Chile

José María Eyzaguirre B, Rodrigo Ochagavía, Jorge Martín, Felipe Larraín and Luisa F Nuñez

Claro y Cía

  1. 1.How common is project finance in your jurisdiction? In what sectors is project financing most common?

    Project finance is a regular legal structure used in Chile to finance the construction and operation of projects of private and public infrastructure, and public services (eg, power plants, toll roads, airports, ports, prisons, public transportation, etc).

  2. 2.What kinds of institutions typically act as sponsors and lenders in your jurisdiction? Why?

    Generally, the sponsors are public utilities already established and operating in Chile that are developing new projects. Also, Chilean and foreign investors with infrastructure background have actively participated as sponsors in the construction and operation of toll roads, airports and ports.

    Regarding lenders, until three or four years ago the monoline insurance companies (eg, MBIA, FSA, Ambac and XL) played a key role in the development of the public infrastructure programmes led by the Chilean government in the past decade, and also financed certain private projects. These lenders, and also the Inter-American Development Bank, insured or guaranteed the indebtedness of the project companies (whether structured as foreign or local long-term bonds or bank financing) on finance structures in which the sponsors generally limit their liability to obtaining project completion and major defaults (eg, loss of a concession contract). During the past years the International Finance Corporation and private banks (mostly from Europe) have actively participated in the financing of different projects.

    Local banks have gradually started to get involved in project financing, but as a general rule are not keen on taking completion risk unless such risk is covered by a sponsor guaranty, a multilateral entity or a foreign bank.

    We are not aware of relevant Chinese investments in these areas. Similarly, private equity funds have had limited involvement.

  3. 3.What structures are most common?

    The most common structures in the case of public infrastructure are BOOT (build, own, operate and transfer) or PPP (public private partnership). The public infrastructure programme led by the Chilean government in the past decade was generally structured as several BOOT projects, pursuant to which the sponsors build, own and operate the project for the term of the concession, and upon expiration they give the project back to the Chilean state (who shall concede it again). Other public services projects (eg, public transportation, prisons and - still not implemented - hospitals) have some of the features of the PPP structure. In the case of private projects, hybrid financings (part project finance and part corporate finance) are the general rule. In private infrastructure projects we have seen a full array of structures where the most notable common element is the existence of offtake agreements which contemplate take-or-pay obligations satisfying the “hell or high water” standard.

  4. 4.Does local law require 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?

    For regulatory or tax reasons, or both, it is required or advisable, or both, that the project company is organised under the laws of Chile. In the case of public works concessions or other contracts with the Chilean state, it is generally a requirement that the project company is local. On private projects, the real driver is tax, to avoid the general withholding tax triggered on funds remitted abroad. Conversely, there are no restrictions on foreign investors holding the equity of the project company.

    The most common legal structures are corporations (sociedades anónimas). In this type of company the interest holders are not liable for the debts of the project company, and the risk of a court “piercing of the corporate veil” is low (there is no relevant caselaw in this regard), but at the same time it is possible to create a security interest in favour of the lenders on the shares issued by the borrower (something which is not possible in limited liability companies (sociedades de responsabilidad limitada)).

    Another legal structure which some market players are using is the stock company (sociedad por acciones). Generally, stock companies share most of the features of corporations (eg, their capital is divided into shares of stock and the rules governing close corporations are applicable as default rules in absence of specific provisions) except that, unlike corporations, they may be formed by one or more persons (individuals and/or legal entities) and are not dissolved when one person holds all of the shares in the stock company.

  5. 5.Please describe the foreign investment regime in your jurisdiction.

    Foreign investment in Chile may be made either under the law governing the Central Bank (Central Bank Act) or the Foreign Investment Statute (“Estatuto de la Inversión Extranjera - Decreto Ley 600”, the Decree Law 600). Under both systems, the foreign investors are granted access to the formal foreign exchange market to repatriate capital and profits. The formal foreign exchange market is composed by the banks established in Chile and the exchange houses, stockbrokers and brokerdealers authorised for this purpose by the Central Bank.

    Investments under Decree Law 600 may be brought in freely convertible foreign currency, tangible assets, technology that may qualify as capital, associated loans and capitalisation of foreign loans registered with the Central Bank or of profits entitled to be remitted abroad. Investments under the Central Bank Act may only be made in freely convertible foreign currency, which may be brought into Chile or used abroad to pay the corresponding investment, or in shares or equity rights of foreign companies.

