Project Finance 2014 – Dominican RepublicPublished on:
1 How common is project finance in your jurisdiction? In what sectors is project financing most common?
Project finance is becoming increasingly common in our jurisdiction. Borrowers have realised that, in addition to the funds, the proper development of a project sometimes requires the expertise and supervision of a strategic ally that may or may not be a shareholder, but one that has real interest in the start-up and completion of the project. It was first initiated in the telecommunication sector and is now mostly used in connection with infrastructure projects.
2 What kinds of institutions typically act as sponsors and lenders in your jurisdiction? Why?
The sponsors are typically companies related to the borrower or a direct stakeholder in the project (shareholders, directly or through a subsidiary, holding company controlled by the shareholders) and, subject to the nature of the project, the state may act as sponsor. As for the lenders, they are typically commercial banks, multilaterals and export credit agencies of the project sponsors’ jurisdiction. The reason why financial institutions and multilaterals are in most cases the lenders is because they have a visible presence in the market, they are closely supervised or they have a long standing reputation of stability and knowledge that makes it easy for the borrower to accept a comprehensive due diligence process and a detailed list of representations and guarantees meant to last until the completion of the project. In the case of multilateral institutions, their participation frequently has an additional value as they can provide advice in connection with relocation processes, environmental planning and other resources that are not readily available for a private lender.
3 What structures are most common?
We have seen several structures being used, from BOT to hybrid financing, that combine the elements of project finance with corporate finance. One of the first project financing transactions in our jurisdiction was related to the construction of a port facility and it followed the BOT model. However, although the idea of implementing a PPP model is becoming more appealing to both the public and private sectors, our legal framework is more flexible when it comes to hybrid financings.
4 Does local law require (or is it advisable) that the project company be organised under the laws of your jurisdiction? What is the typical legal form of a project company and why? Does local law require that any of the project company’s equity be held by local investors?
Under certain regulated sectors, such as telecommunications, the project company needs to be organised under the laws of our jurisdiction. Subject to certain limitations, the same applies when the project is state-owned (ie, construction of a toll road) as, pursuant to local law, a percentage of the company’s equity shall be held by a local investor. The typical form of a project company is a limited liability corporation (sociedad anónima), which is among other corporate vehicles, the entity that requires a more strict corporate governance which brings comfort to the lenders and sponsors as well. In our jurisdiction all corporate vehicles may be subject to the piercing of the corporate veil in the event of fraud or the manifest intention of the shareholders to defraud unsecured and privileged creditors (such as suppliers or the tax administration).
5 Please describe the foreign investment regime in your jurisdiction.
Foreign investment is governed by Law 16-95, which basically sets forth the definition of what shall be considered foreign investment and lists certain areas whereby such investment is not permitted. Such law, which was enacted in 1995, established the principle that both foreign and national investors shall have similar rights and duties, which implies that under Dominican Law, foreign investments shall receive an equal or neutral treatment as compared to local investments. Additionally, there are isolated pieces of legislation that intend to promote both local and foreign investment in certain areas such as tourism, renewable energies and cinematography, to name the most relevant.
6 Are there any restrictions on payments abroad or repatriation of capital by foreign investors?
There are no restrictions on payments abroad or repatriation of capital by foreign investors, provided that all tax obligations accrued have been duly liquidated.
7 Is it permissible for a project company to maintain offshore foreign currency (eg, US dollar) accounts?
Yes, it is permissible for a project company to maintain offshore accounts in foreign currency. This occurs frequently.
8 What recent measures has your government implemented to make projects in your jurisdiction more attractive to foreign investors? Has this involved making government or other local sources of co-financing more available for projects?
