In today’s climate, development banks are providing the bulk of the infrastructure funding in emerging markets, but local development banks are limited in the amount of capital they can provide. As governments look to stimulate their economies through projects, they require additional funding sources. Nei Zelmanovits of Machado, Meyer, Sendacz e Opice Advogados asks what role asset-backed financings will play in future infrastructure development in Latin America – a region with an enormous infrastructure deficit. 

 

Asset-backed financing first started in some Latin American jurisdictions in the mid-1990s. Since then, the region has experienced currency devaluations, crises, bankruptcies and changes in policy, while there is a growing pool of participating parties – from public and private investors to local and foreign institutions offering different financing solutions. In light of the new scenario, governments across the region are implementing measures that will give lenders and creditors more affective ways to enforce their rights. 

 

The Peruvian government has said the country needs to spend US$80 billion to bring its infrastructure up to an acceptable standard, according to Roberto Maclean of Miranda & Amado Abogados. In light of this, a system has developed for secured lending with local legislation providing for several tools. In real estate, a mortgage system for property and concessions has been in place for many years, while there also exists a mortgage over units of production that was recently used to include an LNG facility and pipeline in one single mortgage. In the last six years, a system has been developed that makes it possible to take future assets as security while there is also now a registration system for all types of assets. As it seeks to fill the infrastructure gap, the government has also established that concessions can be mortgaged and given as security to creditors of the project developer. “Even for governmental projects the concession agreements have incorporated ways to protect creditors and reassure them over risks with the project company,” says Maclean. 

 

Juan Fernando Gaviria of prietocarrizosa says Colombia has a very traditional scheme of security interest, with mortgages for immovable assets, pledges for immovable assets and security trust arrangements. But the existing framework brings certain problems when structuring project finance. Firstly, in Colombia there cannot be any security interest over future assets – which is a problem when dealing with greenfield project as all assets are in the future. There are also issues related to private foreclosures because all security interests have to go through Colombian courts proceedings, which can last for up to five years. There are currently two alternatives, says Gaviria, neither of which is ideal. The first is a trust structure, where trustees can sell assets without going though a lengthy court proceeding, but the problem with a trust agreement is that future asset of a project can’t be transferred. The way to address the issue of future assets is to use a pledge over an ongoing concern, but enforcing the rights of a lender in the case of a pledge requires going to the courts. Gaviria says the government is aware of the situation and congress is reviewing a guarantee structure inspired by legislation in Peru that should make it possible to have a security interest over both future and current assets. 

 

In Brazil, Marina Anselmo Schneider of Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados says there has been a boom in mortgage-backed securities, while the government has been working on an initiative to provide tax benefits for foreign investors looking to finance economy through capex and infrastructure projects. The good news is that mortgage-backed securities are governed by strong, tried and tested legislation, which addresses how to guarantee and provide security to the assets in question. In the case of bankruptcy the assets are ring-fenced to pay for the securities. There are two things that are usually provided for the security; receivables or the transfer of ownership of real estate. The lateral is an important development in terms of collateral as it expedites the process via an out of court procedure.

 

Latin Lawyer's Corporate Finance Conference took place in São Paulo on Tuesday 19 March.

 

(Latin Lawyer)