LAW OFFICES CARL KINCAID MENDES VIANNA ADVOGADOS ASSOCIADOS

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LAW OFFICES CARL KINCAIDMENDES VIANNA ADVOGADOS
ASSOCIADOS
MARITIME INFRASTRUCTURE AND INVESTMENT
OPPORTUNITIES IN BRAZIL BRAZILIAN-AMERICA
N CHAMBER OF COMMERCE NEW YORK - NOVEMBER, 2008

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SHIPBUILDING INDUSTRY IN BRAZIL HISTORY
BACKGROUND

• Starting 1999 - Petrobras launched several bids
  for Brazilian new flag vessels (offshore PSV
  AHTS other), 2 years for construction plus 8
  years time charter 40 Brazilian flag off-shore
  vessels were built for local and foreign
  shipowners.
• Investments from foreign shipyards mainly in
  the State of Rio de Janeiro Ex AKER and FELS.
• 2001 2007 Great increase in rig construction
  - Petrobras.
• 2007-2008 - Booming of the shipyard industry
  all shipyards are working at 100 capacity.
• New shipyards are under construction and already
  built to attend the Transpetro program Ex
  Atlantico Sul Northeast of Brazil.
• The PROMINP program local content requirement
  (target minimum of 65 Brazilian suppliers and
  services). Brazilian know-how and manpower.
• Todays challenge price of the steel in the
  domestic market, price of the oil and economical
  crisis. The last meeting of CDFMM US 3.5 BI on
  Yards and Shipping Projects Minister Dilma
  Roussef also confirmed that Government will
  inject additional US 5 BI in the FMM.
• 2008 2012 Tankers for TRANSPETRO and several
  new building projects for bulk carriers and
  container vessels.

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BRAZILIAN SHIPBUILDING INDUSTRY BASIC STRUCTURE
CHART
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BRAZILIAN OFFSHORE SECTOR - PETROBRAS DEMAND
ON VESSEL AND RIGS

PETROBRAS OSVs Fleet Renewal Program 2008-2014 Petrobras intends to have 146 new Brazilian OSVs chartered by granting 8 years firm T/C to Owners with up to 36 months delivery time. The following vessels are said to be chartered/ordered 08 x 21,000 BHP AHTS 10 x 15,000 BHP AHTS 46 x 18,000 BHP AHTS 49 x 3,000T DWT PSV 15 X 4,500T DWT PSV 18 X OSRVs

• SOURCE Brazil/Scanbrasil Offshore The
  Brazilian Offshore Market March 2008.

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BRAZILIAN OFFSHORE SECTOR - PETROBRAS DEMAND
ON VESSEL AND RIGS

• PETROBRAS - INVESTMENTS
• ALREADY CONTRACTED

TRANSPETRO PROMEF 1 TANKERS 26
PETROBRAS PRODUCTION PLATFORMS 6
PETROBRAS (CHARTER) VLCC 2
TO BE CONTRACTED
TRANSPETRO PROMEF 2 TANKERS 23
PETROBRAS (CHARTER) TANKERS 19
PETROBRAS SUPORT VESSELS (24 BIDDING) 146
PETROBRAS PRODUCTION PLATFORMS 8
PETROBRAS RIG VESSELS (DRILLING) 28
TOTAL 224

• SOURCE Navalshore Seminar. http//www.sinaval.or
  g.br/navalshore2008.pdf. June 2008.

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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• The Brazilian Government has a special program
  for the financing of the shipbuilding industry,
  which is funded by the Marine Merchant Fund and
  operated by the Brazilian Development Bank
  BNDES, as main agent and lender, although other
  agents are also beginning to act, as Banco do
  Brasil.
• THE LEGAL BENEFICIARIES OF THE FMM (art. 26 of
  Law 10.893/2004)
• Brazilian Shipping Companies (BSC)
• Brazilian Shipyards
• Brazilian Navy

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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• LEGAL REQUIREMENTS TO INCORPORATE A BSC

• The company can be fully controlled by foreigner
  investors, but the administrator should be a
  Brazilian citizen or a foreigner individual
  holding a permanent Brazilian visa.
• The company can be incorporated as a corporation
  or as a limited liability company and it is
  mandatory to have an office located within
  Brazilian territory.

