Americas Deals of the Year Continued
Latin America ? telecoms
BCP refinancing
The successful $1.725 billion refinancing of Brazilian mobile telco BCP Telecommunicacoes SA (BCP) represents the largest telecoms deal in Latin America to date. The financing blends ECAs, commercial banks, insurers, a vendor and a sponsor at various points in the debt package. More importantly it includes the largest local debt placement yet for a fledgling telecoms company while commanding the most sizeable PRI component for any Latin American deal ever.
ABN Amro, Bank of America and WestLB lead arranged the bulky package with FleetBoston, Citibank, Wachovia Bank, Banco Itau and BSCH joining at the arranger level before general syndication. Additional lenders include BBV, Lehman Brothers, BNP Paribas, Deutsche Bank, Banque Sudameris, Bayerische Landesbank, ING Barings, Dresdner Bank, Mediocredito, Banca Nazionale del Lavoro, Banco Espirito Santo, Safra Group, Highland, HSBC, ABC Bank, Banco Safra, Banco Bandeirantes, Credit Suisse First Boston, Standard Bank, Toronto-Dominion Bank, Banco Excel Economico and Van Kampen.The facility is split into eight tranches. Tranche ?A' totals $975 million and is further split into a $262.3 million ?A1' tranche covered by MIGA, a $216.7 million ?A2' tranche covered by OPIC, a $171.1 million ?A3' tranche covered by private insurers, and a $325 million ?A4' tranche which is uncovered.The ?A1', ?A2' and ?A3' tranches have a five year maturity and are priced at 287.5bp over Libor for one year, after which the margin is tied to a leveraged grid. These tranches have an amortizing repayment schedule and an average life of three years and four months. Pricing on the ?A4' tranche is tied to the Brazil 2004 bond minus 50bp. Initially the margin is 510bp over Libor.The $175 million ?B' tranche is provided by Bellsouth and is priced at 175bp over Libor. The $325 million five year amortizing ?C' tranche is furthger split into a $150 million ?C1' tranche provided by EDC and a $175 million ?C2' tranche which benefits from political risk insurance provided by EDC. The $300 million ?D' tranche is a vendor financing provided by Nortel. The original concession to provide B band cellular services in Metropolitan Sao Paulo was awarded to BCP SA, sponsored by Bell South and Grupo Safra, in 1997, for which the company raised $1.75 billion. In mid 1999, BCP proposed the refinancing mandate to a competing group including artrangers of the original facility, JP Morgan, Citibank, Chase, Deutsche and Wachovia. Explains ABN Amro's Roberto Oei, ?the whole of Latin America is in high growth rate and we strongly believe that tapping multiple markets is key. It's all about being agile in the markets, since Latin American markets require that one keeps multiple windows of opportunity open at once.? Originally banks competing for the refinancing mandate were pushing for another round of 1-2 year financing with bullet structures similar to the existing financing. But ultimately another solution was urged, which fit more squarely with BCP's business plan ? stretching the tenor to reduce the company's exposure to periodic short term financing risk while giving them the flexibility to develop their business without being forced to refinance every two years. ?Instead of going an extra year on the bridge, we needed to go medium term. So our strategy was to focus 100% of our talent on getting 3 to 5 years ? we got five,? explains a banker at WestLB. Also pressing, however, were the effects of currency devaluation on Brazilian companies. In order to mitigate these risks, the financing structure sought to carefully craft long term political risk insurance together with innovative local currency financing.The PRI package was fundamental to achieving the sponsor's goal of lengthening the tenor for a substantial portion of BCP's debt capital. The market at the time was skeptical that PRI providers would have enough appetite or capacity to provide significant amounts of long term cover in Brazil for this type of refinancing, or that banks would be prepared to lend for more than 2-3 years. But the arranger group successfully assembled a package of both private and public sector insurance to complement the existing involvement of EDC.Ultimately AIG led the private insurance portion and OPIC and MIGA provided the public sector insurance. For MIGA, the BCP transaction was its largest ever insurance deal, included under its Cooperative Underwriting Program (CUP) of private insurers including Lloyds, Chubb and Unistrat.The availability of PRI allowed banks to lend for a longer tenor, extending maturity profile of a large portion of BCP's debt capital by providing the company with $975 million of 5 year amortizing debt. Also key to the deal was the inclusion of a large slice of local currency financing in the form of rated local debentures. The debentures, rated ?A' by Standard & Poor's, allowed Brazilian banks and institutions to provide local currency equivalent of $275 million in a debenture issue in December 1999. The issue has a tenor of 5 years with a repricing option for investors at year 2. West LB, ABN Amro and Bank of America fully underwrote the local debentures and the issue was fully placed in the Brazilian capital markets. According to a banker close to the deal, the local issue diversified BCP's currency risk. Furthermore, it marks the last issue to be priced as a percentage of the benchmark CDI index (in this case 104.9%), rather than the ?CDI plus? formula now prevalent. Commenting on the transaction, Bell South's Rawd Mcarthur says, ?the deal represents precisely what we set out to do- it shows the strength of BCP and its sponsors and it pulls together a highly innovative blend of financing.?BCP's backers are understandably upbeat. The operator had a waiting list of subscribers of one million, while having boasted positive cash flow and Ebitda from inception. BCP plans to extend its network through six states in northeastern Brazil around Sao Paolo. It has a potential customer base of 45 million people.
