Brazil to review guarantees for infrastructure projects, source says

SAO PAULO Mon May 19, 2014 9:30am EDT

SAO PAULO May 19 (Reuters) - The Brazilian government, concerned over deadlocks hampering investment, may revamp rules for the use of collateral put forth by construction firms in the financing of infrastructure, a source with direct knowledge of the plans said on Monday.

The initiative includes the creation of so-called equity support agreements in project finance for infrastructure deals, said the source, who requested anonymity because the plan is in the works. All changes to the current regime would be included in an executive decree that would be sent to Congress for approval, the source added.

Equity support agreements allow lenders to force partners in an infrastructure plan to inject cash into the venture in the event of a default. Uncertainties linked to financial guarantees and collateral have put the brakes on the execution of dozens of key projects in recent years, such as the construction of the Corinthians soccer team stadium in São Paulo.

Revamping rules for the use of guarantees could help unlock the auctioning off of more than 11,000 kilometers (6,875 miles) of railways across Latin America's biggest country, among a number of projects badly needed to reignite growth and end decades of logistics and transport bottlenecks. The ESA, as the agreements are known, would be a "mid-term solution until project finance contracts become common ground transactions in Brazil," the source added.

Insurance companies, auditing firms and even regulatory agencies are reluctant to a more generalized use of ESAs as a tool to speed up infrastructure works, citing potential uncertainties facing lenders in case projects fail to take off. The limited number of civil construction firms in Brazil - seven - with the ability to set aside collateral to undertake big projects has also help build up opposition against the ESAs.

The government would be willing to make use of the ABGF, a guarantee fund it created for infrastructure projects, to help mitigate credit risk, the source noted. The fund has 11 billion reais ($4.9 billion) of funds from the government and several private-sector banks.

Government officials plan to soon begin a series of visits, commonly known as road shows, to foreign investors, in order to detail the potential changes to guarantee rules, the source said. Targets for those road shows include foreign companies with interest in Brazilian infrastructure projects, credit rating companies, auditing firms, insurers and reinsurers, the source added. (Writing by Guillermo Parra-Bernal; editing by Andrew Hay)

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