Itiquira: BNDES who?

Brookfield Renewable Power had to close the acquisition of the Itiquira hydroelectric plant without financing from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Brazil's development bank. To minimise that achievement is to underestimate the way in which BNDES has come to dominate Brazil's energy market. Brookfield's financing, in two stages, and two levels of security, and in two currencies, will be the template for any other operational assets that come to market in Brazil.

BNDES' current focus is on building out new capacity, particularly new coal and hydroelectric plants. Its policies forbid it from financing the acquisition of existing assets, as road developers have discovered to their peril. Road concession holders have been forced to borrow in local markets at high rates, to tide them over until they can close a combination of Inter-American Development Bank and BNDES financing (for new construction).

The disengagement of US utilities from Brazil has been a protracted and miserable affair. Many of them took stakes in distributors or built new capacity, much of it gas-fired, and then suffered from a combination of drought, demand destruction and changes in the country's regulatory framework. NRG Energy, then looking to expand outside the US, bought a stake in Itiquira, then under construction, and bought out its partners Vatenfall and Inepar in June 2001.

NRG has since risen, fallen, and risen again, but now prefers to focus on US baseload assets, and at the end of 2007 began the process of selling the plant. Brookfield, formerly known as Brascan, already owned just over 300MW in Brazil, and already had experience of buying capacity from fallen US producers, when it acquired Reliant's upstate New York portfolio in late 2004.

Canada-based Brookfield agreed to buy NRG's 78% stake in the plant for $288 million in December 2007, but still had to tender for the stakes of the plant's minority Brazilian shareholders. So the buyer adopted a two-stage financing structure. It used US dollar debt, secured at the level of a Canadian-registered holding company, to buy out NRG, and would finance the Brazilian acquisition at a later date in Reais. The NRG acquisition closed at the end of April 2008, was financed using Brookfield's internal resources, and then taken out when the dollar bridge closed in June.

Following a beauty contest, Calyon won the mandate to put together the bridge and long-term financing for the acquisition, without a large number of precedents for such a deal. Commercial banks in Brazil have been confined to supporting roles on IDB, IFC or BNDES deals, and those without repasse funding capability cannot even join BNDES deals. Itiquira is a single asset, and is not eligible for development bank funding. Calyon had to assemble a cross-border acquisition financing in a country, and credit market, that was not fertile ground.

The plant has a power purchase running to 2014 with COPEL, the state-owned utility that serves the state of Parana. It operates under a concession that runs until 2024, and is comparatively new. The lead arranger had to set the debt's size so that contracted revenues would be adequate to service the debt, and also to take into account potential revenues from beyond the end of the power purchase agreement, when the plant must be recontracted.

Following the agreement with NRG on its majority stake, the buyer then offered to buy out the minority shareholders, this time offering Reais. So, on top of a $120 million holding company loan, Calyon also assembled a R185 million ($81 million) loan for a locally-incorporated operating company subsidiary, which had the same 18-month maturity as the holding company financing.

For the holding company debt, Calyon brought in Export Development Canada as senior arranger. The two worked together on the financing for the acquisition of TransAlta's independent power assets in Mexico (see above, this issue), and are comfortable with such a risk profile, if not frequent lenders to Brazilian power projects.

For the Real debt, Unibanco and WestLB came on board, and while they might have been less comfortable with the recontracting risk than the holding company lenders, they brought a more patient attitude to the plant's security package. Since it is operated under a concession, the physical plant cannot be pledged to lenders, although the project's shares can be. The revenues and receivables of the plant can only be pledged to lenders with the consent of ANEEL, Brazil's power regulator, at least under the strictest interpretation of its powers. The Real lenders get a pledge of shares, revenues and receivables, while the holding company lenders get a pledge of shares.

International lenders also required a stricter insurance package than is commonly available in Brazil, and finding the necessary cover took time. Brookfield provided a guarantee of any deficit in the project's insurance package, until the more comprehensive insurance package was assembled. The Real debt closed in August, and funded in October, at which point the agreed offer for the Brazilian shareholders' equity was concluded.

The mix of local and offshore lenders proved complimentary, the former providing a more warm reception to the unusual security arrangement, and the latter accepting recontracting risk. The challenge for Calyon will now be to put in place a long-term financing on the plant, and collapse the two tranches into a single facility.

Whether this pre-Lehman debt can be rolled over effectively will decide whether it will spark further cross-border debt and equity interest in Brazil's power sector.

Itiquira Energética S.A
Status: Holding company acquisition closed June 2008, operating company closed August 2008
Size: $288 million
Location: Mato Grosso State, Brazil
Description: Two-stage acquisition of a 156MW hydroelectric plant
Sponsor: Brookfield Renewable Power, Inc
Debt: $120 million and R185 million ($81 million)
Mandated lead arranger (HoldCo debt): Calyon
Senior arranger (HoldCo debt): Export Development Canada
Sole mandated lead arranger and bookrunner (OpCo): Banco Calyon Brasil
Participants (OpCo debt): Unibanco, WestLB
Market consultant: PSR
Independent engineer: Hatch Energy
Insurance adviser: Moore-McNeil
Lender legal counsel: Milbank Tweed (New York) Pinheiro Neto (Brazil)
Sponsor legal counsel: Weil Gotshal & Manges (New York) Pinheiro Guimarães (Brazil)
Seller legal counsel: Vinson & Elkins