such as debentures with floating charges (debêntures com garantia flutuante) (whereby a debenture holder has priority over assets of the debtor that are not encumbered) or the creation of universal liens over certain trading accounts where securities and financial assets are held. There is also an ongoing project for a vast reform of the Brazilian legal regime concerning collaterals in general (still undergoing public hearings and debates), which intends to incorporate certain provisions of the UNCITRAL Model Law, including provisions for floating charges and universal liens.

It is possible for Brazilian entities to give downstream, upstream and cross-stream guarantees. However, controlling shareholders must observe and comply with conflict of interest rules and obtain all necessary corporate approvals, especially in cases where there is no direct or indirect economic benefit for the guarantor.

There are no legal restrictions on a target granting guarantees, security or financial assistance in the context of its own acquisition. The main challenge is of a practical nature, in terms of having or influencing a target to grant collateral for the benefit of a potential future shareholder, especially when the target has minority shareholders.

When the guarantor is a legal entity, corporate authorisations may be required and must be obtained when determined by law (for certain legal entities) or by the constitutional documents. When the guarantor is a natural person, authorisation from spouses or legal guardians may also be required. Additionally, certain entities operating in regulated sectors (such as concessionaires of public services) may need to obtain approvals from the government for the creation of security interests over their shares and credit rights.

Security interests are released under the following circumstances:

• termination, payment or extinction of the underlying secured obligation;
• if the asset or right granted as collateral perishes or ceases to exist (notwithstanding any obligations to replace the assets or rights in such cases);
• if the creditor waives its security interest; or
• if the creditor becomes the owner of the asset or right granted as security.

The rules governing the priority of competing security interests in Brazil are mainly related to the timing of the creation of the right (ie, the creditor that creates and perfects its security interest prior to others has priority) and to contractual arrangements between creditors (ie, creditors deciding upon their priority in relation to a specific collateral). However, the fiduciary property or assignment (propriedade fiduciária, cessão fiduciária or alienação fiduciária) is not subject to subordination, since this type of security entails the transfer of the title of the asset to the creditor, preventing the debtor from offering the same asset as security to other creditors.

Contractual provisions of subordination in the context of an insolvency proceeding should survive, provided that the security interest was duly created and perfected. However, the creditors shall only benefit from the insolvency privileges of a secured creditor to the extent the asset or right granted as security interest is sufficient to secure all obligations vis-à-vis the priorities set forth between the creditors (ie, obligations in excess of the total amount of the security interest shall be considered unsecured obligations).

The enforcement of collateral occurs upon default by the borrower, regardless of whether the default is due to acceleration and/or early termination provisions, or simply the lack of payment when the debt becomes due and payable. The main types of collateral in Brazil are mortgage, pledge and fiduciary lien/assignment (in rem securities).

Prohibition of Commissoria Lex for All In Rem Securities

As a general rule, Brazilian law expressly forbids the creditor from keeping or obtaining title of collateral in the event of default, unless a payment in kind is agreed upon by the parties under which the guarantor shall grant express consent after the final maturity date of the debt. In pledges and mortgages, the guarantor holds title of the asset subject to such security, so it is possible to establish multiple liens (first priority, second priority, etc) and creditors will be subject to the judicial reorganisation and/or bankruptcy of the guarantor in the class of secured creditors, up to the value of the collateral. In fiduciary liens/assignments, the provisional transfer of ownership of the asset is made to the creditor and this title is returned to the guarantor when the latter has fulfilled its obligations under the secured credit. Consequently, it is not possible to establish multiple liens, and creditors may not be affected by the bankruptcy of the guarantor.

Mortgage

A mortgage is a lien over properties and their accessories, with the following provisions:

• the foreclosure must occur through a judicial procedure;
• the repayment of the debt can occur by means of a public auction, a private auction or adjudication of the property by the judicial appraisal value or the value established in the deed; and
• if the asset is sold or adjudicated for an amount that is not sufficient to satisfy the debt, then other assets can be auctioned off to pay the full amount. On the other hand, if the adjudication or the sales price exceeds the debt amount, the excess shall be returned to the debtor.