The measures taken by the government are mostly related to the granting of tax exemptions in favour of investors, the project company, lenders and suppliers of projects in certain sectors of the economy (for example, cinematography). The most recent measure has been the creation of the VUI (ventanilla única de inversiones (single point of contact for investors)) to facilitate compliance by foreign investors with any permitting requirement applicable to a project to be developed in the DR, expedite procedures and thus make the country more competitive as foreign investment destination vis-à-vis other jurisdictions. The VUI is operated by the Export and Investment Center of the Dominican Republic (CEI-RD).
Project and financing documents
9 Will any of the financing or project agreements need to be registered or filed with any government authority or otherwise need to comply with local formalities to be valid or enforceable? Even if not necessary for enforceability, is there any special advantage in complying with local formalities?
Most of the financing and project agreements are subject to registration. In some cases, such as the loan agreement, the same must be filed before the Central Bank for statistical purposes only. In others, mostly in connection with the collateral, such as a mortgage, chattel pledge, share pledge or pledge of an intangible asset, registration requirements before the Land Register Office, the Court of Peace, or the Civil Registry would have to be complied with, as applicable. Other relevant formalities, established for the purposes of making the security enforceable vis-a-vis third parties, would have to be complied with as well. For instance, in the case of a pledge of a concession agreement, such pledge would have to be notified to the competent authority and, if a governmental entity is involved, to the Office of the Attorney General. The prior consent of the authorities is required with respect to telecom and energy concessions and their non-objection in connection with port concessions. In most cases involving a governmental project, a direct agreement among the lenders and the state is highly advisable to secure the enforceability of step-in rights, sharing of communications related to the project, among other things.
10 Are there any advantages in having the project company issue promissory notes that are governed by local law in addition to the credit agreement governed by New York (or other law)?
No. The security is an accessory to the main obligation and if the main obligation is a UK or US governed loan agreement, issuing promissory notes under local law may just increase the possibilities of having unnecessary delays in the event of a foreclosure procedure.
11 Must any agreements (finance or project) be governed by local law?
Certain security documents, such as mortgages, chattel pledges or pledges over concessions granted by the state must be governed by local law as matter of public policy.
12 May a collateral agent act as the sole secured party for the benefit of a group of lenders whose composition may change from time to time?
Yes, in accordance with the recently enacted Law for the Development of the Mortgage Market and the Creation of Trusts, a collateral agent may act as the sole secured party for the benefit of a group of lenders. Multiple service banks, savings and loan associations, any other financial intermediary or foreign bank authorised by the monetary board can act as collateral agents, as well as any other commercial company incorporated under the laws of Dominican Republic or foreign laws with the sole and exclusive purpose to act as collateral agents. Individuals cannot act as collateral agents pursuant to the Law. Prior to the enactment of the aforementioned law, this was not possible as a result of outdated legal provisions, but parties were able to contractually circumvent such impediment by establishing that the collateral agent acted on behalf of the secured parties and such secured parties were listed in the agreement, including a general reference to their potential assignees or purchasers of participations and the like.
13 May a security interest be granted with respect to all of a project company’s assets? Are any types of property considered personal in nature (eg, permits that are granted to an entity that has satisfied certain specific requirements) or “of public interest” such that granting a security interest therein (or foreclosure thereon by the lenders) would not be permissible?
A security interest may be granted with respect to a project company’s assets but by means of separate documents and upon compliance with different formalities. For instance, movables and real estate are subject to chattel pledges and mortgages, which require registration before the Court of Peace and the Land Register’s Office, respectively. A security interest on the shares of the project company is subject to a different set of formalities that may be as simple as the approval of the general shareholders’ meeting or as cumbersome as obtaining the approval or no-objection from one or several governmental authorities. With respect to property acquired after the execution of the security documents, it is usually established that if the value of such property exceeds a predetermined amount, then an amended and restated version of the security document that would cover such asset shall be made. Major acquisitions are subject to the lenders approval and thus having the documents drafted in a timely manner is not a major issue. Finally, except for the privileges provided by law in favour of employees (for their salaries and severance benefits), the tax administration (for due and unpaid taxes) and attorneys (for legal fees) once a first rank security interest is validly granted, the creditor will preserve its rank until the security is either foreclosed or released.
