Navigating ship finance in Brazil

Creation of security over a vessel has always been an important issue for borrowers and lenders in the offshore industry. Instead of the traditional mortgage over a vessel, commonly used in most countries, chattel mortgage has been the preferred choice of security used by many players acting in Brazil.

The recent discovery of significant offshore oil and gas reserves has turned Brazil into one of the world’s hotspots for investing in the offshore industry.
In addition to the obvious commercial opportunities, Brazil also offers various tax incentives, attractive finance and repayment terms, and other benefits targeting those looking to invest in Brazilian shipping companies or build Brazilian flagged vessels.

The Merchant Marine Fund

The Merchant Marine Fund (FMM) plays an important role to incentivise inbound investment. It was created to basically fund the development of the Brazilian shipbuilding industry and is, first and foremost, available to Brazilian shipping companies and Brazilian shipyards to finance of up to 90% of the value of the construction, modernisation or repair of vessels. Although FMM funds are only available to Brazilian shipping companies and Brazilian shipyards, there are no restrictions relating to the involvement of foreign partners or investors working with Brazilian companies. There are, however, certain legal, technical and economic requirements that need to be observed.

Attractively priced FMM funds have been made available through governmental financial agents, the most active of which is the National Bank for Economic and Social Development (BNDES).

The guarantees required by BNDES are normally equivalent to 120% of the financed amount and usually include a mortgage or chattel mortgage (fiduciary sale) of the financed vessel, corporate collateral, bank guarantees, assignment of earnings, and the guarantees issued by the Shipbuilding Industry Guarantee Fund (FGCN), a governmental fund created in 2009 to guarantee projects during construction.

Instead of a traditional mortgage over a vessel or asset, in Brazil the chattel mortgage is the most adopted guarantee among BNDES and other vessel-financing banks.

Chattel mortgage

A Chattel mortgage is the guarantee when the debtor legally guarantees the completion of certain obligations by transferring an asset’s reversible ownership to the creditor.

The general rule that applies under Brazilian law regarding a chattel mortgage is that the debtor must transfer an asset’s title to the creditor and, once the secured obligation is accomplished, the creditor’s title automatically reverts to the debtor.

Such a transfer of ownership to the creditor is intended to be temporary, lasting only until the payment of the secured debt has been made – protecting the creditors. Under a chattel mortgage, the debtor remains in possession of the vessel while the creditor acquires indirect possession through the title (reversible ownership).

In order to be enforceable, chattel mortgages over Brazilian-flagged vessels should be registered before the Admiralty Court, which will enforces the chattel mortgage should a default occur.

This is the main advantage of a chattel mortgage, which provides for a more efficient recovery, as repossession of the asset and its sale is far less bureaucratic than the lengthy legal proceedings related to mortgage foreclosure in Brazil.

It should be highlighted that, although Brazilian law requires the “reversible” property of the secured asset to be transferred to a creditor in order to create a chattel mortgage, where the secured asset is a vessel, special treatment is granted by the Admiralty Court to avoid potential adverse effects to shipowners’ rights (and potential liabilities to creditors).

As such, the Admiralty Court has been granting the registration of chattel mortgages considering this guarantee as an encumbrance on the vessel and, thus, not requiring the transfer of the ownership to the creditor.

The key feature of this ‘special treatment’ adopted by the Admiralty Court is that the transfer of the secured vessel is exercised on a ficta and fiducia basis – that is, the creditor will only be entitled to exercise ownership rights over the asset in the event of a default by the debtor.

In this case the creditor will proceed as if it was the registered owner of the vessel and will be entitled to make the formal registration in its own name and, as a consequence, sell the vessel. It is important to note that the chattel mortgage status of vessels is approached by the Admiralty Court in a very flexible way, and is not in contradiction with other applicable laws, i.e. the Civil Code and Marine Property Registry Law.

Chattel mortgage v mortgage

The main difference between a security created under a mortgage and a chattel mortgage is that in the latter, the debtor effectively transfers its property rights over a certain asset to the creditor, whereas in a mortgage, the title and possession of the secured asset remains with the debtor.

Other relevant differences are:

• Under a chattel mortgage no other liens may be placed on the asset, except for those imposed by law (crewmembers’ remuneration, expenses from voyages etc.), whereas under a mortgage other liens and different ranking liens may be placed on the mortgaged asset.
• Under a chattel mortgage, the guarantee will be easily enforced in case of default, as the creditor will be able to sell the asset extra-judicially, whereas mortgages can only be enforced through legal proceedings.
• Under a chattel mortgage, in case of bankruptcy of the debtor, the secured asset leaves the estate of the debtor and becomes the property of the creditor, i.e. the asset will not be subject to the bankruptcy proceedings. Under the mortgage, the creditor will only get paid after preferred creditors in a bankruptcy process.

In practice, both guarantees usually enable BNDES and other agents of the FMM to offer better finance rates and conditions to companies establishing Brazilian shipping companies and Brazilian shipyards that are aiming to enter the booming Brazilian offshore market.

Flávia Pires is an associate at Vieira Rezende, an associated law firm of Wikborg Rein, in Rio de Janeiro. She has advised a range of international and domestic offshore service companies in their operations in Brazil