    Decree Law 600 contemplates special devices particularly designed for project financing purposes applicable to industrial or extractive projects, including mining projects of US$50 million or more and consist of an invariable overall income tax regime for a total period of up to 20 years and maintenance for the same period of time of the rules and regulations regarding the determination of income taxes and the free exportation of goods as in effect upon the execution of the relevant investment contract. Certainly Decree Law 600 affords the best legal protection available in Chile to foreign investors, as their rights and privileges are secured by an investment contract entered into with the Chilean State which is enforceable against Chile and which cannot be amended unilaterally by the government. These foreign investment contracts are governed by Chilean law and are subject to the jurisdiction of Chilean courts. The Central Bank Act alternative available to foreign investors has traditionally been based only on administrative resolutions issued by the Central Bank and, consequently, is more vulnerable as the Central Bank expressly reserves the authority to change these regulations from time to time.

    Under Decree Law 600, only investment projects of US$5 million (when investments consist of foreign currency and associated credits (the minimum amount is US$2.5 million when the investment is in the form of tangible assets, technology, capitalisation of profits or capitalisation of credits) are eligible. Under the Central Bank Act, only investment projects of US$ 10,000 (or its equivalent in another foreign currency) or more are eligible.

  6. 6.Are there any restrictions on payments abroad or repatriation of capital by foreign investors?

    Generally, no. Decree Law 600 provides that capital invested thereunder may not be repatriated earlier than one year from the time the investment is made. The Central Bank Act has no such restriction. Under both Decree Law 600 and the Central Bank Act profits may be freely remitted abroad at any time at the discretion of each investor.

  7. 7.Is it permissible for a project company to maintain offshore foreign currency accounts?

    Yes.

  8. 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 Chilean government took several measures to tackle the global debt crisis. Among those measures, some had impact in projects, such as reductions in stamp tax rates to financings and increased spending in public works and launching of new public work projects. Except for the latter, we believe that those measures had only temporary effects during 2009 and the first half of 2010.

  9. 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?

    Except for certain security documents and promissory notes, generally it is not necessary that the financing or project agreements be registered or filed with governmental authorities or that comply with local formalities, and there are no special advantages in doing so. The two relevant exceptions are promissory notes (see our answer to question 9) and security interests (see our answer to question 10).

  10. 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?

    Yes. To be entitled to expedited collection proceedings, the promissory notes shall be subject to Chilean law, the applicable stamp tax shall have been paid and the signature of the debtor shall have been authorised by a notary public. It is common practice that the financing contracts are subject to a foreign law (eg, New York or England) and that the promissory notes are subject to Chilean law.

  11. 11.Must any agreements be governed by local law?

    In addition to the promissory notes, the security package shall be subject to Chilean law.

    Chilean laws afford the parties certain latitude to choose the applicable law to agreements creating obligations and covenants (also known as rights in personam), provided there are reasonable contacts with the foreign jurisdiction chosen. Conversely, as a matter of public policy, agreements affecting rights over property located in Chile (also known as rights in rem) shall necessarily be governed by Chilean law, and the parties to them may not opt for a different law.

    Under Chilean law, a fully perfected security interest creates a right in rem over the collateral, which grants the creditor the right to claim and judicially repossess the collateral from any third party; to force the sale of such collateral in a judicial proceeding; and to claim a preference for payment over the proceeds of such sale (subject, of course, to general statutory priorities under Chilean law).

    The salient characteristic of the rights in rem is that the holder may enforce them against any third party - erga omnes. Consequently, they are specifically listed in the Civil Code or other Chilean laws, and it is not possible for the parties to create a new one by means of an agreement (as opposed to obligations and covenants, which are only enforceable against the other parties to the respective agreement, and the parties are, generally, free to create them).

    As a result, if the parties intend to obtain a security interest which grants the creditor the aforementioned right in rem, they shall necessarily comply with the applicable Chilean laws establishing such security interest. In other words, the execution and perfection of, and then the performance and enforcement of, a security interest over property located in Chile shall be subject to Chilean law.

