- 1.How common is project finance in your jurisdiction? In what sectors is project financing most common?
Project finance has become a common practice in Honduras over the last three or four years, particularly for private projects in the areas of renewable energy and, in some ways in telecommunications. In the public sector, even though there have been fewer projects which have involved project finance, it has helped in the development of public work concessions and public services contracts by private companies, to benefit from their experience and skills while controlling high initial investments, reducing tax burdens and allowing long periods of maturity while the lenders have a predictable and reliable cash flow. However, congress has recently enacted the Promotion of Private-Public Partnership Bill (Ley de Promición Alianza Público-Privada) and its regulation, with the purpose of promoting and encouraging these kind of projects.
- 2.What kinds of institutions typically act as sponsors and lenders in your jurisdiction? Why?
Sponsors are usually companies involved in energy and development projects that have strong commercial ties with Honduras, including the United States, Canada and Spain; lenders are usually international development banks that work in the Americas such as the Central American Bank for Economic Integration (CABEI), Inter-American Development Bank (IDB) and World Bank (WB), as well as the Finnish Development Finance Company (FINNFUND), the Central American Renewable Energy and Cleaner Production Facility (CAREC), E+Co Capital, the Corporación Interamericana para el Finaciamiento de Infraestructura (CIFI) and the Entrepreneurial Development Bank of the Netherlands (FMO).
- 3.What structures are most common?
The most common structure is build operate transfer (BOT) and to a lesser extent hybrid financings that combine elements of project finance with elements of corporate finance.
- 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?
Honduran law requires that the project company be organised and incorporated under local law. The most common vehicle is a corporation (Sociedad Anónima). Equity of the project company can be held by local or foreign investors, there is no minimum or limitation in regards to citizenship of investors. The law for the defense of competition regulates conditions under which the awardee may sell or transfer its equity ownership in the concession company, but as long as control is not changed (51 per cent is maintained) no government approval would be required.
- 5.Please describe the foreign investment regime in your jurisdiction.
The investment environment in Honduras is generally open and predictable. The principles of national treatment, no discrimination, economic freedom and private property are defined and guaranteed by the constitution.
Honduras is a services and trade oriented economy that has executed several bilateral investment treaties with strategic partners, as well as important bilateral and multilateral free trade agreements, with purposes of encouraging market access of Honduran products. In recent years, Honduras Rica has enforced free trade agreements with Mexico, Canada, the Dominican Republic, Central America, Panamá, Caribbean Community and with the United States through DR-CAFTA. A Free Trade Agreement with China (Taiwan) was entered into in 2008, and treaties with the European Union are signed and shall enter in force between 2011 and 2012.
Special notice should be made to beachfront property which is governed by Law for Acquisition of Urban Properties in Areas Limited by Art. 107 of the Constitution (Decree No. 90/90) (Shoreline Zone Law), administrative regulations issued by the municipalities and by the Honduran Tourism Institute (IHT), among others. According to this law, foreigners and foreign companies that are not constituted completely by Honduran shareholders will not be able to acquire properties within the areas set forth in Article 107 of the constitution. This area includes state properties, private properties located in the borderland with other countries, or in either coast of the country, 40km from the coast inward, areas within the islands, keys, coral reef, pitfalls, sand banks.
Property in these areas may only be acquired or possessed by Hondurans (by birth), or by companies whose shareholders are Hondurans, or by state institutions, and only for purposes of tourism projects, projects for economic or social development, and must obtain previous approval by the secretary of tourism.
Additionally, on 5 and 6 May, San Pedro Sula, the industrial capital of Honduras, was the siege of an investment forum “Honduras is Open for Business”, which aimed at the launching of Honduras as the most attractive destination for investments. Over 1,300 foreign companies and potential investors, representing 75 countries were invited and participated in the event, which will hopefully have positive outcomes for investment in the country. A few days before this forum, congress enacted the Protection and Promotion of Investments Bill (Ley para la Protección y Promoción de Inversiones), which will serve as the legal basis for all investments in the country as of the date of its publication.
- 6.Are there any restrictions on payments abroad or repatriation of capital by foreign investors?
There are no restrictions on payments abroad or on repatriation of capital by foreign investors. Only withholding taxes would apply, depending on the nature of the payment.
- 7.Is it permissible for a project company to maintain offshore foreign currency accounts?
Yes, it is permissible and it is a common practice in most project financing transactions in Honduras.
- 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?
Both the executive and legislative branches have been working together in matters related to foreign investments in the country. As a result of this alliance, congress recently enacted the Protection and Promotion of Investments Bill (Ley para la Protección y Promoción de Inversiones)and the Promotion of Private-Public Partnership Bill (Ley de Pomoción de la Alianza Público-Privada), which shall serve as the legal basis for potential foreign investments.
- 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?