14 What costs are associated with registering collateral security interests in your jurisdiction? (Please include filing fees, duties, taxes and other applicable amounts.) Are such costs determined with respect to the obligations secured or the approximate value of the property?
Costs vary depending on the type of security. Pledges in general are subject to a minimum payment before the Court of Peace. However, the registration of a mortgage requires payment of a fee equal to 2 per cent of the secured amount. Finally, in the case of pledges over intangible assets, registration before the Civil Registry could be very steep as the amount of the transaction is usually the one taken into account.
15 Does your jurisdiction require lenders to stipulate the value of their collateral security in the relevant security documents? If so, what happens if at the time of foreclosure the property is worth more? Must such amount be stated in local currency even if the financing is in a foreign currency? If so, what protections may be implemented against devaluation of the local currency?
Our legislation requires lenders to stipulate the value of the secured amount and, in the case of the pledge over movable assets, the value of the collateral itself. With respect to real estate, although not required, the valuation of the property is advisable as the Tax Administration may apply a different value if the one specified in the contract is not consistent with the information at the Land Register Office and the Tax Administration. The amounts may be stated in foreign currency. Usually language is included in the contract to make sure that the obligations of the borrower are not considered as fully satisfied until the lenders received the complete secure amount in the currency chosen by the lender. The risk of devaluation is substantially low when dealing with a comprehensive security package that includes contracts (that usually have indexation provisions) and other intangibles. In the case of an extensive security package, it is important to distribute the secured amount taking into account the value of each asset. For instance, if the facility is for an amount in excess of US$100 million it is likely that the main asset will be a concession contract or a right to operate a facility; thus, registering a mortgage on a real estate property that is not worth such amount would entail payment of registration taxes for an amount that would be very steep compared to the ultimate benefits that may be obtained.
16 Does each item of collateral (eg, equipment) need to be individually identified (whether by serial number or otherwise) in the security document to grant a valid security interest in that item? Or would a general description of the types of collateral covered be sufficient?
Yes, the law requires that each item be specified with as much detail as possible. However, in the case of inventories that include assets that lack an individual registration or serial number, reference is made to the volume of the merchandise, its value and the need to keep such volume available at the warehouse or the premises of the borrower at all times.
17 How do lenders satisfy themselves with respect to the absence of other liens on their collateral? Are liens centrally recorded or searchable? May contractors file mechanic liens? If so, are lien waivers enforceable?
Lien searches are available but the registration of multiple liens is not permitted with respect to certain assets such as shares and moveable assets. With respect to real estate property, title insurance is available and the registration of a second or third rank mortgage would be possible, as long as the holder of the first rank allows for such registration, except with respect to privileged creditors as they hold a security interest that ranks above all based on the law.
18 What steps must a lender take to foreclose on a collateral security interest in your jurisdiction? How does a beneficiary of a guarantee provided by a local entity or granted under local law enforce such guarantee? Are any self-help remedies available? Is a public or private sale permissible or required? Is a judicial sale necessary? May lenders participate as buyers in any such sale, including by bidding the debt owed by the project company to them in lieu of cash? May any such sale (private or public) be for foreign currency? Is foreclosure on a pledge of the ownership interests of the project company more efficient and less time-consuming than a foreclosure on individual assets of the project company?
Under Dominican Republic Law there are no self-help remedies available. The lenders cannot take the collateral in satisfaction of the debt without first undergoing a foreclosure procedure. If they do so, based on a contractual provision agreed upon with the borrower, such would be deemed a pacto comisorio, which is prohibited by law thus rendering such clause null and void.
The steps to foreclose on a collateral vary depending on the type of asset, but all of them entail sending a notice to the debtor indicating the existence of an event of default, filing a lawsuit for an attachment of the asset granted as security and ultimately going through a public sale process, whereby if there are no interested buyers or buyers willing to pay the amount necessary for the cancellation of the debt, the lenders may end up receiving the asset in payment (up the value of the foreclosed asset).
