Latin American Refinancing Deal of the Year 2001
Access to the capital markets for Brazilian projects is going to be
difficult so long as offtake contracts have to be denominated in
the Real. Most investors have very grisly memories of the
devaluation crises that periodically affect the Real. AES Tiete, a
hydroelectric portfolio financing, provides an innovative and, for
the time being, unique solution to accessing international capital
markets. At $300 million, it is the largest generating company
financing out of Brazil so far.
Tiete is a 10-dam hydroelectric generating company in which AES bought a 44% ownership stake (which represents a 71% voting stake) in 1999. This was funded by a loan from the Brazilian National Development Bank, BNDES. The concession agreement required that AES, as controlling shareholder, must develop further capacity in Sao Paulo, where the concession is located, before 2007.
AES wanted to underpin these relatively stable-earning assets with long-term debt, but was going to find that, as an acquisition deal, interest from such lenders as the Inter-American Development Bank and the export credit agencies was going to be negligible. Its main selling point was that the power purchase agreements on the plants were largely (36%) with another AES subsidiary, Eletropaulo.
Other offtakers include EBE-Empresa Bandeirante de Energia S.A.(Bandeirante, owned by VBC and Electricidade de Portugal), CPFL-Companhia Paulista de Força e Luz (CPFL, VBC-controlled), Elektro-Eletricidade e Serviços S.A. (Elektro ? Enron), and two smaller companies ? Empresa Elétrica Bragantina S.A.(Bragantina)and Companhia Nacional de Energia Elétrica (Nacional). 10% of output was to have been sold on the spot market, although now that wholesale trading has been suspended, AES has said that it may look for contracts elsewhere.
As a hydroelectric generator, Tiete should also benefit from the country's balancing mechanism, which is an attempt by the regulator, ANEEL to harness the large climatic variations over the country to smooth out variations in revenue to private producers. This means that surplus power from rainy areas can be used to make up for shortfalls elsewhere. Only a countrywide drought, as happened in 2001, can lead to a breakdown.
AES worked with its financial advisor, Bank of America, (BofA) on a capital markets solution, looking for a way of getting around the risk posed by a devaluation to debt service. The method chosen was an insurance product, and BofA talked with a number of private and multilateral institutions about providing cover. The Overseas Private Investment Corporation (Opic), was the most enthusiastic, and prepared in April 2001 to launch a bond issue with devaluation cover.
This policy works less as a straightforward insurance policy and more like a revolving credit attached to the financing. This revolving credit reserve, remains stocked for devaluation-related liabilities of roughly $30 million. If drawn upon, the issuer has to repay the reserve after debt service has been taken care of. Some issues have been raised in the final position of the policy amongst intercreditor arrangements, and Opic can cancel the policy if AES falls short of various labour, environmental or corruption standards.
Fitch and Moody's Investors Service both rated the deal, but Standard & Poor's advice was not sought because it has been fairly tough on Brazilian utilities, including Eletropaulo. Moody's rated the bonds at Baa3 and Fitch rated them at BBB-. Aside from the use of the policy, however, the deal is particularly conservatively structured. Even with a 90% level of contractual coverage, the average debt service coverage ratio is 2.39 times. Moody's debt to break even analysis has a 51% figure.
Even on the policy, as Moody's notes, $30 million is an exceptionally conservative cap. It says that had the policy been taken out in 1982, just before a particularly torrid time for the exchange rate, only $5 million would have been called upon. Current instability in the region, however, should give this policy a fairly solid test. Nevertheless, the trick for arrangers is to create a solid model that recognises the relationship between price contracts and the size of reserve required for the policy. The signs are that those institutions that rushed out their own products in the wake of the Tiete issue have some work to do before being able to structure a deal that repeats the product in a economical fashion.
The 15-year bonds were priced with a coupon of 11.5%. The lack of an S&P rating may have harmed them, but the underwriter reported a strong level of demand, helped no doubt by Opic's additional provision of political risk insurance. The bond could be best described as a securitisation of dividends upstream from the two holding companies for Tiete. Again, despite the fact that that the Grantor Trust relies on funds channelled through a Cayman Islands holding company, investors had few qualms.
The only other worry for the bondholder has been the Annex V provision that was a reaction to the energy crisis in Brazil. This meant that supply obligations for generators were not reduced by as much as the power rationing requirements. That in turn meant that generators incurred losses buying back power on the spot market or from their own customers. Whilst Fitch gave the issue a negative outlook at the end of 2001, it was hopeful that the Annex would be repealed and added that a strong debt service reserve had not yet resulted in a default situation.
Several institutions are looking at adaptations of the structure, including its application to newbuild gas-fired plants. And following the restructuring of Bank of America's project finance activities the field is wide open for creative newcomers to this new capital markets product line.
AES Tiete Grantor Trust
Status: closed 14 May 2001
Location: Sao Paulo State, Brazil
Description: bond financing of hydroelectric portfolio bought by AES in 1999.
