Ecoayres: Cash for trash

At Ps19 million ($6 million) in debt volume the Ecoayres methane capture project financing in Argentina was small in size but long on ambition (not least because it is Argentinean peso-denominated) and one of those deals that left all those that came across it pondering 'why didn't I think of that?'

At its simplest it involves taking an existing landfill site, adding minimal project finance for methane capture and monetizing up front cash payments from certified emissions reductions (CER) sales to developed markets – an income stream spawned by the clean development mechanism of the Kyoto Protocol to the United Nations Framework Convention on Climate Change.

Those cash sales are significant – totalling around four times the debt over its five-year tenor until 2012 – and amount to what would otherwise be an unrealised income stream for project sponsor Roggio Group and the concession grantor Coordinación Ecológica Area Metropolitana Sociedad del Estado (CEAMSE).

Ecoayres is also the first project borrowing in Argentina secured against revenues from the sale of CERs. It is a market that could become a fairly significant local project niche given Argentina's wealth of agribusiness and history of open landfill – both prime targets for CERs.

The $6 million debt funds installation of methane capture equipment at a landfill site in the northern suburbs of Buenos Aires run by CEAMSE and is backed by pre-sold fixed price CERs from 2008 to 2012.

The landfill site – Norte III-B – is located on land owned by the Argentinean Army in the district of General San Martin. The landfill has been in operation since 2006 and will be open until 2010. During this period, the city will dump 15 million tonnes of waste at the 82.5-hectare site.

The waste breaks down by anaerobic decomposition, and produces a large amount of methane, which as a greenhouse gas and contributor to global warming is 21 times more potent than carbon dioxide. The methane is collected from the landfill through vertical wells with a suction system that draws the gas from the waste-bed. The gas is then transported through surface pipes to a treatment centre, where volatile organic materials are filtered out.

The majority of that methane will now be flared to produce carbon dioxide, although some will be diverted to fuel a small on-site generator that produces 330kW to power the project (there are also second phase plans for a larger generation plant).

Initially a candidate for pure equity financing (the final equity is $3 million), Roggio approached Santander with the idea of a debt financing – in effect a small but potentially market-making test deal. Santander then invited public lender Banco de la Ciudad de Buenos Aires on board for its knowledge of the complex local waste regulations and as lender of 50% of the debt.

The project debt repayments are tailored to the construction period and comprise two years disbursement, a one -year grace period and two years repayment until 2012. During that time the project will generate 2.1 million CERs which have been bought at a fixed price under an emissions reduction purchase agreement (ERPA) by Santander, via subsidiary Gestion de Actividades Tecnologicas, and offloaded to mostly European CERs buyers: The project was registered on 27 April 2007, and has a CER crediting period running from January 2008 to the end of 2017 – five years longer than the debt.

Pricing on the local denominated variable rate debt is still under wraps, however it uses local Libor rate BADLAR as its base, which ranged from 8% to 17% in 2007 and is currently around 10%.

Although small, the deal was complicated by Argentina's foreign exchange import-export rules. Consequently, to facilitate the sale of the CERs, Santander has put in place a local trust with accounts in both Argentina and Spain thereby allowing the trust to make cash transfers to itself between the accounts.

The multiple strands to the deal – trust, finance, ERPA, EPC contract – ran in parallel, causing further complication, with any change in the ERPA requiring co-ordination with the other elements.

On the technology side risk is limited. Roggio subsidiary Cliba has a track record in waste management and the project uses proven equipment. Furthermore, to qualify for CERs projects must not be commercially viable as standalones, and therefore the fact that Ecoayres is not, as yet, involved in power generation proved an ironic strength.

Ecoayres is an important deal for the Argentinean project sector. Hampered by size and innovation constraints because of the weakness of the local currency, the unwillingness of international lenders to take on that risk in any sizeable volume and the inability of local lenders to offer long tenors, the market needs small, short-term lending opportunities that are high in number. CER-based deals along Ecoayres' lines fit that profile and Argentina is well-stocked with open landfill sites that merely need capping to spawn a host of repeat transactions.

Ecoayres SA
Status: Closed 22 October 2007
Size: Ps19 million ($6 million)
Location: Buenos Aires, Argentina
Description: Methane capture project at municipal landfill site
Sponsor: Grupo Roggio
Lead arranger: Banco Santander
Lender: Banco de la Ciudad de Buenos Aires
Borrower legal counsel: In-house
Lender legal counsel: Marval, O'Farrell & Mairal
ECR intermediary credit buyer: Santander
Adviser to the credit buyer: Climate Focus