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LAW OFFICES CARL KINCAID MENDES VIANNA ADVOGADOS ASSOCIADOS

LAW OFFICES CARL KINCAID MENDES VIANNA ADVOGADOS ASSOCIADOS. MARITIME INFRASTRUCTURE AND INVESTMENT OPPORTUNITIES IN BRAZIL BRAZILIAN-AMERICAN CHAMBER OF COMMERCE NEW YORK - NOVEMBER, 2008. SHIPBUILDING INDUSTRY IN BRAZIL – HISTORY & BACKGROUND.

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LAW OFFICES CARL KINCAID MENDES VIANNA ADVOGADOS ASSOCIADOS

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

  2. 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. • Today’s 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.

  3. BRAZILIAN SHIPBUILDING INDUSTRY BASIC STRUCTURE CHART

  4. BRAZILIAN OFFSHORE SECTOR - PETROBRAS´ DEMAND ON VESSEL AND RIGS SOURCE: Brazil/Scanbrasil – Offshore – The Brazilian Offshore Market – March 2008.

  5. BRAZILIAN OFFSHORE SECTOR - PETROBRAS´ DEMAND ON VESSEL AND RIGS PETROBRAS - INVESTMENTS ALREADY CONTRACTED: TO BE CONTRACTED: SOURCE: Navalshore Seminar. http://www.sinaval.org.br/navalshore2008.pdf. June 2008.

  6. 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;

  7. 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.

  8. 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. CONDITIONS FOR FINANCING THROUGH THE MERCHANT MARINE FUND

  9. 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.

  10. FMM – LOAN CONDITIONS SOURCE: http://www.bndes.gov.br/programas/outros/naval.asp

  11. FMM – LOAN CONDITIONS SOURCE: http://www.bndes.gov.br/programas/outros/naval.asp

  12. FMM – LOAN CONDITIONS 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

  13. 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.

  14. 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 court´s 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.

  15. 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.

  16. CONDITIONS FOR FINANCING THROUGH THE MERCHANT MARINE FUND MORTGAGE X FIDUCIARY ALIENATION Enforcement procedures and creditor’s rights In the event of debtor’s 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.

  17. 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).

  18. THE NAVAL CONSTRUCTION GUARANTEE FUND - FGCN LAW NO. 11.786 OF SEPTEMBER 26TH, 2008 (FGCN´S 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.

  19. 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.

  20. THANK YOU !

  21. LAW OFFICES CARL KINCAIDMENDES VIANNA ADVOGADOS ASSOCIADOS GODOFREDO MENDES VIANNA AV. RIO BRANCO, 25 – 1º ANDAR TEL. (21) 2223-4212 FAX: (21) 2253-4259 E-MAIL: GODOFREDO@KINCAID.COM.BR WEB SITE: WWW.KINCAID.COM.BR

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