BCP refinancing
Location: Sao Paulo, BrazilCost: $1.725 billionDebt: $560 million A loans covered by Miga, Opic, private and public insurance companies, $415 million uncovered A loans; $175 million B ?loans' from the sponsors; $150 million EDC C loan; $175 million C loan; $300 million D loan provided by Nortel.Sponsors: BellSouth Telecommunications Inc, Grupo Safra Lead Arrangers: ABN Amro, Bank of America, WestLBFinancial Advisers: WestLB, CitibankLegal Adviser: White & Case
Latin Americaa ? oil & gas
Barracuda
The Campos basin, Brazil's largest offshore proven oil and gas reserve, is no stranger to deepwater development projects. On June 23 2000, the largest limited recourse deal of its kind in Latin America, Petrobras' $2.5 billion Barracuda and Caratinga offshore development, reached financial close. The long-term financing package has the longest tenor yet encountered in the sector, replacing a previous bridge facility. The deal, which flaunts an innovative tax structure, also marks the largest loan ever underwritten by JBIC while sporting the most sizeable PRI policy underwritten by MITI and MIGA to date.
Although the deal closed last summer, the last few months have seen the resolution of documentation issues and conditions precedent, as well as the syndication of the debt to interested lenders. Funding comes from a consortium of international lenders, made up of Deutsche Bank Securities, Itochu Corporation and Mitsubishi Corporation acting as global coordinators. Lead arrangers are Deutsche Bank, Industrial Bank of Japan (IBJ), BNP Paribas and HypoVereinsbank, who underwrote a $500 million senior secured bank loan. Petrobras' equity contribution is $700 million.The commercial facility was arranged by Bank of America, Banca Commerciale Italiana/Sudameris, Dai Ichi Kangyo Bank, Standard Chartered Bank, Santander Investment Securities, and Dresdner Bank, ING Barings and Tokai Bank. Each of the ten banks took up $50 million of the total facility. Fees on the facility are reported to have been 187.5bps.In addition, BNDES advanced $760 million of senior secured loans. This component also increased the use of Brazilian content in equipment and services for the project ? the construction of two Floating Producing, Storage and Offloading (FPSO) vessels, necessary for the development, production, gathering, processing and delivery of crude oil and natural gas, will take place locally, thus stimulating domestic industry's participation in the oil sector. According to a banker familiar with the deal, ?BNDES provided long term financing and structured it to maximize Brazilian services while kickstarting the turnaround of the Brazilian shipbuilding industry.?A pivotal driver for the transaction was the Japanese funding component. JBIC provided a $1.1 billion direct loan, from its natural resource development window. The loans include a three year construction period as well as a seven year amortization period, with a final maturity of 10 years.Political risk insurance for the $500 million loan was provided by Japan's Ministry of International Trade and Industry (MITI) and the Multilateral Investment Guarantee Agency (MIGA). Because of the involvement of both Petrobras and the Japanese Bank for International Co-operation, both Barracuda, and Petrobras' Espadarte, Voader e Marimba (EVM) deal, signed concurrently, have been regarded as companion pieces. Barracuda, its participants say, has a stronger security package, economic fundamentals, better pricing and a longer tenor. The deal has been structured as a commercial contract, or charter that mimics a lease, so that it avoids withholding tax. This can be done for a movable asset (the platforms), but also for an