BNP Paribas has closed syndication on what it is billing as the first true project financing in Brazil. And, despite the slew of power projects that have been slated to come to market this year, this deal is in the petrochemical industry. The deal is also the largest in Brazil this year and, a rarity for petrochemicals deals, is not 100% contracted for its output.

Closing financing, however, was a long and tortuous process. The arranger was appointed as financial advisor in May 1998, and since then has had to put together a watertight EPC contract, assemble a multi-sourced export finance package and allow for the demands of Brazil's national development bank, BNDES. It has also had to create a structure that allows for the lower comfort level that foreign lenders have with Brazilian sponsors.

Rio Polimeros is the project company for the Rio de Janeiro Gas to Chemicals Complex, located 30km north of the city that gives it its name. Its purpose is to create a new domestic producer to satisfy growing demand for plastic and petrochemical byproducts in Brazil. The project should be capable of producing 515,000 tonnes per year of polyethylene, the basic chemical building block for plastics.

The project's sponsors are: Suzano Quimica (with a 33.3% stake), Uniao de Industrias Petroquimicas (Unipar, also with 33.3%), Petrobras Quimica (with 16.7%), BNDES Participaçoes S.A. (with 16.7%).

This line-up has been finalised over the three years of serious discussion for the financing, and originally included the Mariani family-owned conglomerate from north-eastern Brazil. After its departure BNDESpar came in as an equity sponsor in Jan 2000. Suzano and Unipar have sizeable petrochemicals interests in the country, although Suzano is understood to be mulling a separation of its interests from its core pulp and paper business.

Petrobras takes the role of feedstock supplier to the plant, although deal participants have been unwilling to give details of the conditions under which the price will be determined. The fact that polyethylene prices are largely, although informally, indexed to the dollar will be comforting. Petrobras is keen to find alternative ways of monetising the gas reserves of the Campos Basin, rather than put up with the opportunity cost that flaring represents.

Rio Polimeros is best seen as a small part of a national network of gas and gas-related work in the country. Work on the Campos field includes a gas separation plant, which will produce methane (much more suitable for power plants, of which Petrobras is planning a number) and ethane, destined for the time being for Rio Polimeros.

The project, although using proven technology, could not proceed with completion guarantees from the sponsors, since these, whatever their financial strength, would have been constrained by sovereign risk perceptions. The sponsors held a beauty contest for the EPC contract, which eventually came down to a shortlist of Bechtel and an ABB Lummus Global/Snamprogetti joint venture. The selection of the latter was more a reflection of capabilities and the strength of guarantees provided, rather than the likelihood of export credit support, since both would have been eligible for involvement on the art of US Ex-Im.

US Ex-Im indeed signed up for the project after a lengthy internal and then congressional scrutiny process. This was forthcoming in 2001, and was not delayed as a result of the events of September 11. Ex-Im provides a 13-year $200.5 million direct credit (congressional approval was required because the loan exceeds $100 million), and took a lead in negotiations with the sponsors.

The other two agencies to provide financing were the BNDES, which provided a R680.5 million direct loan, and Italian agency Sace, which provided cover for a $183 million commercial bank loan. The cover is 95% for political risks and 90% for commercial risks, and the loan was syndicated to Fortis Bank, Banca Nazionale del Lavoro and Hypovereinsbank as arrangers (for $30 million tickets) and Credit Lyonnais as participant with a $20 million ticket. BNP Paribas, the bookrunner, held $40 million. This facility was priced with a 80bp guaranteed spread over the CIR rate and a tenor of construction plus ten years.

The BNDES loan presented a few more problems, not because it was difficult to co-ordinate the documentation process (this went relatively smoothly to past deals, apparently), but because BNDES is unhappy going out to 13 years. This was solved through the use of a cash sweep after year 11 to ensure prompt prepayment for the lenders. This sweep was applied across all tranches.

The use of the cash sweep is apt, since 70% of the plant's output is merchant, sold without contract on the domestic market. This has not caused as many problems as might be expected since all studies of the polyethylene market have indicated that Brazilian demand for plastics is growing and unlikely to abate. The competitive advantages of a domestic supplier using domestic feedstock should be immense, since stripping out the cost of transport should create savings even if a rise in dollar-denominated prices kicks in. Indeed a devaluation in the Real, even if it did depress demand, should preserve the economics of the project since operating costs should fall.

The other 30% of output has been contracted out to Houston based petrochemical marketer Vinmar, although some reports initially put Dow, ExxonMobil and, briefly, Louis Dreyfus in the frame. This contract is sufficient to cover between 70 and 80% of dollar debt commitments. These revenues, moreover, can be held offshore under the Brazilian currency framework.