Pledge

This creates a security interest over movable assets/rights. The types of pledges are rural pledge, industrial/commercial pledge, pledge of rights and securities, vehicles pledges and legal pledges. Pledges have the following characteristics:

• the creditor may sell the pledged asset extrajudicially if the pledge agreement so provides in this sense, or if the debtor grants a power of attorney to the creditor with rights to perform such sale; otherwise, the creditor will have to start a judicial procedure (enforcement procedure) to sell the asset;
• the repayment of the debt in a judicial foreclosure procedure can occur by means of a public auction, a private auction or adjudication of the asset by the judicial appraisal value or the value established in the deed; and
• if the asset is sold for an amount that is not sufficient to satisfy the debt, then other assets can be auctioned to pay the outstanding amount.

Real Estate Fiduciary Lien

This involves the provisional transfer of ownership of the property to the creditor, with the following provision.

• There is an extrajudicial procedure for the foreclosure. A notice is sent to the debtor, determining that the debtor has 15 days to pay the debt; if it is not paid in time, the full title to the real estate is transferred to the creditor, who shall pay tax on the transfer of the asset. In this case, the creditor must set a date, within 30 days of the transfer, for the first auction to sell the real estate. The price of the first auction is determined by the value listed in the agreement or the appraisal value for tax purposes. If the asset is not sold, a second auction date must be set within 15 days. The value is different in the second auction, since the minimum price must take into consideration not only the value of the debt but also the expenses incurred by the creditor during the procedure. If the second auction is unsuccessful, the creditor gets full ownership of the real state, and the debt is considered paid.
• To prevent the release of the debt, the creditor can start a collection action against the debtor in order to sell the real estate and attach other assets up to the amount required for the debt to be paid.

Fiduciary Lien/Assignment

A fiduciary lien involves the provisional transfer of ownership of movable assets/rights to the creditor.

• There are several types of fiduciary liens, depending on the asset that will be encumbered. The general rules applicable to the fiduciary lien are regulated under the Brazilian Civil Code. Also, Law No 4,728/65 specifically regulates fiduciary liens created in the context of the Brazilian financial and capital markets.
• If the debt becomes due and payable and is not paid, the creditor can sell the encumbered asset in order to satisfy the outstanding amount owed to the creditor. If the amount received from such sale surpasses the debt, such exceeding amount must be returned to the debtor. If, however, the amount received is not sufficient to satisfy the debt in full, the creditor may collect the outstanding amount from the debtor. If the debtor or a third party guarantor challenges and/or refuses to deliver the asset, a foreclosure or a search and seizure procedure before the local court may be necessary.

A choice of foreign law as the governing law of a contract will be upheld in Brazil if it does not violate Article 17 of Decree Law No 4.657/42, as amended by Law 12.376/2020. In other words, if the choice of law does not violate Brazilian law, sovereignty, public policy or morality, the judicial court will give effect to said choice. In any event, Brazilian law establishes that a security agreement that regulates the conditions of an asset located in Brazil must be governed by Brazilian law.

The submission to a foreign jurisdiction will also be upheld, as long as the matters involved are not the exclusive competence of the Brazilian jurisdictions, such as matters regarding real estate located in Brazil or the partition of assets located in Brazil. In rem guarantees of assets located in Brazil must be governed by Brazilian law. Credit agreements secured by in rem guarantees of assets located in Brazil may be governed by foreign law in a contract if there is a connection between the foreign law chosen and the places where the agreement could be enforced or the place where the parties to the agreements are based. It is important to highlight that there is not much case law about this issue in Brazil, and there is a risk of some Brazilian courts disregarding foreign law and applying Brazilian laws to the case. This risk is different in an arbitration scenario, due to the fact that the respective law expressly allows parties to freely choose the governing law.