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• CONDITIONS FOR FINANCING THROUGH THE MERCHANT
  MARINE FUND

The shipping activity is regulated and
controlled by Antaq (Federal Government Agency
for Inland and Ocean Navigation). The Resolution
843 issued by Antaq states that to obtain an
authorization to operate as a shipping company is
necessary to fulfill the following
requirements (i) own or bareboat a Brazilian
flag vessel of the same type for a period of more
than a year (ii) a minimum net worth of (a)
US 4,000,000.00 for high sea navigation (b) US
3,000,000,00 for cabotage navigation (c) US
1,250,000.00 for maritime support and port
support navigation and (iii) positive equity
level - equal 1 or more.   However, if the
objective of the company is initially not to
operate, but exclusively to apply for the FMM
financing and the construction of a Brazilian
flag vessel in a Brazilian shipyard, Antaq would
waive the requirement mentioned above, and will
not be necessary to own or bareboat a Brazilian
flag vessel beforehand.      
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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• BRAZILIAN FLAG BENEFITS
• Law 9.432-97 Brazilian Jones Act - Exclusivity
  of Brazilian flag vessels or bareboat
  alternative.
• Tonnage rights BB double foreign flag during
  construction (10 built) in local shipyard and
  afterwards may use half for BB purposes.
• REB - Second and supplementary domestic
  register.
• Taxes Very high costs on vessel importation -
  not feasible.
• Fiscal Privileges Import Tax, ICMS, PIS,
  COFINS and Maritime Education Fund.
• Other Benefits FMM Interest Rates, Insurance,
  Fuel Price, La bor.
• PETROBRAS Recent Tenders for OSVS are
  restricting to new Brazilian flag vessels,
  therefore built in local yards.

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FMM LOAN CONDITIONS
Purpose Grace period Repayment Period Maximum BNDES Interest rates ( p.y.)
Purpose Grace period Repayment Period Share BNDES Interest rates ( p.y.)
Brazilian Shipping Company Brazilian Shipping Company Brazilian Shipping Company Brazilian Shipping Company Brazilian Shipping Company
Construction of vessel Up tp 4 years Up to 20 years Up to 90 2,5 to 5
Jumborization, conversion or modernization of own vessel Up to 4 years Up to 15 years Up t 90 3 to 6
Acquisition and installation of equipment Up to 2 years Up to 5 years Up to 90 3 to 6 if domestic content is over 60 3 to 4
Repair of own vessel Up to 1 year Up to 2 years Up to 90 3 to 6
Projects for research and scientific or technological development and formation and improvement of human resources directed to Merchant Marine, construction or naval repair sectors Up to 2 years Up to 10 years Up to 90 1 to 3
Other Brazilian Companies Other Brazilian Companies Other Brazilian Companies Other Brazilian Companies Other Brazilian Companies
Repair of own vessel for commercial, industrial or extractive application in Brazilian shipyard Up to 1 year Up to 2 years Up to 90 3 to 6
Construction, jumborization, conversion or modernization of any type of own vessel, of commercial, industrial or extractive application Up to  4 years Up to 15 years Up to 90 3 to 6
Projects for research and scientific or technological development and formation and improvement of human resources directed to Merchant Marine, construction or naval repair sectors Up to 2 years Up to 10 years Up to 90 1 to 3

