While private investment is still flowing into infrastructure projects in Latin America and the Caribbean, developers and financiers will have to keep innovating to get deals done.
By Rodrigo Amaral
Mendubim is a Brazilian name for one of the country’s most typical products, the peanut. It has also become synonymous with a new era of infrastructure project financing in the country – and Latin America.
The project financing for Mendubim, a 531 MW solar power plant built by the Norwegian companies Hydro, Equinor and Scatec in the northeastern state of Rio Grande do Norte, has been lauded as a landmark for the infrastructure industry, even though the cost of the project has been anything but peanuts.
When construction started in July 2022, the sponsors needed to raise $243 million to fully complete the project. The timing was not ideal. Brazil was facing the uncertainties of a polarized election cycle, and the US Federal Reserve was beginning to tighten monetary policy by raising its benchmark interest rate.
But Mendubim’s sponsors had an ace up their sleeves. In 2022, the Brazilian government approved a bill that enabled energy companies to sign power purchase agreements (PPAs) with their clients in US dollars. All that was required was energy buyers with revenues in greenbacks. Mendubim had one: Hydro Alunorte in the nearby state of Pará. Alunorte, a unit of Norway’s Hydro, is the world’s largest alumina refinery outside China. It agreed to buy 60% of Mendubim’s output.
“The dollarization of PPAs is a game changer in terms of foreign direct investments in the renewable industry in Brazil,” says James Neate, president and group head of corporate and investment banking at Toronto-based Scotiabank. “Several European companies now have a heightened interest in Brazil specifically because of that.”
With the dollar-denominated PPA at hand, Mendubim was able in November 2022 to secure what it needed. It took out a $130 million, 18-year loan from IDB Invest, the private sector arm of the Inter-American Development Bank (IDB), and another $113 million in 15-year loans from BNP Paribas and Banco Santander.
More importantly, the deal has set up a model that could benefit projects in all kinds of sectors linked to the export of goods or services.
“Brazil’s recent deals with PPAs in dollars was a breath of fresh air in the market.”
– Benoît Félix, Santander CIB
“Brazil’s recent deals with PPAs in dollars was a breath of fresh air in the market,” says Benoît Félix, global head of structured finance at Santander CIB in Madrid. “They are very interesting for banks and investors, and could be helpful, for instance, for export-oriented green hydrogen projects, which will have revenues in dollars.”
Mendubim is an example of the creativity that project sponsors and their bankers have had to deploy to raise much-needed money for infrastructure projects in the past couple of years in Brazil and across Latin America. Capital markets have lost vitality since global interest rates started rising in early 2022. Markets where local currency was abundant, such as Chile and Colombia, saw this source of capital dry up. Rampant inflation made investors more cautious than ever with projects that have revenues in local currency.
To find solutions for these and other challenges, financial advisors have had to really earn their fees.
They came up with solutions that included cross-currency financing structures, multi-jurisdictional credit consolidation deals, and private placements in the United States. Multinational and development banks have also tried new approaches as they strive to use their expertise and financial firepower to bring capital markets deeper into the fold, as IDB Invest did in the case of Mendubim.
One example is provided by another project in Brazil: the Tocantinzinho gold mine in the state of Pará. The sponsors made use of a gold stream structure – basically a loan repaid in species – to fund the completion of the mine.
G Mining, the Quebec, Canada-based company behind Tocantinzinho, agreed to hand 10% of the site’s future gold production to Franco-Nevada, a Toronto-based asset management company, in exchange for a $250 million loan. When the deal was closed, G Mining was barely two years old with the $45 million it had raised in an initial public offering.
“The gold stream plays a really big role in the project. Being such a small company at the time, looking to raise an extra $100 million to $200 million in equity was going to be extremely dilutive for our shareholders,” says Dušan Petković, senior vice president of corporate strategy at G Mining. “Going forward, we can effectively use the cash flow from this project to help fund the next project.”
In Colombia, the refinancing of the Vía 40 4G toll road employed a structure that included long-term and revolving credit facilities denominated in Colombian pesos and UVR-indexed (a local unit of account that adjusts for inflation) and synthetic Colombian pesos. By doing this, the special purpose vehicle behind the project was able to attract investors in US dollars and euros, even though the concession’s revenues are in local currency.
Another remarkable deal was the financing of the acquisition of 400 electric buses and the construction of related infrastructure in Medellín, Colombia’s second-largest city. The sponsors, Australia-based AMP Capital and the Italian electric utility Enel, raised $145 million via two sustainability loans and letters of credit, which were complemented by a dollar-to-Colombian pesos swap.
“Both transactions, to a degree, rely on cross-currency financing, which has been a very interesting option for our clients,” says Romain Papassian, a managing director at Astris Finance in Mexico City.
He adds that the market had been talking about cross-currency deals for over a decade, but it was only in the past couple of years that such tools have been gaining at a significant pace. The main driver was the disappearance of local liquidity in markets like Colombia. Chile is another economy where Papassian sees a lot of potential for cross-currency deals in the near future.