The sale shall take place in local currency, but taking into account the exchange rate, no approvals are necessary to exchange the amounts paid in pesos into US dollars or other hard currency.
19 What creditors would enjoy a higher statutory priority with respect to the collateral security than the lenders?
Those listed as privileged creditors under the Civil Code enjoy a higher statutory priority with respect to the collateral security; they include: the tax authority, for unpaid taxes; employees, for accrued salaries and severances benefits; wives over their husbands’ assets and lawyers, for unpaid legal fees.
20 Would the lenders incur any liabilities upon foreclosure relating to project assets (as opposed to equity)?
Not necessarily. However, if all or almost all of the assets are the subject of foreclosure a third party may claim (if the securities were not duly perfected) that the company has been left bankrupt by reason of the foreclosure and that the beneficiary of the securities – has become the owner of the assets or the beneficiary of the profits resulting from their sale – is jointly liable. To our best knowledge, although this argument has been raised, local courts have not ruled in its favour.
21 What legal restrictions exist with respect to the operation of the project post-foreclosure by the lenders or their designee?
In general terms there are no restrictions, unless we are dealing with a project company that is active in a regulated sector. In the case of regulated sectors or public services, the Direct Agreement that is usually executed with the government is likely to specify that in the event of foreclosure an operator of similar characteristics (in terms of experience and qualifications) shall be found by the lenders to maintain the operations unaltered until a final purchaser expresses interest. As for the temporary ownership the lenders may have, it would not imply that they would have to establish local domicile or comply with the requirements of a final concessionaire. However, the third party that becomes the acquirer would have to meet the same criteria as the original concessionaire.
22 Would the agreement by a project company’s equity holders to make capital contributions to the project company (or directly to the lenders in satisfaction of the debt) be enforceable by the lenders (assuming such rights have been collaterally assigned by the project company to the lenders) in bankruptcy proceedings of the project company?
This would not be enforceable under Dominican Law. Failure to comply with an obligation to do so or to refrain from doing so may result in a claim for damages. Therefore, for such agreement to be enforceable it would have to be submitted to a foreign jurisdiction.
23 Can a project company organised under local laws validly submit to the jurisdiction of a foreign court?
Yes, it can.
24 Is service of process by mail recognised in your jurisdiction or would the project company need to appoint a process agent?
If the choice of law is different than the Dominican Republic or a portion of the security package is located abroad, it is advisable and generally acceptable to appoint an agent for the service of process.
25 Are foreign judgments and arbitral awards enforceable in your jurisdiction? If so, does any process of ratification or additional review need to be carried out in the local court system as a condition to such enforcement? Do sovereign or quasi-sovereign entities (eg, a counterparty to a major project document to which the project company is a party) have the capacity to arbitrate as a matter of local law?
Foreign judgments and arbitral awards are enforceable in our jurisdiction. The enforcement of foreign arbitral awards is subject to the rules of the New York Convention, to which the Dominican Republic is a party. With respect to a foreign judgment, at this time the Dominican Republic is not a party to any convention for the validation of such. However, both arbitral awards and foreign judgments may be enforceable once the interested party obtains an exequatur (local validation judgment) from the local courts. The exequatur would be granted if the decision at hand is final and not subject to further remedies, if all parties were duly summoned, if the due process of law was observed and if the decision does not contravene public policy.
26 Is subordination of debt recognised under the law of your jurisdiction?
Yes, subordination of debt is recognised under the laws of the Dominican Republic. In the event of bankruptcy, secured creditors are allowed to maintain the rank of their security (which is only second to privileged creditors) throughout the process and may even foreclose on their security if they start the corresponding proceedings prior to the judicial stage of the bankruptcy.
