The Ibiritermo power project overcame some enormous hurdles in its bid to close - in fact it was the only major power deal to close in Brazil last year. The logic behind the plant is sound: diversification away from Brazil's obsession with hydro-power. But the political and financial backdrop to the project made what was a good deal look unnecessarily risky.

Co-sponsored by Petrobras and Edison (which acquired its stake through its acquisition of Fiat Energia), construction of the plant was originally financed though corporate facilities.

However, the devaluation of the reais in 2002, uncertainty over how business-friendly the new administration of president Lula da Silva would be, and the potential for a government power moratorium (at the time considered possible if improbable), persuaded Edison that the 30% increase in cost dictated by a project facility were offset by the benefits - particularly political risk mitigation.

Although higher than an international corporate facility, the interest rate all-in cost was still attractive, fixed and substantially lower than Brazilian corporate rates for equivalent tenors. And while the proposed export credit agency financing meant drawn out inter-creditor negotiations, on the up side it also meant access to long-term money at a time when other forms of finance were unavailable for Brazilian risk.

Brazilian power is 90% hydro-based and therefore vulnerable to ranges in rainfall which dropped between 1997-2001 resulting in a major energy crisis. The project was therefore conceived as an addition to the energy matrix to avoid future energy shortages. In addition it enhances Petrobras' investments in gas reserves and the Bolivia-Brazil gas pipeline.

The plant is located outside Belo Horizonte in the Minas Gerais region with energy output into the Sul-Sudeste-Centro-Oeste grid. Unlike many of Brazil's hydro plants Ibiritermo is close to its consumption area and power losses are reduced by an amount equivalent to 20MW.The 226MW CCGT plant's parameters include one 150MW General Electric 7FA gas turbine; one heat recovery steam generator; one 76MW Franco Tosi steam turbine; and a 138KV substation connected to the CEMIG grid. Gas consumption is 1.1 million m3/day. Fiat Engineering was awarded the EPC contract in November 2000 with simple cycle completion following in June 2002 and combined cycle in September 2003.

Although the project comes with no construction risk, from a lender's perspective the plant was not necessary to meet existing power needs, despite Brazil's 2001 energy shortage.But lenders were confident about Petrobras' commitment to the deal - notably its willingness to take operational risk - and that Brazil's energy surplus will only be short term. Ibiritermo also benefits from pro-gas power legislation under which Brazilian gas fired operators can declare output non-flexible and despatch total output as base load.

The deal - sole lead arranged and co-ordinated by BNP Paribas - comprises an ECA-backed multi-currency financing with optimal matching to overall project cost and minimised exchange rate risk. Total project cost is $222 million on a 75/25 debt to equity ratio. Equity is split 95/5 between $52 million in subordinated debt and $3 million in straight equity. Draw down was on December 23.The 12-year project debt is in three different currency tranches: $53 million in a direct loan from US Exim; Eu60 million ($75 million) underwritten by BNP Paribas and backed by a guarantee from Sace; and R$87 million ($29 million) in a direct loan from BNDES.

At the heart of the deal is currency risk mitigation. Petrobras' offtake payments are exchange rate linked. But the deal is also backed by an offshore letter of credit and more frequent principal payments. Brazil does not allow Brazilian companies to hold accounts outside the country so an offshore dollar cash account was not an option. Instead lenders take comfort from an offshore debt service reserve account in the form of an L/C for each currency loan. The structure mitigates currency risk whilst also adjusting for domestic inflation in proportion to each currency loan.

The Sace tranche is not a full commercial guarantee, so BNP is taking on some risk. However, much of the deal's operational risk is shifted to Petrobras. The plant comes with a tolling type agreement and in case of force majeure Petrobras still pays at a fixed monthly rate from the moment the plant met its performance criteria. Petrobras has itself offset that risk with insurance under its corporate umbrella policy.

The case for Ibiritermo will be played out in the coming years. Projects agreed early in 2002 as part of the Brazilian government's Priority Programme for Thermoelectricity, a reaction to the 2001 drought, are on hold with only one - Fortaleza - likely to come to market in 2004. And Petrobas is no longer seen as an aggressive player in the power project sector having made sizeable provisions in its 2003 accounts for losses related to its thermoelectric generation activities. Nevertheless, Ibiritermo is already despatching into the grid and with Petrobras taking much of the project risk, lender's confidence in the deal looks set to be warranted.

Ibiritermo

Status: Closed 10 November 2003

Description: Financing for 226MW CCGT plant in Brazil

Sponsors: Edison (50%); Petrobras (50%)

Lead arranger: BNP Paribas

Direct Lenders: BNP Paribas; US Exim; BNDES

Partial commercial guarantor: Sace

Financial advisor to Sace and US Exim: Taylor-DeJongh

Legal counsel to sponsors: Milbank Tweed Hadley & McCloy (international); Machado Meyer Sendacz e Opice (Brazil)

Legal counsel to lenders: Winston & Strawn (international); Souza Cescon Avedissian Barrieu e Flesch (Brazil)

Intercreditor issues: BNP Milan; Chiomenti Studio Legale

Insurance advisor to sponsors: Aon

Insurance advisor to lenders: JLT Risk Solutions

Engineering advisory to lenders: Mott Macdonald

EPC contractor: Fiat Engineering