Hidro Xacbal: Terra vision

The largest of the current Guatemalan hydro projects and one of very few project finance deals in the country to date, the $226.8 million 94MW Hidro Xacbal hydroelectric power project also demonstrated that carbon credits are useful in making emerging markets renewables deals bankable.

Xacbal is one of a slew of projects (Guatemala has an estimated 5,000MW hydro capacity and 1,000MW of geothermal potential) designed to take advantage of SIEPAC, the interconnection system for Central America and Mexico that is set to be complete in 2008.

Sponsored by Grupo Terra (a Honduran energy, infrastructure and telecoms group), the run-of-river plant will be built in the municipality of Chajul, department of El Quiche, in the northern region of Guatemala, using the flows of the Xacbal River. The project is designed to produce 473GWh per year and will account for 4.5% of Guatemalan electricity generation. It is the largest Guatemalan hydropower project to be built since Chixoy, which came into operation in 1985 and has a generating capacity of 265MW.

Israeli construction company Soleh Boneh is performing civil works with Voith Siemens responsible for water-to-wire electromechanical components. The plant is expected to be fully operational by 2010.

Grupo Cobra is building the project's transmission line under a fixed-fee cost per kilometre based on the type of terrain it encounters as it builds. The project was structured from the outset for project debt and construction contracts compliment each other and provide lenders with comfort during the project works. The project is eligible for carbon credits – both by its likely displacement of bunker oil-fired capacity, and the social and environmental infrastructure investments it has made.

While the 1.28x debt service coverage ratio (DSCR) does not factor in carbon revenue, and the sponsor will not sign any offtake contracts for carbon credits until completion, carbon revenues are pledged to lenders if the DSCR falls below 1.1x. The pledge, laid out in the project's equity contribution agreement, may have meant that the credits could not have been included in the senior debt model, but did help the project get financed.

Furthermore, the project is 100% merchant – symptomatic of investor confidence in the future of the developing local energy market, high combustible fuel prices and the growing local demand for power, which is rising at a rate of approximately 60MWs per year.

The project also benefits from local renewable energy incentives – 10-year breaks on income and corporation taxes plus a break on the import duties for renewable energy generation equipment. – and will have priority dispatch into the National Electric Interconnection System.

Of Xacbal's $226.8 million cost, $167.4 is funded through a 15-year (with a three year grace period) term loan lead arranged by Royal Bank of Trinidad & Tobago (RBTT) – the bank's first project financing in Central America. The deal priced at 355bp over 3-month Libor in year one, 320bp in year two, 315bp in year three, and 300bp thereafter.

The deal came in oversubscribed in syndication and banks and multilaterals that joined were FMO with a $30 million take, G&T Continental Bank with $15 million, the Central American Bank for Economic Integration (CABEI or BCIE) with $90 million, and Banco Agromercantil. RBTT retained the remainder of the loan.

The financing is notable on two levels. First the 15-year tenor is impressive for a merchant project anywhere, let alone one in Guatemala. Second, the debt/equity ratio is high at 3:1 and rises further to roughly 4:1 following end of construction when Terra can withdraw just over $11 million in equity.

Hidro Xacbal is a major boost for the Guatemalan and Central American project sectors. The project will go a long way to insulating the country's electricity market from price spikes caused by rising combustible fuel pricing.

Hidro Xacbal
Status: Financial close 30 March 2007
Size: $226.8 million
Debt: $171 million
Description: 94MW run-of-river hydroelectric project
Location: Quiche region, Guatemala
Sponsor: Grupo Terra
Lead arranger: RBTT
Participants: CABEI, FMO, Grupo Financiero G&T Continental, Banco Agromercantil
Sponsor legal counsel: Paul Hastings
Lender legal counsel: Mayer Brown
Contractors: Solel Boneh, Voith Siemens, Grupo Cobra