immovable asset (the wellheads) by maturing the assets in a trust before recent changes in Brazilian tax law. The SPV used is registered in the Netherlands, and owned by Itochu and Mitsubishi, the lessors. This country has a very favorable withholding tax treaty with the Brazil, and can also offset charter payments against income tax. The rigs, treated as ships for legal and accounting purposes, are registered in Panama. Lease payments, while tied to debt service ratios, are not based on production levels and are unconditional obligations. Millbank Tweed Hadley & McCloy advised the lenders, with further participation from Baker & McKenzie and Trench, Rossi e Watanabe.Motivating the project finance solution was the severe budgetary restriction imposed on the company during fiscal austerity program in the 1995-1998 period. Petrobras was forced during that time to restructure, allocating its reserves for production. Budgetary restrictions applied to any type of indebtedness, in addition to Petrobras' use of its own cash flow. According to Petrobras' Raul Campos, ?off balance sheet treatment was therefore the structuring priority achieved by clearly defining the project scopes, and sources of funding within the project to cover debt service.? The new developments should lower Brazil's dependence on imported oil and at the same time satisfy Central Bank and IMF requirements for levels of indebtedness, since these also show up in governmental budget. The project itself consists of an 11 well subsea development using FPSO vessels with a permanent internal turret. The field layout includes individual satellite wells requiring a total of 34 flexible risers suspended to the sea floor from the FPSO turret. The system, designed and supplied by SOFEC, is one of the world's deepest moored FPSO systems. The two fields are expected to produce a combined 740 million barrels of oil and 345 billion cubic feet of gas during a 25 year period.Petrobras' EVM project also closed on June 23. That deal came in at $1.2 billion, with a total debt package of $980 million. The debt financing comprises a $260 million BNDES loan, a $506 million JBIC loan and a $200 million commercial bank loan. All facilities carry a seven year tenor. Equity on the project totaled some $120 million. That project was also made possible primarily by Japanese cooperation; it was aligned with the Barracuda deal ?entirely for convenience,? says a source close to the deal. Barracuda and CaratingaLocation: Campos Basin, Brazil (offshore)Description: Development of promising deepwater fieldsSponsor: PetrobrasDebt: $2.5 billion in debt financing. Lead arrangers are underwriting a $500 million senior secured bank loan. In addition, BNDES will advance up to $800 million of senior secured loans. JBIC will provide a $1.1 billion direct loan.Tenor: 10 yearsLead Arrangers: Deutsche Bank, Industrial Bank of Japan (IBJ), BNP Paribas and HypoVereinsbankLawyers: Baker & McKenzie; Trench, Rossi e Watanabe
Latin America ? transport
Collipulli-Temuco Toll Road
It is difficult to continue to bracket Chilean deals in with the rest of Latin America when it is capable of producing deals of the sophistication of the financing of this section of Ruta 5. The $215 million (US dollars equivalent) bond financing of the acquisition of this stretch of the Pan-American highway demonstrates not only that the recovery in the country's capital markets is real, but that regional governments should give sustained thought to following its example. Financiers Banco Santander Centro Hispano and XL Capital and sponsor Cintra may be the ones to export it, or at the very least corner a number of the new sections up for tender in the coming years.
