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Risk Factors

Before making an investment decision, potential investors should carefully consider all the information available on this website, especially in regard to the risks described below. Invepar’s businesses, financial situation and operating results may be adversely and materially affected by any of these risks, with a consequent negative impact on the price of its shares. The risks described below are known to Invepar and may affect it substantially. Other risks, not known to Invepar or considered irrelevant, may also affect its businesses.

Risk factors related to the Company:

Dependence on subsidiaries’ results

The Company‘s capacity to fulfill financial obligations depends on cash flow, the revenue of direct and indirect subsidiaries and the transfer or distribution of said income to Invepar as dividends or interest on equity. Some of the subsidiaries have to make unplanned investments, or may have to do so in the future, or may enter into loan agreements which may prevent or limit the transfer of capital to Invepar and/or require the concessionaires’ other debt to be subordinate to the debt incurred through said agreements.

A substantial portion of the Company’s assets is tied to concession agreements. These assets will not be available for liquidation in case of bankruptcy or as a levy of execution in the case of a lawsuit, given that they will be reverted to the granting power in accordance with the applicable legislation and the respective agreements entered into by the concessionaires.

The Company may not be able to fully execute its business strategy.

There is no guarantee that any future goals and strategies will be fully met. As a result, the Company may not be able to expand its activities or replicate its business structure and develop a growth strategy to meet the demands of the markets in which it operates.

In case the business expansion and diversification strategy succeeds, additional financing may be needed and there is no way of ensuring that funding will always be obtained under the same terms and conditions. In addition, the successful implementation of the Company’s business strategy in new segments depends on several factors, including the existence of profitable investment opportunities and a stable legislative and regulatory scenario. If any of these conditions are not met, the Company’s financial situation and/or operating results, as well as its capacity to implement its business strategy, may be adversely affected.

The financial agreements may contain specific obligations, as well as restrictions on its capacity to contract additional debt.

Invepar is party to several financing agreements which require the maintenance of certain financial ratios or the fulfillment of specific obligations. Any non-compliance with the terms of these contracts that is not remedied or permitted by the respective creditors may lead these creditors to declare the advanced settlement of the outstanding balance of the respective debt and/or result in the advanced settlement of other financing agreements (cross default). In addition, some of the financing agreements impose restrictions on the Company’s capacity to raise additional funding, either in Reais or in other currencies.

The Company may be subject to interest rate risks, as most of its operations are financed.

Invepar is exposed to interest rate risks, given that the Company and the concessionaires have contracted a number of loans, most of which are subject to floating rates. If the federal government increases interest rates, including the TJLP long-term rate and the SELIC benchmark rate, or introduces other monetary policy measures that result in such an increase, debt servicing charges will also move up, adversely affecting the Company’s financial situation.

Risk Factors Related to the Company’s Shareholders:

Invepar may need additional capital through an issue of shares or share-convertible securities, which may dilute the interests of its shareholders.

Invepar may wish to raise additional capital through the issue of shares or the placement of public or private securities that are convertible to shares. The raising of capital through a public share issue, which may not grant pre-emptive rights to the current shareholders, pursuant to Corporation Law, may dilute the interests of said shareholders.

The Company may not pay dividends or interest on equity to its shareholders.

In accordance with Invepar’s Bylaws and according to the current legislation in Brazil (Lei das Sociedades por Ações), it must pay at least 25% of annual net income, calculated and adjusted in accordance with Corporation Law, to its shareholders as dividends. The Bylaws also permit the payment of interim dividends based on (i) the six-monthly balance sheet, or (ii) accrued income or income reserves in the last annual or six-month balance sheet. The Company may also pay interest on equity, observing the legal limits. The interim dividends and interest on equity declared in each fiscal year may be imputed to the minimum mandatory dividends payable on the result of the same fiscal year.

Net income may be capitalized, retained or used to offset losses, as determined by Corporation Law, so it may not be available for the payment of dividends or interest on equity. Consequently, Invepar may not pay dividends to its shareholders in a given fiscal year if Management declares such a payment to be inadvisable in light of the Company’s financial situation.

Risk Factors Related to the Company’s Subsidiaries and Affiliated Companies:

The Company and its subsidiaries may not be able to raise sufficient capital or funding to implement their growth strategies.

The growth strategy of the Company and its subsidiaries requires the availability of resources. The Company and its subsidiaries tend to finance a substantial portion of their investments with their own operating cash flow and funding already raised and to be raised. However the Company and its subsidiaries cannot ensure that they will generate sufficient operating cash flow to finance all their necessary investments. In this case, there may be a need for additional resources. Their capacity to obtain capital will probably depend on their level of debt and on prevailing market conditions. Additional capital may not be available or may be subject to unacceptable conditions. The failure to obtain additional capital under acceptable terms may restrict future business growth, which may have an adverse effect on the Company and its subsidiaries. If they obtain funding through debt issues or bank loans, there may be an increase in their indebtedness ratios, adversely affecting their financial situation and jeopardizing their capacity to pay dividends to their investors or amortize their debt with creditors. In addition, if the Company is unable to obtain adequate funding from third parties in order to meet its capital needs, it may be obliged to increase its capital, which will depend on a shareholders‘ resolution.