• SOURCE http//www.bndes.gov.br/programas/outros/
  naval.asp

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FMM LOAN CONDITIONS
Shipping Company Shipping Company Shipping Company Shipping Company Shipping Company
Construction or production of vessel destined to fluvial transport of passengers, of high social interest Up to 4 years Up to 20 years Up to100 1 to 3
Brazilian Shipyards Brazilian Shipyards Brazilian Shipyards Brazilian Shipyards Brazilian Shipyards
Repair of vessel Up to 1 year Up to 2 years Up to 90 3 to 6
Production of vessel destined to a Brazilian navigation company or to export - Until the 5th business day following the foreign exchange closing related to the payment of the vessel price or at the maturity date established in the Production Financing Agreement, whichever takes place first Up to 90 3 to 5
Expansion and modernization of shipyard installations Up to 2 years Up to 10 years Up to 90 3 to 5
Construction of new shipyard installations Up to 2 years Up to 20 years Up to 90 3 to 5
Construction or production of vessel destined to fluvial transport of passengers, of high social interest Up to 4 years Up to 20 years Up to100 1 to 3
Projects for research and scientific or technological development and formation and improvement of human resources directed to Merchant Marine, construction or naval repair sectors Up to 2 years Up to 10 years Up to 90 1 to 3

• SOURCE http//www.bndes.gov.br/programas/outros/
  naval.asp

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FMM LOAN CONDITIONS
Public entities, research institutions and other agencies, including the class representatives of merchant marine and naval construction sectors Public entities, research institutions and other agencies, including the class representatives of merchant marine and naval construction sectors Public entities, research institutions and other agencies, including the class representatives of merchant marine and naval construction sectors Public entities, research institutions and other agencies, including the class representatives of merchant marine and naval construction sectors Public entities, research institutions and other agencies, including the class representatives of merchant marine and naval construction sectors
Construction of auxiliary, hydrographic and oceanographic vessels, in Brazilian shipyard Up to 4 years Up to 15 years Up to100 3 to 5
Projects for research and scientific or technological development and formation and improvement of human resources directed to Merchant Marine, construction or naval repair sectors (inclusive of Brazilian private entities, including the class representatives of merchant marine and naval construction sectors) Up to 2 years Up to 10 years Up to 90 1 to 3
Fishing Fishing Fishing Fishing Fishing
Individual or legal entity exploring artisanal fishing Up to 4 years Up to 20 years Up to 90 1 to 3
         
Vessels Registered or Pre-Registered in the REB (Special Brazilian Registry)        
         
Purpose Grace period Amortization Period Maximum BNDES Interest ( p.y.)
Purpose Grace period Amortization Period Participation BNDES Interest ( p.y.)
Construction of vessels Up to 4 years Up to 20 years Up to 90 3 to5
jumborization, conversion or modernization of vessel Up to 4 years Up to 15 years Up to 90 3 to 6
Repair of vessels Up to 2 years Up to 5 years Up to 90 3 to 6

• In case of financing to projects with domestic
  contents over 60, there will be a 0.5 p.y.
  reduction in interest rate. Computation of local
  contents should follow the BNDES System's
  standards in force.
• SOURCE http//www.bndes.gov.br/programas/outros/
  naval.asp

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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• ARREST AND JUDICIAL SALE OF VESSELS UNDER
  BRAZILIAN JURISDICTION
• Applicable Legislation and International
  Treaties
• The Brazilian Commercial Code (1850)
• The Brussels Convention for the Unification of
  Certain Rules relating to Maritime Liens and
  Mortgages (1926)
• The Brazilian Procedural Code (CPC, 1939)
• The International Arrest Convention (1999) The
  Brazilian Government has not ratified it.

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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• The arrest of ships under Brazilian jurisdiction
  well defined procedure in personam (general
  non privileged creditors) or in rem (maritime
  privileged creditors) First precedent case is
  100 years old - 1908 Argentinian flag vessel
  called San Lorenzo.
• The international jurisdiction of the Brazilian
  courts (CPC, article 88) act or fact occurred
  in Brazil or the obligation to be performed in
  Brazil
• The arrest as a specific precautionary measure
  (CPC, articles 813 and 814) hypotheses and
  requirements.
• The arrest as a non-specific precautionary
  measure (in limine order) broader possibility
  and courts discretion on fumus boni iuris and
  periculum in mora (CPC, article 798).
• The arrest is a preliminary procedure of a
  future recovery claim Brazilian jurisdiction
  should apply to both actions.
• Choice of jurisdiction and applicable law
  relevant issue when contracting the security
  package.