The conditions that have made the financing (in fact the second of its type in the country) possible are the increased prosperity in Chile and the commitment of the government to the privatization of many state assets and reform of its financial sector. Between 1996 and 2000 alone the assets under the management of its pension funds have grown from $28 billion to 36 billion. However, there are strict limits as to the grades of securities in which these can invest.At which point the monolines come in, transforming sovereign-constrained ratings (usually in the BBBs rather than lower down) into domestically palatable AAA credits. The Chilean government has been fully behind the development of the financing instrument, reasoning that putting domestic capital to work in funding infrastructure would be better than seeing funds head north into the US equities market. The most attractive initial candidates for the bond treatment have been the Chilean sections of Ruto 5, or the Pan-American Highway.The section financed this year runs between the towns of Collipulli and Temuco, roughly 574km from the Chilean capital Santiago. Work to be done includes adding a lane in each direction for 75% of the road's length and strengthening underpasses and verges. The current toll collection system consists of a single toll plaza at Temuco. Upon completion Collipulli will also have a plaza, as will major ramps onto the road, charging a quarter of the rate to local traffic. Concessions are usually awarded on the basis of the highest up-front payment offered, subject to various technical requirements. The concession was awarded to Cintra in April 1998 after stiff competition.The section demonstrates strong and consistent growth in traffic ? at around 9.4% per year ? and consultants' reports measured potential for alternative routes as a result of any toll increase. Nevertheless, the concession (for a term of 25 years) comes with a base traffic level guarantee from the Chilean Ministry of Public works, which starts in 2003. This guarantee can be tranched away from a bond issue carrying volume risk, to be pitched at sovereign lenders, or the bond guarantor can simply wrap the entire package.XL, like its competitors, operates under a zero-loss assumption, in effect that it should never have to pay out. A Vollmer Associates report puts projected average growth at 5.6% per year, but the base case used had a rate of 2.7%. XL has an unconditional and irrevocable obligation to pay any claim, whether as a result of massive economic collapse in the country, or a temporary shortfall in revenues, or even a simple clerical error. As a result, XL's obligations to bondholders are straightforward, but in order to minimize the likelihood of a claim, its arrangements with sponsors can be quite complex. As David Stevens, President of XL Capital Assurance puts it, ?our legal agreement with bondholders probably runs to little more than a page, but our legal documentation with sponsors tends to be extremely complex, just like bank documents?.The first bond in Chile financed the Talca-Chillan section of Ruta 5, and carried an MBIA-Ambac wrap. Since then the Russian default has occurred and Latin America has slowly recovered. Nevertheless, it is a tribute both to the strength of the country's financial sector and competition amongst the monolines that Collipulli-Temuco came out with a 20-year tenor, an advance of over eight years on the previous issue. The bonds were priced at 110bp over the domestic base rate, and were rated AAA by Feller & Rate Rating Agency and Duff & Phelps Chile.Bookrunner for the bonds was Banco Santander Centro Hispano, which also acted as financial advisor to the sponsors. In fact, given its capabilities in pensions, banking and brokerage (as the number one bank in the country) Santander probably has more of a grip on this side of toll road financing than any insurer does on the wrap market. Cross-border bank deals, of which there have been a few in the country, can often bring in deep-pocketed outsiders, but bonds are very much the government's favoured instruments.Moreover, local funding, which for projects in the region of $215 million usually means project bonds, usually has a competitive advantage when matched with locally-denominated revenue that few cross-border deals can match. The insurers will be able to do business where local currency ratings of sovereigns are high enough to achieve an investment grade project rating so that their own ratings are unaffected.Construction has already commenced on the road improvements, using the $83 million equivalent equity from sponsor Cintra (part of Spain's Grupo Ferrovial). This began in May 1999, and was 40% complete by August 2000, the date of the bonds' issue. The contractor is Ferrovial Agroman Chile, with Cintra (which won, through the 407 International, Project Finance's 1999 Transport deal of the year) operating the concession.There are several further concessions up for financing in the country, including non-Ruta 5 work, which may be financed on an NPV rather than a fixed concession basis. Peru and Argentina, and indeed any Latin country which makes solid enough progress in reforming its financial sector, are the next candidates for using domestically-wrapped bonds. Competition will also remain intense, with MBIA, Dexia-FSA and XL all with toeholds in the market. Ellis Juan, Head of Investment Banking at Banco Santander in New York says, ?it is possible to get around seven groups bidding for a concession, as happened in the Norte Sul tender. The urban roads tend to show more variation in bids received than the rural ones?. There will probably be plenty of work to go around, even in a country the size of Chile, or as Stevens puts it, ?The pipeline of infrastructure concessions in Chile runs into the billions of dollars, everything from new roads, water, and airports to takeouts of existing projects initially financed by the banking community. Project finance bonds are going to be essential to Chile's ability to finance its massive infrastructure needs?.Collipulli-Temuco Toll Road financingStatus: closed August 2000Cost: $241.7 millionDescription: acquisition and upgrade of 144km toll road south of Chilean capital SantiagoSponsor: CintraDebt: $215 millionMaturity: 20 years, with a average maturity of 17 yearsPricing: 110bpBookrunner and financial advisor to the issuer: Banco Santander Centro HispanoInsurer: XL Capital AssuranceLawyers to the lenders: Debevoise & Plimpton (international) Claro y Cia. (Chile)Technical consultants: Vollmer Associates, R&Q
Latin America ? merchant power
Bajio (Energia Azteca VIII)
The choice faced by the IPP developer in Mexico has often been summarised as whether to work within the strictures laid down by the government or to opt out altogether. Whilst generation assets in private hands have been springing up for the last few years, developers have usually been obliged to sell all output to the Commision Federal de Electricidad (CFE). InterGen and AEP's Bajio project, on the other hand, is a single-handed attempt to create a medium term market in buying and selling electricity. Its financing, moreover, sets the standard for multilateral co-operation and goes some way to understanding why the US Ex-Im Bank's clients are currently rampaging through the global power markets.