  12. 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. As a matter of Chilean law, the designated agent is empowered to represent creditors that have designated it as their agent in the granting and administration of the loans, or in the granting, amendment or extinction of the collateral, or both, and in the joint exercise of the rights arising under the loans or security interests. It allows the representation of both original lenders and additional lenders adhering to the designation agreement. Generally, the law provides the parties with a great degree of flexibility to agree on the terms and conditions governing the collateral agent designation and rules applicable to its actions. The appointment agreement is governed by Chilean law and can be granted in Chile either by private deed protocolised with a Chilean notary public or by public deed executed before a Chilean notary public. It can also be granted abroad but in this later case it has to be legalised before the Chilean consulate and then protocolised in Chile with a Chilean notary public. In this second case, the procedure is typically used in respect of the powers of attorney lenders grant for their representation in the execution of Chilean law documents.

  13. 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 or ‘of public interest’ such that granting a security interest therein would not be permissible?

    Security interests can be granted with respect to all of a project company’s assets only to the extent that each asset over which the security interest is intended to be created is individually described in the agreement creating the security interest. Floating charges or security interests over after-acquired property are available with respect to inventory, raw materials, elaborated and semi-elaborated products and spare parts. Likewise, revenues of a concession company are considered part of the assets covered by the concession pledge.

    The Civil Procedure Code includes a list of the assets that may not be attached. Among others, salaries and child support up to certain amount, the household assets (bed, clothes, etc), working tools and assets employed in services that may not be stopped with serious harm to the public transportation or health. Except for the aforementioned list, there are no restrictions on the assets of a given debtor that may be given as collateral.

  14. 14.What costs are associated with registering collateral security interests in your jurisdiction? Are such costs determined with respect to the obligations secured or the approximate value of the property?

    Depending on the security interest involved, there will be registration and publication fees. The publication fees are fixed and of no relevant amount. Certain registration fees (eg, mortgages) are linked to the guaranteed obligation or the value of the property, with a cap that varies from US$500 to US$750.

  15. 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?

    There is no need to stipulate the value of the collateral in the relevant documents. Conversely, references to the specific guaranteed obligations or a general guaranty clause (available for certain security interests) may need to be included.

  16. 16.Does each item of collateral need to be individually identified 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?

    Except in those cases where a floating lien is acceptable (see our answer to question 12), 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.

  17. 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?

    In addition to the usual representations and warranties given by the party granting the security interest, the lenders may check public records to ascertain whether certain specific security interests (mortgages and pledges without conveyance) have been granted. These searches are easy for purposes of real estates and personal property subject to registration requirements, which is an advantage given the fact that there is no title insurance available in Chile. However, to date such searches are difficult to make in connection with personal property not subject to registration requirements as each jurisdiction within the country has its own register (ie, are not centralised) and as a general rule are not accessible through the internet. The consequences of these limitations are somehow reduced due to the fact that in Chile contractors may not file mechanic liens.

  18. 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 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?

    Enforcement of a security interest or a guarantee depends on the documents evidencing the right of the creditor to collect on the principal agreement.

    Security interests

    To the extent that the indebtedness secured by a security interest is evidenced by a document which entitles the creditor to a summary collection proceeding in Chile (eg, promissory note subject to Chilean law, a recognised foreign judgment for the payment of money, etc) the secured party will be able to foreclose on the collateral in which the security interest has been granted by means of a summary proceeding before Chilean courts. Otherwise the secured party will need to first sue the debtor in ordinary proceedings and upon obtaining a favourable judgment begin summary proceedings.

    Please note that as a general rule foreclosure requires commencement of a collection proceeding before a regular court, which will order a public auction of the collateral and allow the secured creditor to obtain payment with the proceeds of such forced sale (which shall be in local currency). Should there be no bidders at the relevant public auction, the collateral may be awarded to the creditor in payment of the secured obligations. Repossession or other self-help remedies are not allowed under Chilean law.

    As a matter of practice, it is more efficient to foreclose on the shares of the project company (thus taking control over the debtor) than foreclosing on each of its assets. Moreover, foreclosing on certain pledges on shares may not require to follow the procedure described in the preceding paragraph and only require the giving of judicial notice and sale of the shares in a stock exchange.

    Guarantees

    Enforcement of guarantees follow generally the same principles. Please note that if governed by Chilean law, joint (but not several) guarantees are usually evidenced by means of a fianza where the obligor has certain defences, such as the beneficio de excusión: the right to demand that the creditor first seeks to foreclose on the assets of the debtor; the beneficio de división: the right of a co-guarantor that is not jointly and severally liable to demand that the liability be divided among all the co-guarantors, if more than one; the excepción de subrogación: which limits liability if the creditor has done something that impairs the right of the guarantor to be subrogated in the credit against the debtor upon payment; the beneficio de retractación: the right of the guarantor to repudiate the guaranty in respect of future obligations; and the excepciones reales y personales: actions in rem (ie, wilful misconduct) and in personam (ie, set-off) against the creditor. All of such defences, except those based in the wilful misconduct of the creditor (or gross negligence which is assimilated in this regard to wilful misconduct), may be waived in advance, and such waiver is enforceable under Chilean law.

