Novatrans: Terna's prize

The Novatrans transmission project – also known by its geographical title, the North-South Interconnection II project – is the first transmission financing benefiting from the participation of the Inter-American Development Bank (IDB) under an A/B loan structure. It is also the first time an international financing has been used on a Brazilian transmission project.

The deal provides a framework for other project financings in the Brazilian transmission sector. "There are many good aspects to this deal," says Felipe Jens, structured finance and project development, Terna. "The international due diligence required by the IDB was a lot of work but provides a lot of comfort to the shareholders. Importantly, it provides a good source of additional funding."

Giovanni Giovannelli, CFO of Brazilian operations, Terna, adds: "Closing an innovative deal like this was possible thanks to the cooperation of the regulatory agency (ANEEL) and the Independent System Operator (ONS), as well as the strong support of the Brazilian Development Bank (BNDES)".

The project involves the development, operation and maintenance of a 1200MW, 1,278km, 500kv transmission line from the Imperatriz substation, in the state of Maranhão, to the Samambaia substation, in the Distrito Federal, crossing central Brazil. It also includes the expansion of six substations.

The transaction structure includes financing by Banco Nacional de Desenvolvimento Econômico e Social (BNDES) – Brazil's development bank – and the IDB amounting to $266 million equivalent, roughly 60% of the total investment. The IDB participation comprises an A/B loan structure totalling $66 million: a $30 million, 12-year A-loan; and a $36 million, 11-year B loan lead arranged by BBVA, and with SG's participation, priced at between 200bp and 537.5bp over Libor.

Of BNDES' R$542 million, R$425 million is a direct loan, with R$117 million lent through ABN Amro and ItauBBA. The banks are not directly providing any capital, but bear the project risk in a similar way to a monoline. The principal reason for the on-lent portion is to satisfy IDB's pre-condition that 51% of the total financing comes from private sources – under IDB rules BNDES' portion counts as public lending.

Terna takes much credit for negotiating Novatrans – a structure that involves three disparate groups of institutions (BNDES, IDB, private banks) each with disparate expectations to find a coherent funding solution.

One of the most important early negotiations was to convince BNDES to drop its currency basket component from the lending margin – this adds around 20% to the cost of borrowing. The currency basket is supposed to reflect BNDES' cost of raising funding internationally, but as the borrower is rarely aware of the actual composition of such basket (usually a combination of Dollars, Yen and Euros), it is difficult to hedge and is subject to fluctuation.
In tandem with this, the onlenders on the BNDES component, ABN Amro and ItauBBA, were persuaded to lend at the same margin as BNDES rather than apply their own pricing. The R$542 million BNDES portion was priced at 4.5% over TJLP.

The TJLP is a long-term interest rate, set quarterly by the national finance committee comprising the Minister of Planning, the President of the Brazilian Central Bank, and the Minister of Finance. The TJLP comprises two components, one reflecting Brazilian country risk, the other an inflation target. The current TJLP stands at 9.75% and has remained stable even in the current context of interest rate increase in Brazil.

During the construction phase, lenders have recourse to Terna's balance sheet via an indemnity letter and a sponsor support agreement, but once fully operational the debt facilities are fully non-recourse. The IDB and BNDES have different milestones to declare project completion – the BNDES portion has already turned non-recourse, whilst the IDB milestones are likely to be met in the course of 2005.

That the lenders are willing to take project risk is testament to taut contractual underpinning. Project revenues are based on the Brazilian power distribution framework put in place in 1999. The national operator, ONS, issues credit notes to the transmission companies and debit notices to grid users (there are currently around 160). Grid users are liable for this payment whether they are directly connected to the particular transmission company or not. Most users provide direct credit enhancement to ONS: either a letter of comfort, or other security document, from a bank, or a pledge over part of their receivables. This, together with the ability of the transmission companies to report a default on payment to ONS within 48 hours, threat of disconnection, and the fact that transmission is a small proportion of user grid costs, have resulted in a very low default rate – currently zero.

The dollar debt is hedged in the short term through a mechanism that allows a conversion of Reais into an onshore dollar account on a monthly basis. The onshore account required authorisation (again after negotiation) from the Central Bank via resolution 2644, specifically for energy companies. The first monthly deposit was made on September 2004 before the first debt payment on 15 November 2004.

In the long term a dollar swap based on the CDI (the Brazilian equivalent to Libor) is likely. Negotiations are currently ongoing with the IDB for a partial credit guarantee that will reduce the cost of a swap. In the short term, however, a swap is unlikely – Novatrans is comfortably sitting on the good side of the curve as the Real appreciates against the dollar.

Novatrans
Status: Closed 8 July 2004 (disbursed 15 September 2004)
Size: R$1.2 billion ($436 million)
Location: Brasilia to Maranhão, Brazil
Description: 1,278km transmission line
Sponsor: Terna S.p.A.
Debt: R$750 million ($266 million)
Providers: BNDES, IDB, ABN Amro, ItauBBA, BBVA, SG
IDB loan tenor: A – 12 years, B – 11 years
Technical consultant: Mott McDonald
Insurance: Willis
Independent economic adviser: Estudios Energeticos
Environmental and Social: Sargent & Lundy
Lenders' legal: Latham & Watkins (international);
Felsberg & Associados, Advogados (local)
Project legal: Allen & Overy (international); Souza, Cescon Avedissian, Barrieu e Flesch (local)