Subordinated and senior lenders would only be paid pari passu if the senior lenders waive their priority.
27 Are there laws in your jurisdiction that regulate how tariffs payable to a service provider (eg, a power plant or pipeline company) must be calculated? If so, please describe briefly.
The fees payable to a service provider may be freely negotiated by the parties. As for the taxes and levies applicable to those services, they vary depending on the nature of the industry of the project. However, most services are subject to the local equivalent of the value added tax (rate: 18 per cent). In some cases the concessionaire may be subject to payment of certain tariffs in favour of a governmental agency to cover services that by their nature cannot be transferred from the state to a third party, for instance, ports and airports security.
28 Do environmental, tax or other liabilities relating to the project extend beyond the project company to the direct or indirect owners of the project company or to the lenders?
The liability remains with the project company at all times. However, under local corporate law ‘veil piercing’ may take place only when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation.
29 Are there any limitations (or incentives) with respect to importation of equipment or materials to be used in the project?
A combination of both limitations and incentives may apply depending on the industry. For instance, there are tax incentives available for projects in the areas of tourism and renewable energy, to name the most relevant. As for restrictions, they are intended to avoid the importer to benefit more than once from the preferential treatment granted under certain free trade agreements currently in place with Central America and Europe.
30 What land issues might there be in connection with a project financing in your jurisdiction? Are there any restrictions on foreigners’ ownership of land or natural resources? How difficult is it to obtain rights of way (eg, in connection with a pipeline project that traverses many plots of land)?
There are no restrictions applicable to land ownership based on nationality. With respect to natural resources, they belong to the state, but unless otherwise specified by the existing legislation (ie, natural reserves, protected areas) may be subject to usufruct, exploitation, concession and licensing in favour of a third party upon execution of the applicable documentation and completion of any permitting requirements. A centralised registration system is in place and keeps track of changes in ownership, as well as the granting of rights of use and rights of way. Registration is done on a first come, first serve basis and it provides the purchaser, lessee or concessionaire with the publicity required to make the transaction enforceable vis-a-vis third parties and not just between the contracting parties.
31 Please describe any other relevant legal considerations relating to project finance in your jurisdiction.
If the project being financed is a public work commissioned by the state, it may be subject to compliance with the formalities set forth under the Public Procurement Law, which, among other things, requires a public bidding process entailing the submission of the legal documentation of the project company, and also the presentation of the financial plan that would allow for the completion of the works. As some material contracts may already be in place at the time of structuring the project financing, the assignment of those material contracts could be necessary and in some cases the execution of a direct agreement with the counter-party to some of those contracts is advisable to secure lenders’ rights under the financing and security documents.
Public-private partnership (PPP)
32 Has specific PPP-enabling legislation been passed in your jurisdiction?
If so, and if applicable, has it been passed at the federal, state or municipal level and is it sector-specific?
Not yet. However, the subject of PPP is gaining increasing popularity as an option to explore for the financing of certain projects.
33 What legal limitations, if any, are there (whether constitutional or otherwise) on PPP transactions? Are there any limitations on the contracting power of the state, the state’s ability to incur long-term fiscal obligations, or the extent to which certain government functions may be performed by the private sector?
Most of the limitations derive from the state’s ability to incur in obligations or delegate functions, which is subject to Congressional approval. Obtaining such approval may become a lengthy process, as it entails the review by both the Senate and the Chamber of Deputies and the subsequent enactment of a Presidential Decree. The contracting power of the state is subject to the restrictions set forth under the Constitution. The executive branch has limited powers and to the extent that the agreement has an impact over national income or grants tax benefits to a third party, it should be approved by Congress.
34 What are the most significant PPP transactions that have been completed to date?
35 What do you see as the primary impediments and drivers, both legal and commercial, to the development of PPP in your jurisdiction?
The lack of a specific legislation to facilitate the state’s participation in these types of transactions is the primary impediment to the development of PPP in the Dominican Republic.