Project finance agreements do not need to be registered or filed with any government authority in order for them to be valid. However, should the parties enter into a trust agreement as a result of the transaction, this document, and any other document where security interests and collaterals are provided for as a way to secure an obligation, must be registered in the Mercantile Registry.
- 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, promissory notes issued in accordance with local law will allow lenders to execute them through expedited procedures as well as circumventing the validation process of foreign judgments.
- 11.Must any agreements be governed by local law?
Finance agreements can be governed by local or foreign law which is usually determined based on the origin of the lenders. As for trust agreements and other documents which provide for security interests and collaterals, they are usually governed by local law.
However, public work concessions and public services contracts projects shall be regulated by the by the Promotion of Private-Public Partnership Bill (Ley de Pomoción de la Alianza Público-Privada) and its Regulation.
- 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, parties may agree for a collateral agent to act as the sole secured party for the benefit of a group of lenders. The possibility of the composition of lenders changing from time to time and the collateral agent remaining should be determined contractually.
- 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?
Private sector project companies can grant security interests over all of its assets, except those excluded by law (eg easements). As for public works and concessions, the rights and works built by the concession company are state property and therefore not subject to be granted as security. Also, the properties and rights that the concession company acquires and are incorporated into the concession may not be granted as security either unless the state consents to it.
- 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?
Collateral securities (eg, mortgages or pledges) must be recorded with the Mercantile Registry. The legal fees and registration costs (filing fees) are calculated based on the value of the obligation that is recorded on the security document. The registration costs are paid in the form of stamp taxes and registration fees as follows:
- Stamp tax (Attorney Bar): Ten lempiras (L.10.00) per every one hundred thousand lempiras (L.100,000.00) and thirty lempiras (L.30.00).
- Registration Fee (Property Institute): a) Two hundred lempiras (L.200.00) when the value of the obligation recorded in the document is not greater than one thousand lempiras (L.1,000.00) and (b) for the amount exceeding one thousand lempiras (L.1,000.00) an amount of one lempira and fifty cents (L.1.50) shall be paid for each thousand. [Property Law]
- 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?
Yes, lenders must stipulate the value of the collateral security in the relevant documents as well as any possible interest that may apply. If at the time of foreclosure the property is worth more than the outstanding amount, lenders will only take their share and the balance will belong to the debtor. The amount of the collateral security can be stated in local or foreign currency. If necessary foreign exchange swaps can be used to hedge against devaluation.
However, to avoid any problems regarding the enforcement procedure if there happened to be a foreclosure and to avoid any judicial procedures, it has been a practice since the early 1990s to enter into a trust agreement of management and guaranty, where a bank would operate as the trust and shall be in possession of the assets, managing them properly, in such a way that the trustee, through the trust complies with the obligations. Once the trust has been able pay the beneficiary, and the trustee has complied with its obligation, the trust shall distribute and return the exceeding money to the debtor.
- 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?
Yes, all collateral securities that can be identifiable must be identified in the security document (be it private document or public deed). If collateral securities are also recordable (eg, land, equipment, vehicles) they must be registered at the Property Registry.
- 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?
Liens on real estate are centrally recorded and searchable at the Property Registry (www.sinap.hn) so lenders can verify that collateral are free of claim and enforceability of their collateral by confirming the recorded information. As to liens on movable property, they must be registered in the Registry of Personal Securities.
Title insurance is now available in Honduras.
- 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?
Lenders must file a law suit before Honduran courts to demand payment for an obligation. The document that originates the collection must be submitted when filing. Once the claim is filed the court will order the debtor to pay the debt or present evidence of payment or unenforceability of the security document within the 10 days. If the debtor presents strong evidence to the contrary, the court will summon the parties to an oral hearing and decide to confirm the execution or revoke it. If the execution is confirmed, the court will order the auction of the debtors assets for the value recorded (base) on the security document and in its absence by the value set by a court appraiser. The auction will be announced by a notice to be published in a local newspaper of great circulation. The assets shall be acquired at an amount equivalent to at least 70 per cent of its value. The auction will be recorded by the court secretary. The collateral will then be awarded to the highest bidder. All bidders are required to make a deposit in court for the total value of the assets being auctioned. Lenders can participate in the auction and are not required to make a deposit to participate, considering its offer is a payment to its own credit. However if the lender (creditor) bids an amount that exceeds the obligation plus 50 per cent, then it must deposit in order to participate. The proceeds obtained from the auction will be used to pay the principal, and interests of the bligation to the Lender. The remaining (if any) shall be returned to the debtor.
Self-help remedies are available according to Honduran legislation; a lender may take direct ownership of the collateral security in satisfaction of the debt without a previous judicial procedure, for example, by entering into a trust agreement, like mentioned in question 15. The purpose of the trust agreement is that the assets given under trust serve as a guaranty to pay the obligations that the debtor has with the lender. Additionally, the trust agreement will have as purpose the management of cash and payment of the obligations by the trust. And finally, the trust agreement shall constitute the instrument for payment to the lender in case of non compliance of the debtor´s obligations. In the agreement, the parties shall set forth rules for the direct sale of the assets, giving the lender the opportunity to receive the proceeds from the sale of the assets without having to go through a judicial procedure.
