LEVY & SALOMÃO - A D V O G A D O S

Legal Bulletin

v.12 / n.2 - 2006, May / June

Brazil

New Mechanisms of Guarantee for Concessions

The enactment of Law nº 11,196 of November 21, 2005 (which resulted from the so-called “Good Provisional Measure” or “MP do bem”) introduced two new guarantee mechanisms for the financing of public concessions: fiduciary transfer of receivables and step-in rights.

Fiduciary transfer of receivables permits public service concessionaires to offer some of their operating credits in guarantee of long term financings. These receivables are fiduciarily assigned to lenders, which can indicate a financial institution or the concessionaire itself to collect and receive payment of the credits. This guarantee mechanism can only be employed with financings of an average term greater than five years.

The step-in rights mechanism is a prophylactic means of assuring performance on the concessionaire’s financial obligations. It grants lenders the possibility of assuming shareholder control of the concessionaire company to enable the financial restructuring of the concessionaire and the maintaining of service rendering continuity. The conditions to application of this mechanism must be set forth in the concession agreement.

The application of this mechanism does not, however, impede the right of the granting authority to intervene in the concession when necessary.  Both mechanisms aim to minimize the risks and reduce the financing costs to public service concessions.

These concessions usually demand substantial investment, restricted by the difficulty of concessionaires in offering adequate guarantees to lenders in that a large part of assets involved in the financing belong to the granting authority and cannot be offered in guarantee. The fiduciary transfer of receivables and step-in rights mechanisms make investing more secure for lenders, favoring increased offering of financial resources and contributing to the development of project finance operations in Br

azil.

Erik Frederico Oioli, eoioli@levysalomao.com.br

Henrique Vicentin Lisboa, hlisboa@levysalomao.com.br

LEVY&SALOMÃO - A D V O G A D O Sechanisms of Guarantee for Concessions

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