  19. 19.What creditors would enjoy a higher statutory priority with respect to the collateral security than the lenders?

    Certain credits are afforded by law a preferred status, even over-secured credits. This is the case of judicial costs incurred for the general benefit of creditors, other bankruptcy expenses, remunerations of workers and family allowances, social security contributions, tax withholdings and surcharges, and up to 10 months of severance pay per each worker.

  20. 20.Would the lenders incur any liabilities upon foreclosure relating to project assets?

    No.

  21. 21.What legal restrictions exist with respect to the operation of the project post-foreclosure by the lenders or their designee?

    Generally there are no legal restrictions (but please refer to our answer to question 12 on assets that cannot be granted as collateral).

    In certain cases, however, the lender shall be an eligible operator (ie, in public works concessions).

  22. 22.Would the agreement by a project company’s equity holders to make capital contributions to the project company be enforceable by the lenders in bankruptcy proceedings of the project company?

    Generally yes. As to the enforcement thereof it is convenient that the equity contribution agreement or any other security document includes the authority to pass on the required corporate resolutions to be able to materialise the capital contribution, thus avoiding that the lack of those resolutions be used as a defence to avoid or delay the contribution itself.

    Note, in any case, that if the sponsor obligations are part of the financing contracts subject to foreign law (eg, New York or England) against foreign sponsors, the issue should be addressed on that level, and not in Chile.

  23. 23.Can a project company organised under local laws validly submit to the jurisdiction of a foreign court?

    Generally yes. The submission to the non-exclusive jurisdiction of a court sitting abroad, the waiver of objections to the laying of venue of certain actions, suits or proceedings, the waiver of jury trial, and the waiver of immunities contained in the financing contracts are valid and binding on the borrower, except for any waiver of immunities regarding property located in Chile, which is subject to the exclusive jurisdiction of Chilean courts.

  24. 24.Is service of process by mail recognised in your jurisdiction or would the project company need to appoint a process agent?

    Service of process by mail is not recognised in Chile. The project company shall appoint a process agent for this purpose. A foreign judgment would not be considered to have been rendered by default if personal service of process was made upon an agent of the borrower, assuming that such manner of service is valid under the applicable law, unless the defendant is able to prove that due to other reasons it was prevented from assuming its defence. Under Chilean law, service of process by means of mailing copies to the defendant will not be deemed effective to cause proper service of process and, consequently, and any foreign judgment rendered in a proceeding in which process was served by means of mailing copies to the defendant may be then effectively contested by the defendant in Chile.

  25. 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 have the capacity to arbitrate as a matter of local law?

    A final and conclusive court judgment or arbitral award for the payment of money rendered by a court or arbitrator sitting abroad against the borrower will be recognised in the courts of Chile and such courts will enforce such foreign judgment or arbitral award on the borrower without any retrial or re-examination of the merits of the original action under the following circumstances:

    • if there is a treaty between Chile and the country where the foreign judgment or arbitral award was rendered with respect to the enforcement of foreign judgments or arbitral awards, the provisions of such treaty shall be applied (in this regard, note that Chile is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards);

    • if there is no treaty, the foreign judgment or arbitral award will be enforced if there is reciprocity as to the enforcement of foreign judgments or arbitral award (ie, the relevant foreign court would enforce a judgment of a Chilean court or an arbitral award rendered in Chile under comparable circumstances);

    • if it can be proved that there is no reciprocity, the foreign judgment or arbitral award cannot be enforced;

    • if reciprocity cannot be proven, the foreign judgment or arbitral award will be enforced if it has not been rendered by default within the meaning of Chilean law (please refer to our answer to question 23 on personal service of process); and

    • in any event, the foreign judgment shall not be contrary to the public policy of Chile and shall not affect in any way property located in Chile.

    Upon compliance with the above and provided that the foreign judgment or arbitral award is previously legalised and translated into Spanish by an official translator in Chile, the courts in Chile will enforce a final and conclusive foreign judgment or arbitral award for the payment of money rendered by any court or arbitrator referred to above in accordance with the procedure contemplated for the enforcement of final and conclusive foreign judgments in the Civil Procedure Code.

