Local institutions continue to dominate the energy sector in Central America and the Caribbean. This despite the fact that generation projects in the area are beginning to attain the kind of scale to attract international banks, which have remained largely focused on bigger markets such as Brazil and Mexico. Recent deals in Honduras, Colombia and Trinidad all highlight the fact that there are deals to be done but all with significant challenges.

Choloma ? a pure play

One of the most recent deals to close, that of Choloma III, a $119 million deal for a thermal energy plant in Honduras, benefited from the involvement of development banks Cabei, FMO and DEG, as well as private financing from Citigroup, but it was the fact that two tranches with local participation were oversubscribed that stands out for those involved with the deal.

Co-arranged by Citibank and the Central American Bank of Economic Integration (Cabei) for local sponsor, Enersa a subsidiary of the Terra Group, the deal was the largest single asset true project finance in the area, according to the legal advisor of the sponsor, Dino Barajas, director at Paul Hastings.

Santiago Pardo, Director at Citigroup's infrastructure and energy finance team says that the interest from local investors was one of the most interesting aspects of the project.

The strong appetite from the local banks is highlighted, says Pardo, in the fact that the local currency tranche of $19 million and the regional bank tranche of $12 million were oversubscribed.

Local private banks including Banco Agricola, Banco Grupo El Ahorro Hondureño, Banco G y T Continental and GTC Bank participated in a $12 million local tranche while Banco Financiera Comercial Hondureña, Banco de Honduras, Banco Financiera Centroamericana and Banco Grupo El Ahorro Hondureño, were involved in the $19 million local currency denominated tranche.

Including Cabei's $50 million allocation, says Pardo: ?Approximately two-thirds of the funding was raised regionally within that was the local currency element, which we had to upsize because there was much demand for it.?
Initially the plan, says Pardo, was for the loan to be dollar denominated but the local appetite for this tranche resulted in the change of tack.

Barajas believes that the presence of Cabei as co-arranger and as lead financier added credibility and resulted in some of the longest tenors yet witnessed in the region.

With 93% of the loans based on tenors of ten years there was only one lender that structured its participation on the lower five-year tenor. Barajas attributes a lot of the success in securing such long tenors comes down to the Cabei's commitment. ?Having Cabei on board really put this over the top in terms of credibility in the market and comfort for the lenders,? he says.

According to Barajas, the deal, which closed last July, had to be closed in a very short time period to meet to obligations to the construction contractor. Keeping the multiple funding sources in line to complete on time was achieved by importing structures already successfully employed energy projects in Mexico, such as Tuxpan V and Altamira II. ?After closing this deal in three months it's going to send a signal to developers that you can get a project done in a fairly short space of time and that you can get the money at a local and an international level,? says Barajas.
?The fact that it was oversubscribed shows that you can do it in an expedited fashion and now people will be able to take this model and replicate it.? Pardo says that following the deal Citigroup is now working on bringing two similar energy projects through, although it has yet to secure the mandates.

While the Choloma III deal illustrates the appetite of local banks to get involved in projects with sponsors with which they have already developed close links, it also reflects the indifference of international banks to the region. Citibank, which took an $8 million tranche and FMO and DEG who split a $30 million allocation were the only international banks to participate in the $119 million deal.

Pardo says this does not necessarily illustrate a lack of interest by the international banks but simply reflects a solid strategy to ensure the success of the project.

?I don't think it's a lack of interest I think its more that when you go through a deal you try to talk to those people that are more comfortable with the underlying credit risk, with the offtaker ENEE (the Honduras state-owned energy company) and ultimately the sovereign risk. The local banks are obviously more comfortable and know the risks better,? he says.

Recourse resolution

Cabei business executive, Pedro Banegas, says the development bank was also involved in a similar deal for the funding of a 267MW project in Costa Rica, Lufassa III, with a total project value of $180 million. In this instance the bank helped arrange a corporate credit line backed by a consortium of regional banks, which lent $53 million on the project. Cabei took on the remaining $69 million of the corporate facility. Local bank participants included Banco Atlantica, Banco Fecohsa, Banco Mercantil and Banco del Istmo, BGA and the Costa Rican arm of Banex.

The sponsor, Luz y Fuerza de San Lorenzo provided corporate guarantees on the debt rather than going down the project finance route. ?Basically the difference is that this was a recourse financing so we gave additional guarantees to the financing, including cash flow guarantees and with the other assets of the company,? says Banegas. Unlike Choloma III the loans were structured over 12 years. This is one project, according to Barajas, that may well benefit from a future re-financing along the same route as that of Choloma III.

While the spurt of liquidity coming from local banks ? highlighted in projects like these including dollar financing with a less costly due diligence process and more expeditious approvals ? has been positive, for Roberto Vellutini, head of the Inter-American Development Bank's private power team, there remain issues affecting the attractiveness of the sector. ?In some countries there is an absolute lack of opportunities for private participation and investment in infrastructure,? he says. In many countries, he adds, the scale of the projects are too small for a true project finance operation as well as credit issues for the public offtaker in many cases.