In accordance with the financing agreements, the Company may be subject to specific obligations, as well as restrictions on the capacity to raise additional funding

We are party to several financing agreements which require the maintenance of certain financial ratios or the fulfillment of specific obligations. Any default in the terms of these contracts that is not remedied or permitted by the respective creditors may lead these creditors to declare the advanced settlement of the outstanding balance of the respective debt and/or result in the advanced settlement of other financing agreements (cross default). In addition, some of our financing agreements impose restrictions on our capacity to raise additional funding, either in Reais or in other currencies.

The Company is subject to interest rate risks, as most of its operations are financed.

Invepar is exposed to interest rate risks, given that the Company and the concessionaires have contracted a number of loans, most of which are subject to floating rates. If the federal government increases interest rates, including the TJLP long-term rate and the SELIC benchmark rate, or introduces other monetary policy measures that result in such an increase, debt servicing charges will also move up, adversely affecting the Company’s financial situation.

Higher-than-expected construction costs may have a negative impact on the Company’s financial situation and operating results.

The Company’s capacity to (i) conclude incomplete works and future projects required by the concession agreements, (ii) assume ancillary projects in existing concessions, and (iii) acquire new concessions is subject to fluctuations in labor and raw material costs, changes in the overall economic situation, credit and negotiating conditions, default or unsatisfactory payments on the part of companies contracted and subcontracted by the Company, and interruptions resulting from unforeseen engineering problems. These factors may significantly increase such costs. In addition, if we are unable to ensure that some or all of these costs are considered in the concession agreements’ cash flow, they may have an adverse effect on the Company’s financial situation and operating results. This risk is mitigated by resorting to EPC (Engineering/Procurement/Construction) agreements, through which the engineering and construction risks are transferred to the building contractors, with previously determined scope and prices.

Risk Factors Related to the Clients of the Company and/or its Subsidiaries and Affiliated Companies:

Risks Related to Highway Operations

The public may react negatively to toll charges and the periodic tariff adjustments.

Private-sector highway concessions were introduced relatively recently in Brazil, slightly more than ten years ago. Before that, there were very few toll roads in the country. Subsequently, however, toll charging has been on the increase and will probably continue to provoke negative reactions from users, especially truckers, who at the beginning of the decade organized a series of protests and blocked highways in an attempt to put pressure on the government to reduce tariffs or exempt certain users from toll payments. Even though tariff increases are determined by the concession agreements, these protests may affect the granting power’s decisions in regard to said increases, as well as reducing revenue by decreasing traffic from the toll roads. Such factors may have a negative impact on the Company’s operating results.

Risks Related to Subway Operations

Subway users may react negatively to any increase in fares.

In accordance with a clause in the concession agreement, the subsidiary Metrô Rio may adjust its fares in line with the annual accumulated IGP-M inflation index in January of each year, rounding the figure upwards or downwards depending on its second decimal place. This adjustment and the rounding may cause a greater impact than inflation on the base date of the validity of the adjustment, which is always in April. As a result, passengers may opt for other means of transport that compete with the subway system, including buses, trains and vans, which may adversely affect the Company’s financial results.

Risk Factors Related to the Economic Sectors in which the Company Operates:

The Company’s operations are located in Brazil; consequently Brazilian political and economic conditions may adversely affect its businesses, financial situation and operating results.

The federal government has made frequent interventions in Brazil’s economy, albeit without causing any drastic political and/or economic change. The government’s measures to control inflation and implement its macroeconomic policies, for example, involved, in the past, price and wage controls, currency devaluations, capital controls and import restrictions, among others. Invepar, like all other market agents, has no control over future government measures and policies, nor can it predict what they may be. Consequently, its businesses, financial situation and operating results may be affected by such interventions, as well as other economic factors, including:

  • increases in inflation;
  • foreign exchange controls and restrictions on offshore remittances, similar to those imposed in 1989 and the beginning of 1990;
  • exchange variations;
  • the absence of domestic GDP growth;
  • social unrest;
  • reduced liquidity in Brazil’s capital and credit markets;
  • monetary policy;
  • increases in interest rates;
  • price volatility, especially regarding fuel prices;
  • import and export controls;
  • fiscal policy and changes in tax legislation;
  • other political, diplomatic, social or economic issues in Brazil or impacting Brazil.