As to the waiver of immunity, the exercise of the Brazilian jurisdiction is valid and can be consented through arbitration clauses, contractual clauses or international treaties, and a party may also resort to court to waive its immunity.

A judgment given by a foreign court can be enforced in Brazil without a retrial of the merit, but it must first be ratified by the Superior Court of Justice, and the following requirements need to be met:

• jurisdiction – the decision must be rendered by a court or arbitral tribunal with jurisdiction over the matter, according to the rules of the place of origin;
• the parties – both parties have been summoned and participated in the lawsuit (or have allowed judgment by default);
• decision – it must be a final decision and effective in the place of origin;
• certified copy – a certified copy of the judgment and a Portuguese version (authorised translator) must be presented; and
• Brazilian law – it cannot offend Brazilian public order, sovereignty or human rights.

The enforcement of injunctions and interlocutory orders rendered by a foreign court is also possible by means of rogatory letters, in which case the Superior Court of Justice also has jurisdiction to grant exequatur to rogatory letters issued by foreign courts, unless otherwise established in international treaties signed by Brazil.

The arbitral award needs to fulfil the same requirements as the judgment, plus the following terms:

• the agreement must be valid under the law of the country of origin or the law applicable to the agreement;
• the object of the dispute must be capable of being settled by arbitration under Brazilian law;
• the parties must be capable;
• the defendant must have been duly notified of the appointment of the arbitrator and the proceeding, having his defence rights guaranteed;
• the arbitral decision must have been rendered within the limits of the arbitration convention, or, if not, it must be possible to segregate the part that oversteps it;
• the arbitration must have been instated as per the arbitral commitment/clause; and
• the arbitral decision can be enforced on the parties, and has not been annulled or suspended in the country of origin.

Insolvency proceedings such as judicial reorganisation proceedings and bankruptcy can impact a lender’s ability (foreign or domestic) to enforce its rights under a loan or security agreement.

The Brazilian Bankruptcy & Insolvency Law (Law No 11,101, dated 9 February 2005 – BBL), as amended, provides for the following insolvency proceedings for business debtors (companies and individual entrepreneurs):

• judicial reorganisation (recuperação judicial);
• extrajudicial reorganisation (recuperação extrajudicial); and
• bankruptcy (falência).

Nevertheless, the BBL expressly allows debtors and creditors to enter into private agreements for debt restructuring outside of insolvency proceedings, pursuant to Article 167 thereof.

Debt restructurings outside of insolvency proceedings are a common practice in Brazil, especially for companies facing less severe crises and/or whose indebtedness is particularly concentrated with financial creditors. Debt restructuring agreements outside insolvency proceedings usually involve the negotiation of a standstill/grace period, an increase and/or decrease of yield, the granting of additional security, the consolidation of credits and/or formation of syndicates of creditors, financial covenants, cash sweep obligations, go-to market obligations, supervision by watchdogs and/or cash injection by the shareholders.

If such out-of-court agreements are signed by creditors holding more than half of the claims of any particular class or type (ie, unsecured claims, secured claims, financial claims, vendor/supplier claims, etc), the debtor may also file for an extrajudicial reorganisation in order to bind the dissenting group of creditors. Labour claims can only be subject to the extrajudicial reorganisation plan if they are previously negotiated with the respective and competent labour union. The request for extrajudicial reorganisation can also be made if one third of the creditors adhere to the plan, as long as  the legal quorum of 50% is obtained within 90 days.

Commencement of a Reorganisation Proceeding

The court order commencing a reorganisation proceeding provides for the stay of actions and enforcement actions against the debtor for a period of 180 days, extendable for one equal period (stay period). The stay order applies for the claims that are subject to the reorganisation, which means that those claims that are excluded from the effects of the reorganisation proceeding by the BBL – such as tax claims, claims secured by fiduciary liens (alienação fiduciária e cessão fiduciária), claims arising from leasing agreements (arrendamento) and post-petition claims – are not subject to the stay period.

