Michael Marray looks at the challenges faced by two project financings in the Brazilian market.

In spite of improving investor sentiment towards Brazil, project financings remain difficult to put together, and the multi-sourcing of export credit agency (ECA) or development bank support plus a local currency debt tranche is generally required to get deals closed.

Even with ECA involvement, the number of banks willing to lend has shrunk, with a number of large players pulling back on their global project lending in the past 18 months. And problems among project developers have also had an adverse effect.

The steady flow of power projects from the late 1990s onwards were generally equity financed, with bank debt taken out upon completion. But cash-strapped sponsors are now less willing to commit equity, and the number of power generation projects under construction has fallen.

Facing the challenge

Nonetheless, against this challenging background, two large Brazilian project loan financings are currently in the market, and should close over the next few months. One involves the Ibirite gas-fired power plant, sponsored by Petrobras and Edison of Italy. The second is a gas pipeline project being sponsored by Petrobras and three Japanese companies.

The involvement of Petrobras is no surprise, since the most bankable deals out of Brazil often involve the state-owned oil company, which is the most sought after client for every project finance banker and lawyer wanting to do business in Brazil.

Petrobras has an ambitious programme of oil and gas exploration, with an associated network of pipelines. And it has also been actively involved in the power generation sector as a way to monetise its gas resources, and sometimes acts as gas supplier and electricity offtaker on the same project.

BNP Paribas is working on syndication for the commercial bank debt portion of a financing for the Ibirite gas fired power plant in the state of Minas Gerais. The $65m 12-year loan is partially guaranteed by the Italian Export Credit Agency, SACE, reflecting the heavy Italian involvement in the project, with both an Italian sponsor and an Italian-built steam turbine.

The original Ibirite sponsors were Petrobras and Fiat Energia, but in 2001 Fiat disposed of its energy division to raise cash after suffering well-publicised problems in its core auto manufacturing division. The buyer was Edison, which thus assumed control of the 50% stake in Ibirite.

The Ibirite financing also comprises a $66m direct loan from US Eximbank, which is supporting the project because General Electric is supplying the gas turbine. Last, there is a local currency loan equivalent to $22m provided by development bank Banco Nacional de Desenvolvimento Econômico e Social (BNDES).

Having a BNDES local currency tranche has become common in Brazilian power deals because this local currency component helps to match costs better with Real-denominated electricity sale revenues, and reduces the risks associated with inconvertibility or devaluation.

Japanese guarantee

The second deal involves the $1bn Malha pipeline project, expanding the Petrobras gas pipeline network linking the important industrial areas of northeastern and southeastern Brazil.

A $260m commercial bank loan is being partially guaranteed by Nippon Export and Investment Insurance (NEXI), the Japanese ECA that works closely with the government to promote Japanese export sales and projects overseas. This is a club deal and, with the help of the cover from NEXI, price talk is in the region of 165 basis points (bps) over Libor.

In addition, there is a $394m direct loan from the Japan Bank for International Co-operation (JBIC), plus a Real denominated loan equivalent to $256m from BNDES.

Apart from Petrobras, the Malha sponsors are Mitsui, Itochu and Mitsubishi. Japanese firms are heavily involved in the Brazilian oil and gas sector and are benefiting from a more aggressive stance from both NEXI and JBIC in promoting Japanese business interests around the world.

The Ibirite and Malha deals illustrate the fact that project finance in Brazil still relies heavily on ECA and/or multilateral support, and this necessity to multi-source financing greatly adds to the complexity of putting these transactions together. There can also be bottlenecks at the ECAs, which do not always have the staff resources to hurry projects along.

One big deal that closed last year also featured the multi-sourcing approach. In June 2002, the Termopernambuco gas-fired project was financed with an $88m equivalent Real denominated loan from BNDES, and an 11-year $202m A/B Loan from the Interamerican Development Bank (IDB).

The A Loan portion, held on the IDB’s own books, totalled $42.4m. The $160m B Loan was led by SG and BBVA, with pricing changing during the life of the loan, beginning in year one at 362.5 bps over Libor and rising to 500bps during the past four years.

Stable outlook

In the first half of 2002, there had been a scramble by corporate borrowers and project developers to get financing in place ahead of election uncertainty, and this proved to be a wise precaution. By mid-2002, when left winger Luiz Inacio Lula da Silva increasingly looked set to win the election, investors were running scared, and many deals were put on hold.

But after Mr Lula won and was sworn in as president in January, international lenders began to take a more sanguine view. Investors are now returning to Brazil, and in May Fitch Ratings took its single B sovereign rating off Rating Watch Negative and changed it to Stable Outlook, citing improved political and economic conditions.

Thus the bright spot for bank lenders is that country risk is now perceived as lower than it was last year, and concerns among power project lenders are now more specifically related to the chaotic development of electricity pricing regulation, a process inherited from the previous administration.

Devaluation risk

Worries about the volatility of the Real are still a problem. “One risk that many banks no longer want to take is devaluation risk, and for power financings this is a problem even for the best structured deals, because the Brazilian government does not allow indexation of power contracts to the US dollar, as is the case in some other countries,” comments Philippe Ventoze, vice-president, project finance, at BNP Paribas in Săo Paulo.

Mr Ventoze says he would like to see multilaterals offering devaluation credit facilities, similar to the one provided by the Overseas Private Investment Corporation (OPIC) in the 2001 financing for the AES Tiete hydroelectric project in Brazil. In that case, OPIC provided a $30m standby credit facility to make scheduled debt service payments to bondholders in case of revenue shortfalls due to the devaluation of the Real.

“Many banks are not willing to take the risk of not being paid on time because of a macroeconomic event such as devaluation, and it would help on future deals to have a devaluation facility available to be drawn to help pay down senior US dollar debt in case of a devaluation,” says Mr Ventoze.

This would allow payments to remain current, while at some point in the future there could be a sweep of excess cashflows into the structure. This is because the Power Purchase Agreements are adjusted annually for inflation, and thus as devaluation feeds into the inflation rate the price of electricity is adjusted upwards.

In addition to the gas-fired programme, there may be some smaller hydroelectric facility financings closed in the next 12 months. Hydro plants are less problematic to finance, since their revenues are better matched to operating costs, and the plants are not exposed to the dollar fuel prices that make the gas-fired deals so difficult.


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