In a stormy market, however, many companies have preferred to sit pat until the clouds dissipate. The end of 2021 saw a flurry of refinancing deals as issuers anticipated the monetary tightening cycle that was just around the corner.
“In the generation and in the transmission spaces, sponsors are opting for mini perm-type structures because everybody is biding their time until they feel the capital markets will come back,” says Tobey Collins, a managing partner at advisory firm Astris Finance in Washington, DC.
Others have tapped private markets. Such was the case with teh Chilean unit of Innergex, a Canada-based power company. It issued a $710 million green bond that was completely sold to private investors in the United States. According to New York-based investment bank SMBC Group, which acted as lead placement agent and green bond coordinator, it was the largest US private placement and largest renewable project bond out of Latin America in recent years. The money, complemented by letters of credit worth $93.1 million, was used by the firm to refinance debt and partly fund the acquisition of Aela, the operator of three wind farms in Chile.
Acquisition opportunities have also been firmly on the radar of private equity and sovereign funds. According to the New York-based Association for Private Capital Investment in Latin America (LAVCA), infrastructure deals were the major driver behind a record-breaking year for private capital investment in Latin America in 2022. A total of $13.3 billion was invested in 46 equity and debt projects that year, representing 47% of total capital deployed by the association’s members in that period.
Several of those deals aim to benefit from the impact of global trends on the region. The energy transition to net-zero carbon dioxide emissions, in particular, is drawing interest from investors. The IDB has estimated that $2.22 trillion in investments will be necessary for Latin America to meet the United Nations Sustainable Development Goals by 2030.
Global megatrends are also turning the spotlights on sectors such as mining, logistics and renewable energy, notes Ronnie Hawkins, a partner at Global Infrastructure Partners. It was with that logic in mind that the New York-based investment firm acquired a 50% stake at Tramerse, which owns ports in Peru that are key to export the country’s immense copper reserves.
“Copper is an essential metal for the energy transition and electrification. The region also has reserves of lithium, and the potential for agricultural exports is huge. The logistics and infrastructure around those areas create an interesting market,” Hawkins says. “Nearshoring and offshoring trends are also positive for countries like Mexico and others. Digital infrastructure in Latin America is also of interest, even though we have not made an investment in that sector so far in the region.”
The latter megatrend provided the reasoning for another remarkable private capital play, this time in Chile. Phoenix Tower International (PTI), majority owned by New York-based investment management firm Blackstone, set up a complex and creative debt restructuring deal that enabled it to invest $930 million to purchase a portfolio of transmission towers belonging to WOM, a Chilean telecommunications group. Debt incurred in 13 countries in Latin America, as well as the United States, were consolidated into a $2 billion multi-facility loan, a feat of financial engineering that caught the interest of lenders.
“We refinanced several loans and included several countries, and Chile was a new one that came into the deal,” says Natalie Morales, PTI’s treasury director. “We received proposals from players that do not usually lend money in this industry, including small banks from Panama.”
One country that has not suffered as much from a lack of local liquidity is Brazil, where the local development bank BNDES has resumed its appetite for the provision of large financial packages for infrastructure projects. Major examples were the 20-year, BRL6.9 billion ($1.2 billion) loan to Spain’s Acciona to build the Line 6 of São Paulo’s metro system, or the 24-year, BRL3.94 billion loan to Gas Natural Açú to build GNA II, a liquefied natural gas-fired power plant in Rio de Janeiro.
This time, however, BNDES’ involvement in the market may come with a twist. Rather than crowding out other financiers and investors with uncompetitive rates and conditions, the bank has shown willingness to work with them.
“BNDES seems to want to participate in the financing of projects along with the market, and under market conditions,” says Marcelo Girão, managing director of project finance at Itaú BBA in São Paulo. “They no longer have that logic of providing huge subsidies that ended up inhibiting capital markets.”
In both the Line 6 and GNA II deals, for example, BNDES agreed to take on part of the projects’ construction risks and accept guarantees in the form of letters of credit provided by armies of commercial banks. In other times, only physical assets would have been accepted as guarantees, according to sources.
BNDES has also tried to boost the issuance of debt in domestic markets to finance infrastructure. It was with this goal that it agreed to purchase BRL550 million out of the BRL1.95 billion groundbreaking blue bond issued by Brazilian water, wastewater and solid waste management company BRK Ambiental in November 2022.
However, some observers still question whether, under the left-wing government of President Luis Inácio Lula da Silva, BNDES will be able to contain its long-held instincts and actually work as a catalyst for the capital markets.
“In Brazil, BNDES still is the only game in town,” Astris’ Collins says. “The debentures market comes and goes, but even then BNDES is behind a large share of issuances. The market for real long-term debt, which is what the infrastructure sector needs, continues to be lacking.” LF