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lation is that the terms of the concession can be tailored to the specific re- quirements of the project. For lenders, this may include, among other things, specific recognition of step-in rights in the event of default, exemptions from withholding and stamp taxes and more certainty with respect to the creation and enforcement of security interests.


Government control and termination rights Infrastructure projects in Panama usually involve investments in regulated in- dustries. Such is the case with the energy, telecommunications, ports, toll- roads, mining, and petroleum storage, transportation and refining industries. Lenders must be aware that the government of Panama and its regulatory agencies exercise influence on companies operating in these industries.


Lenders must be particularly aware of the Panamanian government’s right


to terminate concessions. By law, the government of Panama always reserves the right to unilaterally terminate a concession for reasons of public interest (rescate administrativo) upon payment of fair compensation. The details of what constitutes public interest, what is fair compensation and which process is to be followed change, to some extent, from one concession agreement to the next.


In addition, the government of Panama also reserves the right to terminate


a concession in case of a breach of its terms by the concessionaire and in the event of the insolvency or bankruptcy of the concessionaire. As in the case of the unilateral termination of a concession, the details of what constitutes a breach of contract, what compensation, if any, is due to the concessionaire, and which process is to be followed also change, to some extent, from one concession agreement to the next.


PANAMA


in favour of lenders. In infrastructure projects of a size and nature that require step-in rights, concessionaires should seek a concession agreement enacted by special legislation.


Lenders should also review the good standing of the concession and the


concessionaire, as the government generally reserves substantial rights to audit performance of the concessionaire under the concession agreement and vio- lations of such terms may constitute causes for termination.


Collateral package The financing of most of the infrastructure projects in Panama has included a comprehensive and complex security interest package. Security packages have ordinarily included a combination of a mortgage or an assignment of the concession, an assignment of concession termination payments, a pledge of the stock of the concessionaire, a pledge or similar security interest on col- lection, capex and debt service reserve accounts, a mortgage on real property, a chattel mortgage on movable assets, an assignment of insurance payments, an assignment of accounts receivable and an assignment of material contracts, such as power purchase agreements.


Although, in general terms, Panamanian law favours the creation, perfec-


tion and enforcement of these security interests, lenders should be aware of certain limitations.


Concession agreement Generally speaking, infrastructure concession agreements can be mortgaged under Panamanian law. Prior consent from the government is in most cases necessary to create a valid mortgage on a concession. In addition, the filing of a mortgage agreement with the Public Registry is required for the validity and perfection of the mortgage.


Although a properly constituted mortgage will grant the mortgagee a first


priority security interest on the concession, lenders should be aware that fore- closure on the concession must be carried out through judicial proceedings and, before the concession can be transferred upon foreclosure, the govern- ment must approve the new concessionaire. Thus, lenders can expect the fore- closure of a concession mortgage to be a lengthy process that will involve substantial government participation.


The mortgage of the concession agreement must be governed by Pana-


manian law. Regarding hydroelectric plants, concessions to use water resources in Panama are granted by the Panamanian Environmental Agency. At the moment, this agency is of the view that concessions for the use of water re- sources are not transferrable.


Shares of stock of the concessionaire Shares of stock of Panamanian companies can easily be pledged. Pledging shares of stock usually requires only the execution of a pledge agreement, the delivery to the pledgee of the share certificates with blank stock powers and an annotation of the pledge on the company’s stock register. No filings are required for the perfection of a stock pledge. Nonetheless, lenders must be


As the concession is in most cases the most important asset of the conces-


sionaire, lenders must take care to understand the circumstances under which the concession can be terminated and the way in which termination payments are calculated and paid. It is critical that whatever termination payment the concessionaire is entitled to receive, independently from the cause for termi- nation of the concession, be assigned to the lenders. Consents, filings and proper formalities must be obtained and followed for the assignment of these termination payments to be valid and enforceable against the government and to be excluded from the bankruptcy of the concessionaire and beyond the reach of other creditors.


Some concessions, such as Petaquilla’s copper mine and the Panama Canal


Railway’s railroad, have granted lenders limited rights to step in, operate the concession, cure defaults and identify potential purchasers for the concession before the government terminates the concession. However, the general legal framework applicable to most concessions does not contemplate step-in rights


aware that the legal framework applicable to most infrastructure concessions requires prior consent from the government in order to create a valid pledge on the shares of a concessionaire.


A properly constituted pledge will grant the pledgee a first priority security


interest in the stock of the concessionaire. As opposed to a concession mort- gage, the foreclosure of a pledge on the shares of the concessionaire need not be carried out through judicial proceedings. The shares can be disposed of through private or public sales. However, as in the case of foreclosure of a con- cession mortgage, the legal framework applicable to most infrastructure con- cessions requires that the new owner of the shares be approved by the government before consummation of the foreclosure.


One issue that frequently comes up in connection with concession agree-


ments is whether pledging the stock of the parent company of the conces- sionaire also requires the consent of the government. The legal framework


ENERGY & INFRASTRUCTURE | LATIN AMERICA 2013 75


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