However, there are some exceptions. Actions claiming illiquid claims may continue until a final decision is rendered in the case. Creditors that are not subject to the reorganisation may enforce their claims against the debtor during the stay period; however, the attachment or foreclosure of collateral over capital assets that are considered essential to the debtor’s business activities is not allowed during the stay period. The bankruptcy court has jurisdiction to determine whether or not the capital asset is considered essential to the debtor’s business.

Also, it is important to point out that the stay period applies exclusively to the debtor that is under reorganisation. The right of creditors to pursue collateral or guarantees granted by third parties is preserved during the reorganisation proceeding.

Commencement of an Extrajudicial Reorganisation Proceeding

A stay period also applies exclusively to the claims that will be subject to such proceeding. The stay period will have its initial term with the filing of the plan/proceeding, but will only be ratified if the legal quorum of 50% is proven within a 90-day period (see 7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency).

Commencement of a Liquidation Bankruptcy Proceeding

Unlike the reorganisation process, all existing creditors are subject to the effects of a liquidation bankruptcy. Once the bankruptcy is decreed, enforcement actions against the debtor are stayed and creditors are paid pursuant to the priority order provided for in Articles 83 and 84 of the BBL (the legal waterfall). Exceptions to this rule refer to lawsuits claiming illiquid claims. Once the company is rendered bankrupt, it will be judicially represented in all claims by the trustee (administrador judicial) appointed by the court. Also, creditors holding claims secured by fiduciary liens may foreclose the collateral and are not subject to the legal waterfall. If the collateral is in the possession of the debtor, the creditor must file a restitution claim before the bankruptcy court in order to recover the asset.

As for tax claims, the merits of the claim will be analysed by the tax courts, but the bankruptcy court is competent to analyse constriction acts over any essential/capital assets of the debtor.

Payment of Creditors in Reorganisation Proceedings

The BBL does not adopt the "absolute priority rule" for reorganisation proceedings. There are some specific rules – for instance, labour claims for up to five minimum wages due in the last three months prior to the filing of the judicial reorganisation request must be paid within 30 days. Labour claims must be paid within one year, extendable for a further period of two years if the requirements provided for in the BBL are met (performance of bond or other reasonable guarantees, approval by the majority of creditors in the labour class and payment in full of the labour claims). In general, however, creditors are paid according to the payment provisions provided for in the reorganisation plan, which shall be approved by a majority of creditors in each class restructured by the reorganisation plan.

Payment of Creditors in Liquidation Bankruptcy Proceedings

The BBL has recently been amended, and all bankruptcies decreed must now abide by the new provisions regarding the legal waterfall.

Article 83 of the BBL provides for a priority order for the payment of creditors in liquidation bankruptcy proceedings, as follows:

• labour claims, up to the amount of 150 minimum wages per creditor (approximately BRL150,000);
• claims secured by mortgage (hipoteca) or pledge (penhor), up to the value of the collateral;
• tax claims;
• unsecured claims, which includes all claims that are not mentioned in the other items, labour clams exceeding 150 minimum wages (ie, BRL165,000 given the current minimum wage of BRL1,100) and the balance of secured claims that are not paid with the proceeds resulting from the sale of the respective collateral;
• contractual and legal fines, including those of a tax-related nature;
• subordinated claims, such as those legally and contractually provided for, and claims held by shareholders, directors and officers who are not contractual employees of the debtor and whose claims do not abide by fair market practices; and
• interest accrued after the bankruptcy decree.