Government measures to maintain economic stability, as well as speculation over future government initiatives and even political crises, may generate uncertainties concerning the Brazilian economy and, consequently, its deceleration, leading to greater domestic capital market volatility and affecting the Company’s businesses, financial situation and operating results. Any reduction in economic activity may have a direct impact on the expected revenue growth of all Invepar’s subsidiaries.

The volatility of the Real in relation to the Dollar may increase funding costs and result in substantial changes in the Company’s results due to the subsidiary Metrô Rio’s Dollar-pegged obligations.

Over the last decade, the Real has suffered frequent devaluations against the Dollar and other currencies. During this period, the federal government introduced various economic plans and implemented several foreign exchange policies, including sudden devaluations, periodic mini-devaluations (with the frequency of the adjustments varying between daily and monthly), exchange controls, and a floating exchange market system. At certain times, there was significant volatility in the value of the Real vis-à-vis the Dollar and other currencies. It is impossible to ensure that devaluation or appreciation of the Real against the Dollar and other currencies will not have an adverse effect on Invepar’s businesses, even without exposure to Dollar financing lines.

From time to time, there have been significant oscillations in the exchange rate between the Real and the Dollar and other currencies. Any devaluation of the Real against the Dollar may create inflationary pressure in Brazil, generally resulting in higher prices, including fuel prices, and forcing the government to adopt recessionary policies. On the other hand, any appreciation of the Real against Dollar may lead to a deterioration in the country’s current accounts and balance of payments, as well as a reduction in export-driven GDP growth.

Risks Related to Highway Operations

The Company is exposed to risks related to traffic volume and toll revenue.

The revenue of the highway concessionaires comes from toll fees, which may be affected by changes in traffic volume, an increase in toll tariffs and consumers’ reaction to such an increase. Traffic volume in turn depends on several factors, including travel quality, convenience and times on toll-free highways or toll highways outside the Company’s concession, the highways’ quality and state of conservation, fuel prices, environmental regulations, including measures to restrict vehicle use in order to reduce pollution, and the existence of competing means of transport, as well as changes in the behavior of consumers, including for economic, social, cultural and climate-related reasons.

Heavy vehicle traffic, which is responsible for a substantial portion of the Company‘s revenue, may also be affected by changes in the economy. Seasonal traffic peaks, in summer and winter, may vary significantly depending on the weather and tourist market conditions. The Company cannot guarantee its capacity to adapt operations to abrupt changes in traffic volume and toll revenue, which may negatively impact its business and financial situation.

A reduction in vehicle use due to a deterioration in economic conditions or an increase in fuel prices, would have an adverse effect on the Company’s businesses, financial situation and operating results.

Invepar’s businesses depend on the number of passenger and cargo vehicles using its highways and the frequency with which they do so. Traffic reductions may be caused by a decline in economic activity, inflation, an increase in interest rates and higher fuel prices, among other factors. Such an effect may also be directly influenced by users’ personal circumstances, or indirectly by a reduction in commerce in general, resulting in less use of commercial vehicles. Any reduction in traffic, whether due to a weak economic performance or an upturn in fuel prices, would adversely impact the Company’s businesses, financial situation and operating results.

Risks Related to Subway Operations

The Company is exposed to risks related to passenger volume.

Most of the Company‘s business depends on the volume of passengers using its subway lines or those using it in combination with other means of transport. A reduction in this volume could occur due to a decline in economic activity, lower fuel prices or the creation of new transport options, among other factors. Such an effect could arise directly from the personal circumstances of the subway users or indirectly from a reduction in employment in the metropolitan region of Rio de Janeiro. Any reduction in passenger volume would have a negative impact on the Company‘s business.

Risk Factors Related to Regulation of the Operational Sectors of the Company and its Subsidiaries and Affiliated Companies:

The Company operates in a highly regulated environment and its operating results may be adversely affected by government measures.

Invepar’s main commercial activity is the operation, exploration and maintenance of highway and subway services that constitute public services delegated to private enterprise and are therefore highly regulated. In addition, the granting authorities possess considerable discretionary powers, with which they can, for example, oblige Invepar to reduce its tariffs or increase its mandatory investments, while still observing the right to subject the agreements to economic and financial rebalancing. Attitudes such as these or the establishment of even more rigid rules may adversely affect the Company’s results.

The Company may also be affected by federal, state and municipal government decisions on the development of Brazil’s road system, especially in regard to the granting of new concessions, as a result of which competition may increase. In addition, a decision not to proceed with the highway concession program may limit the Company’s capacity to grow and implement its commercial strategy. The same situation may occur in the case of the subway system and vehicle inspections.

Growth through bids or the acquisition of concessionaires may be adversely affected by future regulatory measures or government policies related to Brazil’s highway concession program.