For the direct sale of the assets:
- the parties shall determine the sale price of the assets given under the trust, by an appraisal, which shall be done annually;
- a notice shall be published in a local newspaper and/or any other media, stating the basis of the auction, which shall be published at least ten days before the auction;
- the parties shall determine the place where the auction should take place;
- all bidders shall provide a deposit in favour of the lender; and
- the lender shall participate in the auction, and will only be able to bid up to the amount owned by the debtor.
The foreclosure on a pledge of the ownership interests of the project can be more efficient and less time consuming than a foreclosure on individual assets of the project company. The Personal Securities Law (Ley de Garantías Mobiliarias), has been enacted to regulate normal collateral securities and it is aimed at making collection procedures more efficient and less time consuming.
- 19.What creditors would enjoy a higher statutory priority with respect to the collateral security than the lenders?
Usually, if the collateral security is registered in the roperty Registry, there should not be any creditors with a higher statutory priority. However, if a third party believes that it has statutory priority to be paid, the third party may also sue the debtor for payment, providing prima facie evidence of his right to payment.
However, like mentioned in question 18, this might be prevented if the parties enter into a trust agreement and set forth procedure rules on the direct sale of the assets given under the trust.
- 20.Would the lenders incur any liabilities upon foreclosure relating to project assets?
Aside from recorded first priority rights over the collateral, creditors would not incur any liabilities upon foreclosure relating to project assets.
- 21.What legal restrictions exist with respect to the operation of the project post-foreclosure by the lenders or their designee?
In the event of a foreclosure of a project company that operates a concession right the bidder will inherit the same rights and obligations of the concession agreement. In order for the lender or third party to take over the project it must meet the same requirements as the borrower. There is no restriction on foreign ownership or operation of the project.
- 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?
Yes, said agreement can be enforceable in a bankruptcy proceeding.
- 23.Can a project company organised under local laws validly submit to the jurisdiction of a foreign court?
Yes it is possible if the parties so agree. The parties can also submit to international arbitration, in which case an arbitral clause is required. Another possibility for conflicts between a foreign investor and a state is to go to international arbitration under a bilateral investment treaty (BIT), for cases when the state of the investor and the state that receives the investment have a BIT in force.
- 24.Is service of process by mail recognised in your jurisdiction or would the project company need to appoint a process agent?
Yes it is. The Code of Civil Procedures states that upon the request of the interested party, process can be personally served by certified postal mail with delivery record through the official postal service of the country. Other service of process alternatives include fax or e-mail, nonetheless the initial service must be served personally, at his domicile or at the companies registered domicile. Companies with agents or representatives that do not reside in-country require - in accordance with article 308 of the Commerce Code - a resident agent that must be an in-country attorney with an office that serves as preregistered process agent.
- 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?
Yes, foreign judgments and arbitral awards are enforceable in Honduras. Costa Rica entered into law the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards on 10 June, 1958; it was later ratified on October 3, 2000. Costa Rica entered into law the Inter-American Convention on International Commercial Arbitration on 30 January, 1975; it was later ratified on 22 March, 1979 and has been in force since 20 January, 1978. Both conventions recognise the right to refer any dispute to arbitration and the obligation to recognize the arbitral awards.
Honduran courts recognise the validity of a foreign judgment or arbitral award provided that they comply with principles of due process. According to the Civil Procedure Law, a foreign judgment or award will be recognised if:
- it is previously requested and permission is granted by the Honduran Supreme Court of Honduras (Exequatur) pursuant to existing treaties regulating recognition and enforcement of foreign judgments; or absent any such treaties, if
(i) the award, which shall be res judicata, must be rendered by competent authority according to Honduran norms of international jurisdiction;
(ii) the party against which the award is enforced must be personally summoned and had been guaranteed the right to its defence, and was notified of the award wished to be enforced, according to the laws of the country of origin;
(iii) fulfills all legal requirements to be considered authentic in the country of origin and in Honduras;
(iv) that the award is not against Honduran principles of public policy and the obligation it binds to be of legitimate and legal performance within the Honduran territory;
(v) the award is not incompatible with awards previously rendered by Honduran courts; and
- the Honduran Supreme Court has approved the enforcement of such judgment after having;
(i) received an official translation, duly legalized or apostilled, of the foreign judgment; and
(ii) heard the parties opinion.
- it is previously requested and permission is granted by the Honduran Supreme Court of Honduras (Exequatur) pursuant to existing treaties regulating recognition and enforcement of foreign judgments; or absent any such treaties, if
- 26.Is subordination of debt recognised under the law of your jurisdiction?