The following claims are paid with priority over the claims mentioned above (as per Article 84 of the BBL):

• essential expenses of the bankruptcy administration and labour claims due within three months before the bankruptcy decree, up to five minimum wages per creditor (BRL5,500);
• amounts disbursed to the debtor under a judicial reorganisation by the DIP lender;
• restitution claims for money, such as amounts arising from an advance on exchange contracts (adiantamento a contratos de câmbio) and amounts equivalent to the value of an asset of the creditor in possession of the debtor upon the bankruptcy decree, if the asset no longer exists (this provision also applies to claims secured by fiduciary liens over assets in possession of the debtor);
• payments due to the trustee and third parties hired by the trustee, as well as reimbursements of amounts due to the members of the Creditors' Committee, and labour claims relating to services rendered after the bankruptcy decree;
• claims arising from obligations assumed by the debtor during the reorganisation or after the bankruptcy decree;
• amounts disbursed by creditors during the liquidation bankruptcy;
• expenses incurred in the collection, administration and sale of assets of the estate;
• court expenses related to lawsuits and enforcement actions in which the estate takes part; and
• taxes accrued after the bankruptcy decree.

The BBL does not provide for an equitable subordination rule. However, during negotiations of the reorganisation plan, it is usual for creditors to demand subordination of the payment of claims held by shareholders. Also, Article 43 of the BBL provides that shareholders with more than 10% of the social capital are not allowed to vote at general meetings of creditors. Brazilian law understands that shareholders who have a conflict of interest may not vote in the reorganisation plan, even those holding claims against the company.

In a liquidation bankruptcy proceeding (see 7.2 Impact of Insolvency Processes), claims held by shareholders, officers and directors are considered unsecured claims, unless their claims do not abide by fair market practice (in which case, they will be deemed subordinated claims). If the claims of such shareholders arise from DIP loans, they will have priority payment, as per Article 84 (see 7.3 The Order Creditors Are Paid on Insolvency).

If a borrower files for an insolvency proceeding in Brazil (ie, a bankruptcy), the lender should face the following risks.

• If the lender is subject to the insolvency proceeding (ie, has an unsecured claim or a claim secured by mortgage or pledge over the debtor’s assets), it is not entitled to enforce its claim or security and shall receive its claim according to the provisions of the plan (in the case of reorganisation) or pursuant to the priority order established by law (in the case of liquidation bankruptcy). However, if the debtor intends to sell the asset over which a creditor has an in rem guarantee or substitute it for another one, it must obtain prior approval from such creditor.
• If the lender is not subject to the insolvency proceeding (ie, has a claim secured by a fiduciary lien), it may enforce its collateral; however, in reorganisation proceedings, if the bankruptcy court considers the collateral to be essential to the debtor’s activities, the lender will not be able to foreclose the collateral until the end of the stay period.
• If the security provider or the guarantor were to file for bankruptcy, this should not, in principle, affect the lender's claim against the original borrower.

Project finance is a financing model based primarily on cash flow from the project to support its debts and financings and provide an adequate return for the invested capital, which makes it possible to implement long-term projects. Thus, the main characteristics of project finance are (i) the possibility of third-party financing, with greater return to shareholders, and (ii) risk segregation, mainly by creating a special purpose vehicle (SPV) and segregating the sponsoring company's balance sheet. Project finance involves a full network of agreements, such as engineering, construction, operation and maintenance, supply, guarantees, commercial and financial agreements, with risks and responsibilities allocated to different parties through the stakeholders.

Over the past 30 years, project finance has become a relevant tool for financing infrastructure projects in Brazil. In the 1990s, infrastructure projects for providing public services were mainly developed and funded by governmental authorities. However, a change in the political-institutional environment of the Brazilian government, including a reshaping of the state organisation and its role after the redemocratisation, allowed for certain privatisations and concession arrangements to be implemented, which consequently allowed private sponsors to develop such projects funded by project finance structures. Initially, such projects were mainly related to the development of power generation and transmission, as well as toll roads and communication services.

Over the past 20 years, the project finance industry in Brazil has developed and matured to cover other areas, such as ports, airports, arenas for the World Cup and the Olympics, mining projects, railways, subways, industrial facilities, renewable energies and public lighting.