The granting power, in its bid notices, imposes certain requirements which must be complied with by all bid participants, including the financial stability indicators of those taking part, or their shareholders. Invepar cannot be certain that, in the future, it will be able to comply with all the requirements imposed by future bids, especially since some concessions were obtained before the Company was constituted based on the capacity of the shareholders to comply with the stated requirements. Additionally, any acquisition involving the transfer of control from an existing concessionaire to Invepar must be submitted to the approval of the granting authority.

Decisions on public service concessions, as is the case with highways, change in accordance with public policies. The bidding rules for public service concessions are also subject to change in the federal, state and municipal government spheres. Federal and state bids are scheduled to occur in the future, but the Company cannot guarantee that they will actually be implemented. If they do not take place or are insignificant, not economically feasible or unattractive to Invepar, the expansion and diversification of the business may be adversely affected.

The Company’s business, financial situation and operating results may be adversely affected if the economic and financial rebalancing mechanisms following an increase in cost or reduction in tariffs do not generate cash flow in a timely manner.

The concession agreements determine the toll tariffs to be charged and envisage periodic adjustments to offset inflation. However, these tariffs are subject to approval by the granting power and Invepar cannot be sure that it will act in a favorable or diligent manner.

In case of adjustments that are not a result of tariff increases in order to offset the effects of inflation, the Company relies on a mechanism envisaged in the concession agreements (the so-called economic and financial balancing mechanism), which allows Invepar and the granting authority to seek adjustments to accommodate unforeseen changes following the execution of the agreements affecting the economic elements agreed upon when the concessions were granted. Such adjustments may result, in accordance with the terms of each contract and based on the prevailing legislation, in compensation through tariff alterations, adjustments to the envisaged investments or an extension of the concession term, among others, including a combination of such offsetting mechanisms.

The procedure for re-establishing economic and financial equilibrium is at the discretion of the respective granting power. Consequently, if the re-establishment of economic and financial equilibrium does not result in an adequate increase in cash flow, as in the case, for example, of a change in the concession term, the Company’s businesses, financial situation and operating results may be adversely affected.

The Company is subject to environmental laws and regulations which may become more rigid in the future, resulting in larger obligations and an increase in capital investments.

Compliance with this legislation is monitored by government bodies, which may impose administrative penalties in the case of non-compliance. These penalties may include fines, the revocation of licenses and even the temporary or definitive suspension of Invepar’s operations.

The approval of more rigid environment laws and regulations may force Invepar to allocate greater capital investments to this area, resulting in a change in the planned investment distribution. Such changes may have a material and adverse impact on the Company’s results and financial situation. In addition, if the Company does not comply with the environment protection legislation, it may suffer penal sanctions, without prejudice to the obligation to repair any damage resulting from said non-compliance. Penal sanctions may include, among other measures, the loss or restriction of tax benefits and the cancellation or suspension of financing lines from official credit agencies, as well as a ban on government loans, which may have a negative impact on the Company’s revenue or make it difficult to obtain funding in the financial market.

Any delays or deferrals on the part of the environmental licensing authorities in regard to the issuance or renewal of licenses, or an eventual inability to meet the requirements established by said authorities during the environmental licensing process, may damage or prevent, depending on the case, the installation and operation of the Company’s businesses.

Without prejudice to the above, any non-compliance with the environmental legislation or the obligations assumed by the Company through conduct adjustment instruments or judicial agreements may have a material and adverse impact on the Company’s image, revenue and operating results.

Future acquisitions may be contested by the Brazilian fair trading authorities.

In accordance with Law 8884 of June 11, 1994, as amended, which deals with the economic order, any operations aimed at any type of economic concentration, whether through the merger or acquisition of companies, the constitution of a company to exercise control over other companies, or any other form of corporate grouping that leads to a company or group of companies retaining 20% of an important market, or if any of the participants recorded annual gross revenue of R$400 million or more in the previous fiscal year, may be submitted to the SBDC (Sistema Brasileiro de Defesa da Concorrência), a Brazilian fair trading authority.

The SBDC determines if a given operation would have a negative impact on competitive conditions in the Company’s market or on the latter’s consumers. In this context, although Invepar holds public concessions with regulated tariffs, future acquisitions may not be approved or may be subject to costly conditions, such as restrictions on how the Company operates in the market, which could negatively affect its operating and financial results.

It is worth noting that, as a result of article 90, sole paragraph of Law 12529 of November 30, 2011, which became effective on May 29, 2012, the execution of associative agreements, consortiums or joint ventures between two or more companies in order to participate in direct or indirect government bids (or agreements resulting from these bids) will no longer be considered as acts of concentration.

Unfavorable judicial or administrative decisions may have an adverse effect on the Company.

The Company’s subsidiaries are party to judicial and/or administrative processes in the civil, tax and labor areas, whose results may be unfavorable. Decisions against Invepar’s interests that result in the payment of substantial amounts or prevent a given business from developing as initially planned, may have an adverse effect on the Company.