Latin America's recent economic growth has not yet led to a slew of high-profile infrastructure financings. A large part of this is the general hostility that several incoming administrations have shown to private infrastructure financings. Another is that the present growth in Latin America comes off the back of a global commodities boom, and longer-term trends in several markets have been less encouraging.

Gas-fired generating capacity has become much less attractive, against a background of high electricity prices, and limited downstream infrastructure. Brazil experimented with several gas-fired projects, using state oil company Petrobras as supplier and offtaker. Now, like its peers Chile and Mexico, Brazil is taking another look at large scale hydroelectric power.

The initiative is not without controversy – Brazil is highly dependent on hydroelectric capacity, and thus adequate rainfall, and hydro projects often attract criticism over their environmental consequences. But the Campos Novos project financing, which closed in January of 2005, takes on these innate difficulties, and is the first large-scale hydro project to secure financing on the international market.

Campos Novos is an 880MW hydroelectric project located on the Canoas River, in the State of Santa Catarina. Its owner is the Votorantim group, through a variety of subsidiaries – CPFL Geracao de Energia (CPFL Geracao, 48.72%); Companhia Estadual de Energia Eletrica (CEEE, 6.51%) Centrais Eletricas de Santa Catarina (CELESC, 2.04%); Companhia Brasileira de Aluminio (CBA, 22.69%); Companhia Niquel Tocantins (CNT, 20.04%).

The project is 201m high and 590m in length. It consists of three 293MW turbines and an 11km transmission line to be connected to the existing 230kV Campos Novos substation. It is designed to produce enough electricity for Votorantim's metals and distribution subsidiaries. As such it benefits from having a sponsor that is also an offtaker, a combination that makes credit assessment much more straightforward.

The arrangement, while hardly novel, is designed to cope with ongoing uncertainty in the Brazilian electricity market. The crisis of 2001-2002, where a drought, and huge spikes in power prices, led to rationing, and caused the Brazilian government to reassess its plans for the country's electricity market.

This new approach stressed the building of transmission capacity, stepped back from implementing a spot market, and an end to the construction of more gas-fired capacity. The transmission market has been a success, and has helped distribute electricity around the country much more effectively.

ANEEL, the Brazilian regulator, and ONS, Brazil's independent system operator, also use the assured energy concept. This is based on the fact that Brazil is so large that it will rarely experience poor rainfall in all regions at once. Thus generators will be compensated for the loss of revenues associated with rainfall causing a generator to produce less than its assured capacity.

Thus, the assured, and therefore contracted, capacity is less than half the project's nameplate capacity. CPFL Distribuicao is taking 119MW, CPFL Piratininga is taking 63MW, and CBA is taking 85MW, and CNT is taking 75MW. The obligations under these power purchase agreements carry joint and several guarantees from Hejoassu, the Votorantim holding company for the shareholders, and carry a term of 12 years.

The strong corporate backing for the offtake is not the only support offered to the project. CPFL is not a wholly-owned subsidiary of Votorantim – Bradesco, the project's financial adviser, and Camargo Correa, a construction firm that is the project's engineering, procurement and construction contractor, also own a third. Camargo Correa provides a guarantee for its work under the construction contract, while Votorantim wraps this work with a completion guarantee.

The final area where the sponsors have stood up to provide some lender comfort was by providing undertakings to compensate lenders for the results of any devaluation in the value of the Real. Power revenues are denominated in Reais, while the debt facilities are partly in dollars.

The lenders thus look essentially to the credit and revenues of the various component parts of the Votorantim empire for security of repayment. As such, the structuring was probably more than would strictly be required for the purposes of a multilateral lender. But while Campos Novos might be a relatively conservative play, it serves as a useful template for future financings.

Moreover, the deal was originally intended as an A-B loan financing, with four commercial lenders in the frame to be the providers of a $225 million B loan. But as the sponsor and IDB prepared to come to terms in November 2003, financial markets panicked at the prospects of the election of president Luiz Inacio Lula da Silva. The banks pulled the loan.

The IDB was left with a large funding gap that BNDES, Brazil's development bank, filled. The IDB is providing a 15-year (12 years with a 26-month grace period), $75 million facility, and BNDES a $267.5 million loan with the same maturity. The two are providing loans under a common terms agreement, rank pari passu, and their behaviour is regulated using an intercreditor agreement, but the documentation for each loan is separate.

The deal did attract some interest from commercial lenders in the period leading up to its close in January 2005. At that point the Brazilian economy had become much more settled, but BNDES decided to hold the debt on its books. Nevertheless, there are several other large Brazilian corporates looking to install hydro capacity, so the time spent on Campos Novos has not been wasted.

Campos Novos
Status: Closed 25 January 2005
Size: $523.9 million
Location: Santa Catarina, Brazil
Description: 880MW hydroelectric project
Sponsors: CPFL Geracao, CEEE, CELESC, CBA, CNT
Debt: $342.5 million
Providers: IDB, BNDES
Sponsor legal advisers: Allen & Overy (international) and Advocacia Waltenberg (Brazilian)
Lender legal advisers: White and Case (international) and Souza Cescon Avedissian, Barrieu e Flesch Advogados (Brazilian)
Independent engineer: RW Beck
Insurance consultant: Willis
Environmental consultant: CH2M Hill
Resettlement consultant: John Renshaw
Independent financial consultant: PricewaterhouseCoopers
Economic consultant: Mercados de Energia