Over those years, the role of the main lenders has changed. Initially, the financing of infrastructure projects in Brazil was provided by development banks, such as the Brazilian Development Bank (BNDES), Caixa Econômica Federal, Banco do Brasil and Banco do Nordeste, and multilaterals. At that time, interest rates in Brazil were very high, so such institutions offered subsidised interest rates that were substantially lower than those offered by commercial banks. Multilaterals also had a minor share in the market, particularly because of currency risk.

After the economic and political crisis of 2014 and the adverse market conditions in the following years, the BNDES and those governmental agencies reduced their role as the main provider of infrastructure projects, and this, together with the reduction of credit lines from public entities, has opened up the space for other entities, such as ECAs, foreign development agencies, private banks, institutional investors and the capital markets. The increase of the presence of the capital market was also driven by the enactment of legislation that ensured tax incentives to project bonds (also known as incentivised debentures).

The following also affected those changes in the project finance industry:

• the special regime for fostering private investment in the infrastructure sector (Programa de Parcerias e Investimentos – PPI) and reducing bureaucracy in the granting process;
• a variety of tax incentives for the development of the projects and for the financing, such as project bonds (or the so-called infrastructure debentures), which benefit from certain tax exemptions;
• objective regulations regarding bidding procedures, especially regarding the termination and re-auctioning of the projects, as well as changes in the bankruptcy law;
• new financing products and concession agreement provisions for mitigating foreign exchange risks; and
• a decrease in the market’s interest rates in parallel with the adoption of a new standardised interest rate by BNDES, which is more aligned with market practice.

Moreover, as a result of those changes and the increase of funding alternatives in the project finance industry, non-recourse structures have become more common.

The legal framework for project finance transactions varies, depending on the sector and the background of the project that is being financed. Projects that involve public services that are subject to concession are usually subject to the provisions of the Bidding Law, the Concession Law, the PPP Law and other laws applicable for the specific sector. The framework applicable to projects that are developed by the private sector and have only private counterparties consists of sector-specific laws and the general laws that relate to transactions among private parties.

The Public-Private Partnership (PPP) Law governs projects structured under a PPP scheme at the federal level and provides a general framework for projects sponsored by municipalities and the state. Nonetheless, public services may also be provided pursuant to the Concessions and Public Bidding Law.

In general, the Brazilian legal framework allows public services to be granted by means of a public bidding process, concessions (including PPPs) and authorisations. However, as each public service and infrastructure segment has its own specific regulations and regulatory bodies, certain specificities may apply.

PPPs were first introduced to the Brazilian legal framework in 2004. The PPP Law is a result of a diagnosis that there were significant infrastructure gaps at all levels, and it was aimed at encouraging private participation in the country's deficient public services or public works and developing Brazilian infrastructure. PPPs under the PPP Law are defined as public concessions and require partial or full payments by the public authority. In addition to fees paid by the final users of such public services, a pecuniary compensation from the public partner is required; this mixed payment scheme permits the implementation of projects that are not financially sustainable based on project revenues.

The PPP law provides for the construction and operation of infrastructure facilities for certain public services by private companies on a long-term basis. To be eligible for a PPP, the project to be awarded and its respective agreement shall set forth at least the following characteristics for the PPP project:

• the amount involved in such contract shall not be lower than BRL10 million;
• the tenor shall not be less than five years or greater than 35 years; and
• the contract shall not have as its sole objective the provision or supply of personnel, the supply and installation of equipment or the execution of public works.

The first PPP transaction implemented in Brazil was the operation of Line 4 of the subway in São Paulo, which was granted by the state with a tenor of 30 years.

Almost two decades have passed since the PPP Law was enacted, and multiple infrastructure services have been successfully implemented in different sectors, such as subways, hospitals, administrative centres, football stadiums, water and sewage treatment services, public lighting, data centres and affordable housing.