Sponsor: AES
Debt: $300 million
Maturity: 2015, with a ten-year average life
Coupon: 11.5%
Underwriter: Banc of America Securities
Insurer: Overseas Private Investment Corporation, for both inconvertibility and devaluation (first application)
Lawyers to the underwriter: Millbank Tweed Hadley & McCloy
Lawyers to the sponsor: Davis Polk & Wardwell
Lawyers to Opic: Chadbourne & Parke
Financial advisor to Opic: Taylor deJongh
Market consultant: Wharton Economic Forecasting Associates
Tiete is a 10-dam hydroelectric generating company in which AES bought a 44% ownership stake (which represents a 71% voting stake) in 1999. This was funded by a loan from the Brazilian National Development Bank, BNDES. The concession agreement required that AES, as controlling shareholder, must develop further capacity in Sao Paulo, where the concession is located, before 2007.
AES wanted to underpin these relatively stable-earning assets with long-term debt, but was going to find that, as an acquisition deal, interest from such lenders as the Inter-American Development Bank and the export credit agencies was going to be negligible. Its main selling point was that the power purchase agreements on the plants were largely (36%) with another AES subsidiary, Eletropaulo.
Other offtakers include EBE-Empresa Bandeirante de Energia S.A.(Bandeirante, owned by VBC and Electricidade de Portugal), CPFL-Companhia Paulista de Força e Luz (CPFL, VBC-controlled), Elektro-Eletricidade e Serviços S.A. (Elektro ? Enron), and two smaller companies ? Empresa Elétrica Bragantina S.A.(Bragantina)and Companhia Nacional de Energia Elétrica (Nacional). 10% of output was to have been sold on the spot market, although now that wholesale trading has been suspended, AES has said that it may look for contracts elsewhere.
As a hydroelectric generator, Tiete should also benefit from the country's balancing mechanism, which is an attempt by the regulator, ANEEL to harness the large climatic variations over the country to smooth out variations in revenue to private producers. This means that surplus power from rainy areas can be used to make up for shortfalls elsewhere. Only a countrywide drought, as happened in 2001, can lead to a breakdown.
AES worked with its financial advisor, Bank of America, (BofA) on a capital markets solution, looking for a way of getting around the risk posed by a devaluation to debt service. The method chosen was an insurance product, and BofA talked with a number of private and multilateral institutions about providing cover. The Overseas Private Investment Corporation (Opic), was the most enthusiastic, and prepared in April 2001 to launch a bond issue with devaluation cover.
This policy works less as a straightforward insurance policy and more like a revolving credit attached to the financing. This revolving credit reserve, remains stocked for devaluation-related liabilities of roughly $30 million. If drawn upon, the issuer has to repay the reserve after debt service has been taken care of. Some issues have been raised in the final position of the policy amongst intercreditor arrangements, and Opic can cancel the policy if AES falls short of various labour, environmental or corruption standards.
Fitch and Moody's Investors Service both rated the deal, but Standard & Poor's advice was not sought because it has been fairly tough on Brazilian utilities, including Eletropaulo. Moody's rated the bonds at Baa3 and Fitch rated them at BBB-. Aside from the use of the policy, however, the deal is particularly conservatively structured. Even with a 90% level of contractual coverage, the average debt service coverage ratio is 2.39 times. Moody's debt to break even analysis has a 51% figure.
Even on the policy, as Moody's notes, $30 million is an exceptionally conservative cap. It says that had the policy been taken out in 1982, just before a particularly torrid time for the exchange rate, only $5 million would have been called upon. Current instability in the region, however, should give this policy a fairly solid test. Nevertheless, the trick for arrangers is to create a solid model that recognises the relationship between price contracts and the size of reserve required for the policy. The signs are that those institutions that rushed out their own products in the wake of the Tiete issue have some work to do before being able to structure a deal that repeats the product in a economical fashion.
The 15-year bonds were priced with a coupon of 11.5%. The lack of an S&P rating may have harmed them, but the underwriter reported a strong level of demand, helped no doubt by Opic's additional provision of political risk insurance. The bond could be best described as a securitisation of dividends upstream from the two holding companies for Tiete. Again, despite the fact that that the Grantor Trust relies on funds channelled through a Cayman Islands holding company, investors had few qualms.
The only other worry for the bondholder has been the Annex V provision that was a reaction to the energy crisis in Brazil. This meant that supply obligations for generators were not reduced by as much as the power rationing requirements. That in turn meant that generators incurred losses buying back power on the spot market or from their own customers. Whilst Fitch gave the issue a negative outlook at the end of 2001, it was hopeful that the Annex would be repealed and added that a strong debt service reserve had not yet resulted in a default situation.
Several institutions are looking at adaptations of the structure, including its application to newbuild gas-fired plants. And following the restructuring of Bank of America's project finance activities the field is wide open for creative newcomers to this new capital markets product line.
AES Tiete Grantor Trust
Status: closed 14 May 2001
Location: Sao Paulo State, Brazil
Description: bond financing of hydroelectric portfolio bought by AES in 1999.
Sponsor: AES
Debt: $300 million
Maturity: 2015, with a ten-year average life
Coupon: 11.5%
Underwriter: Banc of America Securities
Insurer: Overseas Private Investment Corporation, for both inconvertibility and devaluation (first application)
Lawyers to the underwriter: Millbank Tweed Hadley & McCloy
Lawyers to the sponsor: Davis Polk & Wardwell
Lawyers to Opic: Chadbourne & Parke
Financial advisor to Opic: Taylor deJongh
Market consultant: Wharton Economic Forecasting Associates
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