Bajio is not the first Mexican power project to sell direct to corporate clients ? both the TEG deals (see below) and the Monterrey III deal sold capacity to the private sector. The TEG deals ? as well as the more recent Enron Monterrey project ? were created under self-supply legislation as inside-the-fence facilities. Monterrey III had a mixture of CFE (498MW), PPA with Alfa PEGI (388MW) and merchant output (114MW), but was constructed by sponsors Iberdrola on balance sheet, ostensibly for reasons of timing.The rationale behind these additional supply contracts is not only an unwillingness to rely too heavily on the CFE credit at a time of rapid reform in the Mexican energy sector, but also a reflection of the competitive nature of the bid process. The prices offered under the CFE contracts have been driven so low that only the sponsors with the lowest cost of capital and the least demanding return requirements can compete. A creative approach and the ability to oversize a project by adding additional turbines can seriously alter a project's economics. Bajio, originally tendered as El Sauz, is a 600MW gas-fired power station located at Guanajuato in central Mexico. It was awarded to InterGen in June 1999, and AEP Resources bought a 50% stake in December 1999. The bid process itself was fraught, since at that time the legality of bidding additional capacity was open to debate. John Foster, senior vice-president and regional executive for Latin America InterGen, continues, ?up until Bajio, no company had made a material generation investment in a non-fully subscribed CFE project. Since Bajio, most CFE project bidders have followed our lead?. He has a point: the Naco-Nogales (Union Fenosa) and La Rosita (then Rosarito, InterGen) plants all carry plans for extra turbines. 495MW of the plant's capacity acts as the ?anchor? for the plant, a 25-year power purchase agreement with the CFE along the lines of vanilla IPPs in Mexico. This is supported by a fuel supply agreement, also with the CFE, which allows for the pass-through of fuel costs. The remaining 105MW is to be sold to nearby industrial companies under recent regulations permitting large companies to do so. The sales will normally take the form of short, 1-2-year bilateral contracts. Here Bajio relies upon the economic strength of the region, which currently imports some of its power.The financing was grounded on two lending institutions. The first was the Inter-American Development Bank, an experienced player in the market and sine qua non of the independent power developer. The IDB A/B loan facilities both have tenors of 12 years (door-to-door). The $23.0 million IDB A loan is funded directly by the IDB and the $113.0 million IDB B loan is funded by commercial banks. BNP Paribas and Deutsche Bank have underwritten the IDB B loan, with Citibank and Dresdner acting as co-arrangers.The most novel aspect of the deal, however, was the introduction of a comprehensive guarantee from the US Ex-Im Bank to a further $215 million of debt. Exim has been examining the use of cover that goes back into the construction period of a project's life, but has historically been too risk averse. Bajio is the first time that such comprehensive cover has been extended to a project, at least in part because of the presence of InterGen parent Bechtel as EPC contractor for the GE 7FA turbines to be installed.The cover marked an advance for Exim, but also opened up a fresh pool of liquidity in a market where some institutions show signs of lagging. Since the $215 is now backed by the credit of the United States of America it amply qualifies for inclusion in Citibank's GovCo commercial paper conduit. GovCo, where the paper will remain during construction, has only been used for equipment finance before, and marks a project first. Comprehensive cover now appears on the InterGen/Enka deals and the Kepco Ilijan deals, where Exim has contributed to two other awards.Mexico's energy could be undergoing a revamp very soon, with everything from partial privatization to the creation of a spot market up for discussion. In this atmosphere it was difficult to persuade banks to take on the risks on the merchant offtake portion, and this has been guaranteed by InterGen. Mexican growth, Bajio's efficiency and a lack of subsidies for industrial users of the CFE's electricity make this unlikely.The challenge for sponsors, at least in the more populous parts of the country, will be to adapt this in a way to make banks more comfortable with merchant risk. InterGen might be able to increase its equity/sub-debt proportion mix, or a sovereign upgrade may give lenders a clearer perspective on which are the top Mexican industrials. Its next project is the La Rosita plant, which will use cross-border supply and partial offtake contracts to alleviate the southeastern US' power woes.