In general terms, some projects – especially concessions and PPPs – usually require the granting authority to be notified of the financing and the securities given. Others might require governmental approval of the loan conditions.

Standard project finance transactions in Brazil usually require the financial documents and collateral agreements to be publicly registered before the Register of Deeds and Documents (RTD) if they involve securities over shares and credit rights. If the security package also provides a guarantee on real estate assets or equipment, such as mortgages, assignments and fiduciary sales, then the documents will have to be registered before the Real Estate Registry. Other registries may be required, depending on the type of asset granted as a guarantee. Also, in some cases, project finance and guarantee documents are required to be registered before the competent Board of Trade. Various fees and charges applicable to the public registries in these cases are applicable.

The usual main governing laws related to registration are the Brazilian Civil Code and Law No 6,015 of 1973, known as the Public Registries Law. However, specific legislation may be applicable, depending on the project sector and the assets given as guarantees.

Each infrastructure and public service sector has its own governmental body that is responsible for the regulation of its services.

With respect to the oil and gas, power and mining sectors, the main federal entity that has the attribution of proposing guidelines for the bidding of the exploration and production related to such sectors, and to promote studies, amongst other matters, is the Ministry of Mines and Energy (MME), with a specific secretariat for each sector.

In the oil and gas sector, the main governmental agency related to MME that is responsible for the regulation of the sector is the Oil, Natural Gas and Biofuel National Agency (ANP). This agency is responsible for the regulation, inspection and issuance of laws related to activities using oil and gas resources, among other matters. The primary law related to oil and gas is Law No 9,478 of 1997, which also creates the ANP. Recently, Decree No 10,712 of 2021 regulating Law No 14,134 of 2021, known as the New Oil Law, was enacted to attract investments and foster competitiveness. The New Oil Law also aims to regulate activities related to the transportation of natural gas treatment and the processing, underground storage, conditioning, liquefaction, regasification and commercialisation of natural gas.

In the energy sector, the main governmental agency related to MME is the National Agency of Electric Energy (ANEEL). In addition to MME and ANEEL, other relevant governmental authorities are the National Operator of Electric System (ONS) and the Chamber for Commercialisation of Electric Energy (CCEE). In 1998, the Brazilian government enacted Law No 9,648 (the Power Industry Law) to overhaul the basic structure of the electricity industry. In 2004, the Brazilian government enacted legislation in an effort to further restructure the power industry, with the ultimate goal of providing consumers with secure electricity supply combined with low tariffs. In 2012, the Brazilian government enacted two Provisional Measures that have considerably changed the Brazilian electric energy sector overview; both were approved and converted into law.

The Brazilian constitution provides that all natural resources are the property of the Union and the ownership thereof is detached from the surface area. States have title over water and land resources, unless such resources are already controlled by the Union through a federal law. In the mining sector, the federal government has the sole responsibility for legislating, and the competent authorities are MME and the National Mining Agency (ANM). The main laws and regulations related to this sector are Decree Law No 227 of 1967 and its Regulation (Decree No 9,406 of 2018). Also, ANM Ordinance No 155 of 2016 consolidates the main regulations and ordinations related to the sector. Under such regime, private companies might be awarded mining concessions to explore areas upon the payment of royalties to the government and compensation to the owner of the property.

The main issues when structuring deals in Brazil depend on the segment and the respective stage of the project. In general, the sponsor’s track record and the quality of the off-takers play a key role in the risk allocation and bankability of the project.

Other than the traditional risks applicable to project finance transactions (ie, construction risks, operation risks and political risks), the key issues to be allocated in structuring a project in Brazil include:

• foreign exchange rate exposure;
• obtaining regulatory and environmental authorisations;
• compliance with anti-corruption laws;
• the creation of new taxes; and
• changes in the tax legislation.

The requirements and specificities of the legal form of the project company vary in accordance with the sector and its applicable norms. Generally, the SPV is constituted as either a corporation (sociedade anônima) or a limited company (sociedade limitada), pursuant to the Brazilian Civil Code and the Brazilian Corporations Law.