    Note with respect to public policy and the enforcement of the obligations of the borrower, and foreign judgments and arbitral awards with respect thereto, that generally, any provisions purporting to authorise conclusive determinations by any person whether for interest, indemnities, costs or otherwise may not be enforceable if such determinations are so arbitrary and unreasonable as to be contrary to basic and fundamental principles of the laws of Chile. Also, disclaimers of liability will only be enforceable if there is no gross negligence or wilful misconduct on the part of the person benefiting from such disclaimers. Finally, to the extent any section of any transaction document authorises a party to exercise self-help remedies or entitle a person to benefit from enforcement proceeds resulting from foreclosure of collateral in Chile in respect of which a third party holds a security interest, any such section may be deemed to be contrary to basic and fundamental principles of Chilean law.

  26. 26.Is subordination of debt recognised under the law of your jurisdiction?

    Subordination of debt is regulated under Chilean law, and should be recognised by the trustee in bankruptcy when paying to different creditors (senior first, then subordinated). But note that the subordination agreement shall comply with certain execution formalities (granted by means of a public deed or a private deed authorised before a notary public and deposited with the same).

  27. 27.Are there laws in your jurisdiction that regulate how tariffs payable to a service provider must be calculated? If so, please describe briefly.

    The answer will depend on the type of industry. Electric generation prices are either regulated or unregulated, depending on the clients. Water supply and sewage services tariffs are also regulated. Pipeline transportation fees are determined by the contracting parties.

  28. 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?

    No.

  29. 29.Are there any limitations with respect to importation of equipment or materials to be used in the project?

    There are no limitations with respect to importation of equipment or materials to be used in the project, but there may be some tax incentives applicable (eg, deferral in payment of import duties).

  30. 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?

    Generally there are no land issues to the extent that the project company has secured ownership or a long-term lease of the site where the project will be located. Please note that issues may arise in certain cases in connection with mining rights underlying the project site or if the project site is a state-owned asset that needs to be acquired from the government.

    Except for certain restrictions on ownership of land located near the border, there are no restrictions on foreigners’ ownership of land. As to natural resources, except for limited restrictions on the ownership of hydrocarbons and certain areas of the economy (such as fishing and shipping) there are no restrictions on foreigners’ ownership of natural resources.

    Rights of way and expropriation for projects that require them (eg, pipelines, toll roads) are specifically regulated, and provided proper compensation is paid to the affected land owner, the project company should be able to obtain them through a summary court proceeding. Moreover, in many cases the compensation to be paid for the easement is determined by independent third parties, if not agreed by the parties, without delaying the imposition of the easement.

  31. 31.Please describe any other relevant legal considerations relating to project finance in your jurisdiction.

    Foreign lenders should be aware that contractual step-in rights and the conditional assignment of the project contracts may face certain difficulties on enforcement under Chilean law.

  32. 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?

    Yes, in the context of public works concessions. The most relevant provisions applicable to public works concessions in Chile are Supreme Decree No. 900, published in the Official Gazette on December 18, 1996, as amended, which sets forth the text of the Public Works Concession Act; and Supreme Decree No. 956, published in the Official Gazette on March 20, 1999, which sets forth the Public Works Concessions Regulation.

  33. 33.What legal limitations, if any, are there 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?

    Except for hydrocarbons and certain mining projects nationalised at the beginning of the 1970s the state does not have more limitations on the carrying forward of PPP transactions than those imposed by the law.

    A special law shall be passed by Congress for the Chilean state to assume long-term fiscal obligations, as has recently been reaffirmed by the Constitutional Court in respect of a public transportation project outside the Public Works Concession Act and by the Public Works Concession Act where the Chilean state has certain latitude to incur in long-term fiscal obligations not exceeding 50 years.

  34. 34.What are the most significant PPP transactions that have been completed to date?

    The most significant PPP transactions completed to date are prisons and public transportation. On the specific BOOT side, toll roads, airports and ports are well known for their success (amounting to more than US$11 billion in the aggregate during the last decade).

  35. 35.What do you see as the primary impediments and drivers, both legal and commercial, to the development of PPP in your jurisdiction?

    The primary drivers for the development of PPP in Chile are the political, legal and economic stability that has existed in Chile during the past two decades, as it can be easely evidenced by the success of the prior public works concession programme, as applied to toll roads, airports and ports. The primary impediments are social or political considerations on “privatising” certain areas, such as hospitals.

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