Bajio
Status: signed 23 June 2000Cost: $436 millionLocation: GuanajuatoSponsors: InterGen, AEP ResourcesCapacity: 600MWFuel: natural gasOfftake structure: 495MW purchased under PPA with CFE, remainder sold under short-term contract to local industrial customers.Financing: $22.5 million IDB A loan, $113 million B loan, $215 covered by Ex-Im construction guarantee through construction and sold through a Citibank conduit.Arrangers: Paribas, Deutsche Bank, Dresdner Kleinwort Benson, CitibankLawyers to the borrower: Hunton & Williams Lawyers to the Lenders: Mayer Brown & PlattFinancial advisors to Exim: Taylor de Jongh
BCP refinancing
The successful $1.725 billion refinancing of Brazilian mobile telco BCP Telecommunicacoes SA (BCP) represents the largest telecoms deal in Latin America to date. The financing blends ECAs, commercial banks, insurers, a vendor and a sponsor at various points in the debt package. More importantly it includes the largest local debt placement yet for a fledgling telecoms company while commanding the most sizeable PRI component for any Latin American deal ever.
ABN Amro, Bank of America and WestLB lead arranged the bulky package with FleetBoston, Citibank, Wachovia Bank, Banco Itau and BSCH joining at the arranger level before general syndication. Additional lenders include BBV, Lehman Brothers, BNP Paribas, Deutsche Bank, Banque Sudameris, Bayerische Landesbank, ING Barings, Dresdner Bank, Mediocredito, Banca Nazionale del Lavoro, Banco Espirito Santo, Safra Group, Highland, HSBC, ABC Bank, Banco Safra, Banco Bandeirantes, Credit Suisse First Boston, Standard Bank, Toronto-Dominion Bank, Banco Excel Economico and Van Kampen.The facility is split into eight tranches. Tranche ?A' totals $975 million and is further split into a $262.3 million ?A1' tranche covered by MIGA, a $216.7 million ?A2' tranche covered by OPIC, a $171.1 million ?A3' tranche covered by private insurers, and a $325 million ?A4' tranche which is uncovered.The ?A1', ?A2' and ?A3' tranches have a five year maturity and are priced at 287.5bp over Libor for one year, after which the margin is tied to a leveraged grid. These tranches have an amortizing repayment schedule and an average life of three years and four months. Pricing on the ?A4' tranche is tied to the Brazil 2004 bond minus 50bp. Initially the margin is 510bp over Libor.The $175 million ?B' tranche is provided by Bellsouth and is priced at 175bp over Libor. The $325 million five year amortizing ?C' tranche is furthger split into a $150 million ?C1' tranche provided by EDC and a $175 million ?C2' tranche which benefits from political risk insurance provided by EDC. The $300 million ?D' tranche is a vendor financing provided by Nortel. The original concession to provide B band cellular services in Metropolitan Sao Paulo was awarded to BCP SA, sponsored by Bell South and Grupo Safra, in 1997, for which the company raised $1.75 billion. In mid 1999, BCP proposed the refinancing mandate to a competing group including artrangers of the original facility, JP Morgan, Citibank, Chase, Deutsche and Wachovia. Explains ABN Amro's Roberto Oei, ?the whole of Latin America is in high growth rate and we strongly believe that tapping multiple markets is key. It's all about being agile in the markets, since Latin American markets require that one keeps multiple windows of opportunity open at once.? Originally banks competing for the refinancing mandate were pushing for another round of 1-2 year financing with bullet structures similar to the existing financing. But ultimately another solution was urged, which fit more squarely with BCP's business plan ? stretching the tenor to reduce the company's exposure to periodic short term financing risk while giving them the flexibility to develop their business without being forced to refinance every two years. ?Instead of going an extra year on the