Yes, as long as the possible provisions of an agreement between the senior and subordinated lenders pursuant to which the subordinated lenders agree that they will not be repaid (in whole or in part) until the debt to the senior lenders is paid do not contradict or affect third party rights in accordance with the rules of bankruptcy and/or those that are recorded at the Property Registry.
- 27.Are there laws in your jurisdiction that regulate how tariffs payable to a service provider must be calculated? If so, please describe briefly.
Yes. The Electricity Sector Law (Ley Marco del Sector Subsector Eléctrico) and its regulation contain provisions regarding the tariffs that shall be charged to consumers for electricity services. The prices and tariffs are subject to the approval by the National Electricity Commission, a governmental institution that ensures compliance with the standards of quality, quantity, reliability, continuity, and optimal service for the generation, transmission, distribution and marketing of electricity. The Telecommunications Sector Law (Ley Marco del Sector de Telecomunicaciones) and its regulation contains the tariffs and prices that the consumer shall be charged for the telephone services. The method to determine the price or tariff depends on each service, there are no standard procedures; each service has its own variables and formulas, which are periodically reviewed to determine the applicable tariffs.
- 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?
According to Article 20 of the Commerce Code, only persons who have de facto control in the company´s functioning, whether or not they are shareholders, will be held liable against third parties, in a joint, subsidiary and unlimited way, for malicious acts done on behalf of the company.
Tax or other liabilities may not be extended to Lenders.
- 29.Are there any limitations with respect to importation of equipment or materials to be used in the project?
Yes there are. In the case of concession contracts, the concession company has the right to request tax benefits that relate only to the concession (eg, customs tariff, import duties, selective consumption tax and any other tax for both local purchases and the import of goods required to execute the concession). However, all the equipment and materials imported or purchased locally with such exemption, may only be used in the concession. The equipment will be introduced to the country under temporary importation and to enjoy this benefit, it must remain in the country only for the duration of the construction of the works, its maintenance or the provision of public service, as appropriate. To these effects, the concession company must pay a guarantee to the customs administration, through custom pledges exempted from paying any registration costs, fees or any other tax. All the equipment introduced to the country under temporary importation, once the construction stage of the works or its maintenance is completed, or the service is covered, must be re-exported or nationalised, with previous payment of taxes and fees, as appropriate. For any exemption, the Ministry of Finance will require the prior recommendation of the state, in accordance with the requirements of the law.
- 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?
There are no restrictions applicable to foreigners regarding the acquisition of land, except for maritime zone properties defined in Article 107 of the constitution, as mentioned in question 5. If due process is followed regarding permits (eg, municipal and environmental) there should be no land issues regarding project finance endeavors.
If the project requires the acquisition of rights of way, the state must follow the statutory expropriation procedure exercising its eminent domain powers.
- 31.Please describe any other relevant legal considerations relating to project finance in your jurisdiction.
Project finance is still an option mainly reserved for big public infrastructure works - concession projects in particular where the revenue stream can be better assessed by lenders. Furthermore Honduras is still relatively new to concession projects but because of its stable economic climate and growth, it remains an attractive centre business and required infrastructure growth.
- 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. The promotion of the private-public partnership bill (Ley de Pomoción de la Alianza Público-Privada) and its regulation was enacted on August and December 2010, respectively, which apply both at national and municipal levels.
- 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?
The promotion of the private-public partnership bill does not provide to any limitations on PPP transactions. However, it does specify that a PPP transaction may only be done for the following purposes:
- Construction and/or operation, and/or transfer, and/or maintenance of public works or services;
- Expansion of existing public works/services;
- Rendering a public service, completely or partially, whether as a result of the execution of a public work, or not;
- Execution of a public work, with or without rendering public services, which shall be leased by the state;
- Management as trust of properties, services, accounting systems, technical systems, programs or projects for development, credit contracts, among others; and
- Any other service that may result in a PPP transaction, within the limits of the law.
- 34.What are the most significant PPP transactions that have been completed to date?
Since the promotion of the private-public partnership Bill (Ley de Pomoción de la Alianza Público-Privada) has been recently enacted (August 2010), the government is still in the process of constituting the Commission for the Promotion of Private-Public Partnership (COALIANZA, in Spanish), which will be the entity responsible of leading and supervising the PPP transactions. Once the government has set up this entity, PPP transactions will be able to be carried out in the country.
- 35.What do you see as the primary impediments and drivers, both legal and commercial, to the development of PPP in your jurisdiction?
The main impediments for the development of PPP’s in Honduras are the lack of significant capital markets. The main drivers are the long established stable political system, a reliable and stable economy, and a strong regulatory system that assures investors their rights regarding public contracts. The youthful experience in concession projects provides for mix reviews but still an optimistic outlook.
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