Other factors include the limited number of investors and banks interested in the region, with all the main banks focusing on Mexico. ?I do not distinguish a large degree of ?attractiveness? among the countries, although some of them exhibit features that are more conducive for private investment and financing,? says Vellutini. He highlights Costa Rica's legal system and the successful privatization of most of El Salvador's power grid.

Dollar or domestic?

One of the fundamental inhibitors to the participation of international banks is that ?with few exceptions (e.g. dollar-indexed revenues/tariffs), most sponsors are seeking local currency financing which can be provided by local banks at tenors compatible with the nature of the investment. Tough competition for international lenders,? says Vellutini. The IDB is involved in two generation projects in Central America, including the Bonyic hydroelectric project in Panama and the Amatitlan geothermal scheme in Guatemala.

With a total project cost of $53 million, the Bonyic scheme will be structured with an A/B loan of $15 million and $23 million respectively, with $7 million in sub-debt.

The Amatitlan project has a total cost of $55 million and is being funded with an A loan of $22 million and a B loan of $19 million. The arranger mandate for both projects is being finalised, and may include a local bank, according to Vellutini. Approval and closing are expected by the end of the third quarter for both projects.

As well as the size of most projects and competition from other structures, the issue of currency risk and the relative absence of US dollar denominated long-term offtake agreements are also seen as factors holding the sector back. ?Electricity, not being a commodity which can be exported and earn hard currency, is another,? says Eric McCartney executive director, Chapin International. ?Even if the contract was in dollars or indexed to dollars, it is impossible to hedge the currency risk. This was one of the biggest problems during the devaluation in Indonesia in the mid-90s. Contracts were in dollars but because of the devaluation no one could pay for the electricity.?

The IDB, says Vellutini, has ?sought to overcome our limitations on local currency financings with the use of our Partial Credit Guarantee (PCG) to credit-enhance bond issuance and bank-financing in local currency. We have approved one operation with a Salvadorian bank for a mortgage-backed security operation enhanced with our PCG, but so far none in Central America involving infrastructure projects.?

Most investors in Central America have some form of political risk coverage for the equity for expropriation, adds Vellutini and ?presumably this risk is also mitigated on the debt side by multilateral financing. ?Even countries like Honduras, which still has a fully state-owned power sector, allow for dollar-indexed tariffs in their PPAs with private power plants; this is perhaps more important, both from sponsors and lenders' viewpoint, than the convertibility/ transferability risk because it affects the overall viability of a project finance structure based on dollar financing.?

One of the biggest regional electricity players that has taken advantage of the improving appetite from local, regional and international banks for these types of projects is AES. The Arlington-based energy specialist has re-financed a string of assets in Central America recently as part of its strategy to recover from its financial difficulties.

AES: bankers' delight

The recent refinancing of its Colombian subsidiary, Chivor S.A., involved the issuing of $170 million in senior secured notes and the placement of a $83 million peso-denominated Colombian bank facility with a seven-year tenor. Local banks participating included Bancolombia and Banco de Bogota. Chivor used the proceeds of the notes, together with the net proceeds of the local syndicated loan and Chivor's available cash, to repay in full Chivor's existing outstanding syndicated loan of roughly $260 million.

Chivor, the country's third largest hydroelectric generator is a 1,000MW hydroelectric facility generating 11% of Colombia's electricity. Liliana Aleman, Chivor's chief financial officer, says the bond issue was five time oversubscribed largely due to interest from European and US-based mutual and hedge funds. Deutsche Bank acted as the arranger for the bond issue, with Bank of America Securities acting as co-manager. Local banks Corfinsura and Colcorp acted as joint leads for the local syndicated loan.

The financing closed at the end of November 2004 with 30% of the bonds sold to UK institutions and 65% to investors in the US. The presence of big hitters such as Fidelity in the list of bondholders, says Aleman, shows a surge in interest in Colombian notes, linked to the improvements in the country. ?It is not usual demand of about 5 times for the amount that we issued also reflects the appetite from international investors,? says Aleman.

?The demand for both debt tranches among the investor community exceeded our expectations and we greatly appreciate this show of confidence in the company and country,? says Felipe Ceron, AES vice president of Latin American Generation and chief executive of AES Gener. The issue was given a B1 rating by Moodys and B from Standard & Poor's. The coupon was eventually set at 9.75% with the notes due in 2014.

It was one of a handful of AES transactions in the last two years linked the company's restructuring.

At the end of 2003 AES Panama closed a $320 million financing for its portfolio of power facilities in the country. The refinancing replaced a construction facility closed in September 2002. The four-tranche transaction involved a local and international bank facility, an institutional facility and an export credit guaranteed facility with tenors ranging from ten to fifteen years. The non-recourse financing involved 18 institutions, and received an international investment grade rating of BBB- from Fitch Ratings.