bridge, we needed to go medium term. So our strategy was to focus 100% of our talent on getting 3 to 5 years ? we got five,? explains a banker at WestLB. Also pressing, however, were the effects of currency devaluation on Brazilian companies. In order to mitigate these risks, the financing structure sought to carefully craft long term political risk insurance together with innovative local currency financing.The PRI package was fundamental to achieving the sponsor's goal of lengthening the tenor for a substantial portion of BCP's debt capital. The market at the time was skeptical that PRI providers would have enough appetite or capacity to provide significant amounts of long term cover in Brazil for this type of refinancing, or that banks would be prepared to lend for more than 2-3 years. But the arranger group successfully assembled a package of both private and public sector insurance to complement the existing involvement of EDC.Ultimately AIG led the private insurance portion and OPIC and MIGA provided the public sector insurance. For MIGA, the BCP transaction was its largest ever insurance deal, included under its Cooperative Underwriting Program (CUP) of private insurers including Lloyds, Chubb and Unistrat.The availability of PRI allowed banks to lend for a longer tenor, extending maturity profile of a large portion of BCP's debt capital by providing the company with $975 million of 5 year amortizing debt. Also key to the deal was the inclusion of a large slice of local currency financing in the form of rated local debentures. The debentures, rated ?A' by Standard & Poor's, allowed Brazilian banks and institutions to provide local currency equivalent of $275 million in a debenture issue in December 1999. The issue has a tenor of 5 years with a repricing option for investors at year 2. West LB, ABN Amro and Bank of America fully underwrote the local debentures and the issue was fully placed in the Brazilian capital markets. According to a banker close to the deal, the local issue diversified BCP's currency risk. Furthermore, it marks the last issue to be priced as a percentage of the benchmark CDI index (in this case 104.9%), rather than the ?CDI plus? formula now prevalent. Commenting on the transaction, Bell South's Rawd Mcarthur says, ?the deal represents precisely what we set out to do- it shows the strength of BCP and its sponsors and it pulls together a highly innovative blend of financing.?BCP's backers are understandably upbeat. The operator had a waiting list of subscribers of one million, while having boasted positive cash flow and Ebitda from inception. BCP plans to extend its network through six states in northeastern Brazil around Sao Paolo. It has a potential customer base of 45 million people.
BCP refinancing
Location: Sao Paulo, BrazilCost: $1.725 billionDebt: $560 million A loans covered by Miga, Opic, private and public insurance companies, $415 million uncovered A loans; $175 million B ?loans' from the sponsors; $150 million EDC C loan; $175 million C loan; $300 million D loan provided by Nortel.Sponsors: BellSouth Telecommunications Inc, Grupo Safra Lead Arrangers: ABN Amro, Bank of America, WestLBFinancial Advisers: WestLB, CitibankLegal Adviser: White & Case
Latin Americaa ? oil & gas
Barracuda
The Campos basin, Brazil's largest offshore proven oil and gas reserve, is no stranger to deepwater development projects. On June 23 2000, the largest limited recourse deal of its kind in Latin America, Petrobras' $2.5 billion Barracuda and Caratinga offshore development, reached financial close. The long-term financing package has the longest tenor yet encountered in the sector, replacing a previous bridge facility. The deal, which flaunts an innovative tax structure, also marks the largest loan ever underwritten by JBIC while sporting the most sizeable PRI policy underwritten by MITI and MIGA to date.
