Abengoa received its first disbursement on 31 October for the ATE II transmission project financing in Brazil. The Inter-American Development Bank, which is providing $117.4 million of the project's $549 million cost, closed its financing in September. BNDES, Brazil's development bank, is currently finalising financing and intercreditor documents, and hopes to close shortly.

The aggressive bid for the concession demanded that lenders respond in kind, and the resulting structure, a mix of development bank debt and cofinancing, is innovative.

Abengoa, the Spanish developer with a portfolio that includes solar and ethanol projects in Spain, France and the US, has won several transmission concessions in Brazil, and is also an investor in the sector in Chile. It holds seven concessions, of which  its most recent – the 459km Package A which runs through the States of Para and Tocantins, was awarded on 17 November 2005. That $270 million deal, to be known as ATE III, is currently being assembled.

ATE II is a 1,200MW, 922km, 500kV electricity transmission line from the Colinas substation (in the State of Tocantins) to the Sobradinho substation (in the State of Bahia), running through Brazil's north and north-east.

The concession is part of Brazil's government programme to increase system reliability and enable electricity to move between regions of the country more easily. Since rainfall varies widely by region, the transmission projects are designed to even out distribution across the country.

Abengoa won the ATE II concession on 18 November 2004, the same day as its bid was opened. It signed a concession agreement on 15 March, and is presently constructing the project through a subsidiary. The financing refinances in part equity capital that Abengoa has expended on the project to date.

The bids for concessions are submitted as a single number, a yearly payment from the grid operator to the concessionaire. This is expressed as a discount to the annual permitted revenue, a figure that the Brazilian government and its regulator, ANEEL, sets with regard to construction costs and user tariffs.

The APR has normally proved to be uncannily close to what bidders have been prepared to put forward. Discounts of between 5% and 10% are typical. The system has tended to reward incumbents with either a low cost of capital or the ability to spread costs across other operations, although Italian and Spanish developers have also been successful.

But Abengoa's bid – a 48% discount to the APR – is comfortably the lowest ever recorded. This is equal to a payment of R$107.6 million ($50 million) per year. While the developer's other operations in Brazil, and the related economies of scale, will have helped in producing this number, more important is its access to competitive finance.

ATE II is the second large-scale project in the country that the IDB and BNDES have both financed. The first – Terna's Novatrans project – closed in August 2004, a $403 million financing that was the first time international lenders had financed a transmission project (for more on the project, and additional information about the country's transmission sector, please search 'Terna', at www.projectfinancemagazine.com).

The two main features of the IDB's facility are its long tenor and its flexible amortization schedule. For ATE II, the IDB managed a tenor that, at nearly 17 years (including construction), is not only more than BNDES was willing to offer, but its longest yet in Brazil.

The IDB has not only allowed the developer to borrow an amount sufficient to pay interest during construction, but has also lent ATE II a sufficient amount for some interest payments during the project's first few years of operation, something it is normally reluctant to do. The amortization schedule during the early years of the project's operation is also relatively gentle, accounting for maybe 10% of principal, reflecting the low payments due as per Abengoa's bid.
Of the IDB's debt, $110 million is a 17-year A loan, while Santander is financing $7.4 million as a 13-year B loan.

While the IDB has pronounced itself as confident in the legal structure underpinning the project, commercial banks are still sceptical about stretching tenors to this degree. Of the $160 million equivalent BNDES loan, denominated in Reais, $80 million is likely to come as cofinancing repasado from five domestic banks – Santander, Itau, Unibanco, Bradesco and Votorantim.

The final structural challenge came from making sure that the termination payment applicable to the concession would be enough to repay outstanding debt. ANEEL, the Brazilian regulator, can terminate the concession for a number of reasons, and the termination payment would include deductions if the operator did not run this according to the agreement.

The payment is based on an accounting-derived number called the value of non-amortized assets, which roughly, but not exactly, reflects the outstanding principal on the project's loans, among other factors. The IDB has lobbied successfully for the payment to reflect this, as well as including covenants specifying that senior debt to non-amortized assets must maintain a ratio of 1:1.

The financing structure shows some improvements on earlier models of transmission financing, although in one respect the Brazilian government is taking a step backward. It has usually been willing to offer limited indexation to the dollar of payments to concessionaires. This has been crucial in attracting long-dated outside financing to the sector, but the Brazilian government, despite the results of the discount that Abengoa offered here, is likely to end indexation. The ATE II financing, on which Abengoa is currently working with both the IDB and the International Finance Corporation, will be the first offshore deal to cope with this issue.

ATE II
Status: IDB loan closed September, disbursed 31 October, BNDES loan still waiting to close.
Size: $549 million
Location: Brazil
Description: 1,200MW, 922km, 500kV transmission line
Sponsor: Abengoa
Debt: $117.4 million from the IDB, R$342 million from BNDES
Co-lenders: Santander ($7.4 million IDB B loan), Santander, Itau, Bradesco, Votorantim, Unibanco (BNDES co-financing)
Legal counsel to the IDB: Latham and Watkins (international), Felsberg e Associados (local)
Legal counsel to sponsor: Allen & Overy (international), Castro, Barros, Sobral, Gomes Advogados (local)
Economic consultant: Mercados de Energia/PSR
Independent engineer: Rio Negro Environmental and social consultant: Ecology and Environment do Brasil
Insurance adviser: Aon