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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• CONTRACTUAL GUARANTEES
• I) FIDUCIARY ALIENATION
• Applicable Law - Fiduciary alienation is ruled
  by article 66 of Law 4.728/69, Decree-Law 911/69,
  Law 9.514/97 (unmoveable assets) and also
  articles 1361 and following of the Brazilian
  Civil Code Law 10.406/2002 and the Brazilian
  Procedural Code.
• Definition of fiduciary alienation - The
  contract through which the debtor, in order to
  guarantee the payment of a debt, transfers to
  the creditor the fiduciary property of an asset,
  while retaining the direct possession of same,
  under the resolutive condition to pay the debt.
  Therefore, the transfer of such fiduciary
  property to the creditor is only valid and
  effective as long as the debtor has not fully
  paid in his debt. After the payment of the debt,
  the fiduciary property returns to the debtor.

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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• MORTGAGE X FIDUCIARY ALIENATION
• Enforcement procedures and creditors rights
• In the event of debtors default, the creditor
  may exercise the rights as fiduciary owner,
  repossessing the vessel and promoting a private
  sale of the same, and shall use the product of
  such sale recover its credit (including,
  outstanding debt, interests, penalties and any
  and all costs incurred by creditor to collect
  payment from debtor). In case the product of the
  sale is superior to the accrued debt, such
  balance shall be returned to debtor.
• This instrument is more effective and less
  bureaucratic than the traditional mortgage, as
  creditor will not need to proceed with long
  mortgage enforcement procedures in Court, which
  may entail several years.

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CONDITIONS FOR FINANCING THROUGH THE MERCHANT
MARINE FUND

• Contractual guarantees (cont.)
• II) Bank Guarantees
• III) Corporate Guarantees
• IV) Assignment of contractual revenues (ex
  charter hires)
• V) Share Pledge Agreements
• VI) Performance Bond (seguro garantia).

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THE NAVAL CONSTRUCTION GUARANTEE FUND - FGCN

• LAW NO. 11.786 OF SEPTEMBER 26TH, 2008 (FGCNS
  STRUCTURE) IT IS STILL DEPENDING ON THE
  REGULATION BY DECREE.
• PURPOSE
• The FGCN serves to guarantee the credit risk of
  finance operations to naval construction carried
  out by financial agents authorized to operate
  with resources of the Merchant Marine Fund - FMM
  and restricted to the period of building of the
  vessel.

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CONCLUSION

• Brazil is nowadays the most important market for
  repair, conversion and ship/rig building projects
  in South America.
• Over the last 10 years the shipyard industry and
  infrastructure were rebuilt, updating know-how
  and technology. The Government through Petrobras
  - and Transpetro more recently - is upgrading the
  level of quality and efficiency of the local
  industry based on the local content requirement.
  Sophisticated supply vessels, rigs and platforms
  have been already built and delivered on time in
  Brazil. Very attractive conditions for financing
  through the Merchant Marine Fund and tax
  incentives are also a positive element. We have
  been advising several foreign clients which
  recently built vessels/rigs in Brazil using the
  tax incentives and the financing facilities of
  the BNDES. They are successfully operating their
  Brazilian fleet within our trade limits.
• Based on the current shortage of space in the
  traditional shipyard markets, Brazil is a reality
  and an interesting alternative venue of
  opportunities for foreign investors, shipowners
  and shipyards.

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• THANK YOU !

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LAW OFFICES CARL KINCAIDMENDES VIANNA ADVOGADOS
ASSOCIADOS

GODOFREDO MENDES VIANNA AV. RIO BRANCO, 25 1º
ANDAR TEL. [phone] FAX (21)
2253-4259 E-MAIL GODOFREDO_at_KINCAID.COM.BR WEB
SITE WWW.KINCAID.COM.BR