Lender protections in the project finance market of the Dominican Republic
May 2013 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
The Dominican Republic (DR) is a robust emerging market ripe with lucrative finance opportunities for both lenders and project sponsors. Its well-developed regulatory framework, political and economic stability and ample governmental support have contributed to a recent increase of infrastructure, mining, energy, and real estate projects. In 2012 the total foreign direct investment amounted to $3.6bn, a 40 percent increase compared to $2.8bn in 2011, according to CEI-RD, a local investment promotion agency. In recognition of the need of equity injection in those sectors, the Dominican government has been actively promoting direct investment by modernising the laws on arbitration, companies, and mortgage, and opening a one-stop shop for setting up projects.
The country’s capital market is still not equipped to handle capital-intensive projects. Although the local banks are well capitalised, they prefer to participate in financing of even small projects ($10m) as part of a lending syndicate. Likewise, their role is somewhat undermined by high local interest rates, short repayment terms, and rather high loan loss allowance mandated by the banking regulations to be set aside. As a result, the developers turn to international financial markets to fill the void. Private equity funds and foreign banks, mostly New York-based, now routinely participate in all types of projects, starting from resort real estate development to construction of subway lines in the capital Santo Domingo.
For capital-intensive projects, for example, in the infrastructure or energy sectors, financial institutions prefer to share the risk with multilateral financial institutions (MFIs) and international financial institutions (IFIs), which have a lot of experience financing local projects and established relationships with the authorities providing them with a sense of security. Such MFIs and IFIs include the Inter-American Development Bank (IDB), World Bank, International Finance Corporation (IFC), Société de Promotion et de Participation pour la Coopération Economique (PROPARCO), European Investment Bank, and French Development Agency (AFD), among others. These institutions have enjoyed solid support from the Dominican government interested in tapping into their resources and vast technical expertise to make projects more financially viable and attractive to other lenders.
The Dominican law provides significant flexibility to lenders and project sponsors by allowing them to choose laws of any jurisdiction to govern their relationships, as well as relationships with the Dominican government. The only exceptions are real estate mortgages and non-possessory pledges of local movable property, which must be governed by the local law.
To address the project risks, in addition to protective provisions in project and financing instruments, the lenders can obtain adequate security to cover the principal, interest and other amounts owed in the event of early termination of the financing agreements. The Dominican law does not have any restrictions on what can be granted as security for financing private or public projects; it can include real estate mortgage, lien on assets, share pledge, assignment of rights of any type including those granted by a concession, lease or other contract, assignment of receivables, and personal guarantees.
In addition to collateral granted by the borrower to secure financing, in large public infrastructure projects, such as energy generation, the lenders can take advantage of various protective provisions. These should be established not only in the financing documents, but also in other project documents, where the government acknowledges and accepts the lender’s ‘step-in’ rights, allowing the lenders to: (i) cure any default by the concessionaire, including designation of a provisional operator acting on behalf of the lender; (ii) foreclose on the collateral pledged in public projects subject to a concession and to assume its ownership after foreclosure without the need for further approvals; and (iii) have special termination payments owed to the concessionaire by the government included in a special account approved by and pledged to the lender, among others.
Also, in projects of high interest for the government, the sponsors and the financial institutions can obtain sovereign guarantees, which the government is authorised to grant as it deems necessary, subject to approval by the National Congress. Such sovereign guarantees have been known to include revolving letters of credits, return of investment and minimum income guarantee, guaranteed issuance of permits, licences and other approvals, change of law and economic equilibrium protections.
The DR is a race-notice jurisdiction, thus, the lenders should ensure that their collateral is promptly and properly recorded. Possibly the largest misconception of new lenders entering the DR financing market is the assumption that enforcement of collateral is self-executory, similar to the common law countries that allow a non-judicial foreclosure. In the DR, all real estate foreclosures need to follow the court procedure, where the lender takes the leading role, making it a race-to-foreclose jurisdiction.
Others protections provided by the Dominican legislation to project developers and financial institutions consist of two mechanisms recently created by Law 189-11 on Development of Mortgage Market and Trusts, which introduced trusts and collateral agent structures as an alternative for the protection of project assets and better administration of collateral. Prior to this formal inclusion in the Dominican legislation, both mechanisms have been successfully implemented in many financing and business transactions on the basis of private agreements appointing escrow agents, and have proven to be the lenders’ favourite.
The trust is created for the benefit of the project participants (usually the lender) by the debtor (settlor), who transfers ownership of its project assets to a trustee usually responsible for maintaining, securing and administering such assets, as well as project funds, as provided by the trust agreement. Since the assets transferred to the trust are excluded from the debtor’s estate, they are beyond the reach of the debtor’s other creditors, as well as the debtor itself, which makes the trust mechanism more attractive to the lenders.
Compared to the trust, the collateral agent mechanism does not transfer ownership of the assets. The appointed collateral agent administers the collateral for the benefit of the project participants and is entitled to register the collateral and act in court under its name only, which, in turn, greatly facilitates structuring syndicated loans. In any case, the debtor or guarantor must agree to the appointment of the trustee and the collateral agent.
In sum, despite the obvious risks of the rapidly developing project finance market in the DR, lenders are provided with adequate protections in the form of collateral, contractual protective provisions and, in some cases, sovereign guarantees. Coupled with the ever-increasing demand for project financing, such protections make the Dominican Republic an attractive lending destination allowing the lenders to benefit from significant returns on investment.
Katherine Rosa is a partner, and Yulia B. Felender and Melissa Gilbert are associates at Jiménez Cruz Peña. Ms Rosa can be contacted on +1 809 548 2706 or by email: firstname.lastname@example.org. Ms Felender can be contacted on +1 809 548 2713 or by email: email@example.com. Ms Gilbert can be contacted on +1 809 548 2711 or by email: firstname.lastname@example.org.
© Financier Worldwide
Katherine Rosa, Yulia B. Felender and Melissa Gilbert
Jiménez Cruz Peña