Depending on how the debt transaction is structured, certain transactions entered into with foreign lenders (ie, loan agreements) must be registered at the Central Bank in the Registry of Financial Transactions (ROF), which shall be done before the disbursement of such loan, to create the flow of funds and payments related to the financing facility. Other specific registrations and the payment of additional amounts may be required, depending on the choice of law and jurisdiction and the type of investment, including whether it is a direct investment in the company or in the capital market.

Under Brazilian law, the creation of liens and encumbrances in favour of foreign lenders does not generally require any specific approval. However, the granting of security over real estate assets in rural and border areas for foreign lenders may require additional authorisation from the government. Certain additional approvals may be needed for the remittance of funds, depending on the particularities of the sector and the security package of the project.

In Brazil during the 1990s, infrastructure projects for providing public services were mainly developed and funded by governmental authorities. However, over the past 20 years the main financing sources have been governmental entities, development banks, multilaterals, commercial banks and export credit agencies. More recently, the capital market has become one of the main funding alternatives.

Due to the characteristics of the main players, typical financing sources and structures for project financings involve project bonds, lending facilities and commercial lending facilities.

When financing is obtained at the capital markets, the debt instrument commonly used in project finance is project bonds (debentures), which may obtain additional tax incentives if they are classified as incentivised project bonds (debêntures incentivada). The project bonds are implemented by means of indenture (escritura de emissão), which provides the terms and conditions for the issuance of the project bonds. In certain key transactions, the BNDES and certain multilaterals have also provided additional collateral in capital markets-funded transactions.

When financing is obtained from development banks such as BNDES or Banco do Nordeste, or from multilaterals such as the IDB or IFC, a loan agreement is usually used to implement the financing facility. In this kind of financing, the development banks or the multilaterals and the companies negotiate the terms and conditions of the financing, usually based on such entities' standardised templates.

When financing is obtained from commercial banks, the transaction is usually obtained by means of commercial lending facilities, which are implemented in Brazil using Bank Credit Notes (cédula de crédito bancário – CCB). In this kind of credit instrument, the debtor specifies the terms and conditions agreed upon with the lender, similar to promissory notes. Those commercial lending facilities are usually sought by projects that are at early stages of development and not yet so mature as to seek finance for a longer term at the capital markets or with development banks or multilaterals.

Export credit agencies and development agencies usually provide funding for long-term financings, depending on the characteristics of the project, especially the origin of the suppliers of the equipment and the sponsors of the project.

The exploration of natural resources requires certain authorisations and concessions to be obtained from public authorities, depending on the resource to be explored.

Certain registers may also be required for trading such resources, especially if such activities require the transport and storage of those resources. A case-by-case analysis may be needed to identify the specific requirements of the resources to be traded.

The environmental, health and safety laws that apply to projects in Brazil vary, depending on the sector in which the Brazilian companies being financed operate. In general, one of the most important environmental policies in Brazil that must be considered in any infrastructure project is the National Environmental Policy, which aims to regulate activities that are considered to be potentially polluting, giving rise to the possibility to preserve, improve and recover environmental quality related to such projects.

The National Policy for Solid Waste might also be applicable to some projects. It was established by Federal Law No 12,305 of 2010 and has the management of solid waste in Brazil as its main objective.

Regulatory agencies related to the environment also vary according to the nature of the project, and can act at a municipal, state and federal level. At the federal level, the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) is considered the main Brazilian regulatory agency regarding environmental matters.

In relation to health and safety laws, Decree Law No 5,452 of 1943 (Consolidation of Labour Laws) can be considered the main legislation relating to workers' rights and safety, as it provides the general standards for related health and safety issues. One of the main bodies responsible for the inspection of labour, safety and health conditions is the Labour Prosecutor's Office. There are also specific norms that apply to private and public companies and projects, and vary in accordance with the activities being developed.