Although the deal closed last summer, the last few months have seen the resolution of documentation issues and conditions precedent, as well as the syndication of the debt to interested lenders. Funding comes from a consortium of international lenders, made up of Deutsche Bank Securities, Itochu Corporation and Mitsubishi Corporation acting as global coordinators. Lead arrangers are Deutsche Bank, Industrial Bank of Japan (IBJ), BNP Paribas and HypoVereinsbank, who underwrote a $500 million senior secured bank loan. Petrobras' equity contribution is $700 million.The commercial facility was arranged by Bank of America, Banca Commerciale Italiana/Sudameris, Dai Ichi Kangyo Bank, Standard Chartered Bank, Santander Investment Securities, and Dresdner Bank, ING Barings and Tokai Bank. Each of the ten banks took up $50 million of the total facility. Fees on the facility are reported to have been 187.5bps.In addition, BNDES advanced $760 million of senior secured loans. This component also increased the use of Brazilian content in equipment and services for the project ? the construction of two Floating Producing, Storage and Offloading (FPSO) vessels, necessary for the development, production, gathering, processing and delivery of crude oil and natural gas, will take place locally, thus stimulating domestic industry's participation in the oil sector. According to a banker familiar with the deal, ?BNDES provided long term financing and structured it to maximize Brazilian services while kickstarting the turnaround of the Brazilian shipbuilding industry.?A pivotal driver for the transaction was the Japanese funding component. JBIC provided a $1.1 billion direct loan, from its natural resource development window. The loans include a three year construction period as well as a seven year amortization period, with a final maturity of 10 years.Political risk insurance for the $500 million loan was provided by Japan's Ministry of International Trade and Industry (MITI) and the Multilateral Investment Guarantee Agency (MIGA). Because of the involvement of both Petrobras and the Japanese Bank for International Co-operation, both Barracuda, and Petrobras' Espadarte, Voader e Marimba (EVM) deal, signed concurrently, have been regarded as companion pieces. Barracuda, its participants say, has a stronger security package, economic fundamentals, better pricing and a longer tenor. The deal has been structured as a commercial contract, or charter that mimics a lease, so that it avoids withholding tax. This can be done for a movable asset (the platforms), but also for an immovable asset (the wellheads) by maturing the assets in a trust before recent changes in Brazilian tax law. The SPV used is registered in the Netherlands, and owned by Itochu and Mitsubishi, the lessors. This country has a very favorable withholding tax treaty with the Brazil, and can also offset charter payments against income tax. The rigs, treated as ships for legal and accounting purposes, are registered in Panama. Lease payments, while tied to debt service ratios, are not based on production levels and are unconditional obligations. Millbank Tweed Hadley & McCloy advised the lenders, with further participation from Baker & McKenzie and Trench, Rossi e Watanabe.Motivating the project finance solution was the severe budgetary restriction imposed on the company during fiscal austerity program in the 1995-1998 period. Petrobras was forced during that time to restructure, allocating its reserves for production. Budgetary restrictions applied to any type of indebtedness, in addition to Petrobras' use of its own cash flow. According to Petrobras' Raul Campos, ?off balance sheet treatment was therefore the structuring priority achieved by clearly defining the project scopes, and sources of funding within the project to cover debt service.? The new developments should lower Brazil's dependence on imported oil and at the same time satisfy Central Bank and IMF requirements for levels of indebtedness, since these also show up in governmental budget. The project itself consists of an 11 well subsea development using FPSO vessels with a permanent internal turret. The field layout includes individual satellite wells requiring a total of 34 flexible risers suspended to the sea floor from the FPSO turret. The system, designed and supplied by SOFEC, is one of the world's deepest moored FPSO systems. The two fields are expected to produce a combined 740 million barrels of oil and 345 billion cubic feet of gas during a 25 year period.Petrobras' EVM project also closed on June 23. That deal came in at $1.2 billion, with a total debt package of $980 million. The debt financing comprises a $260 million BNDES loan, a $506 million JBIC loan and a $200 million commercial bank loan. All facilities carry a seven year tenor. Equity on the project totaled some $120 million. That project was also made possible primarily by Japanese cooperation; it was aligned with the Barracuda deal ?entirely for convenience,? says a source close to the deal. Barracuda and CaratingaLocation: Campos Basin, Brazil (offshore)Description: Development of promising deepwater fieldsSponsor: PetrobrasDebt: $2.5 billion in debt financing. Lead arrangers are underwriting a $500 million senior secured bank loan. In addition, BNDES will advance up to $800 million of senior secured loans. JBIC will provide a $1.1 billion direct loan.Tenor: 10 yearsLead Arrangers: Deutsche Bank, Industrial Bank of Japan (IBJ), BNP Paribas and HypoVereinsbankLawyers: Baker & McKenzie; Trench, Rossi e Watanabe
Latin America ? transport
Collipulli-Temuco Toll Road
It is difficult to continue to bracket Chilean deals in with the rest of Latin America when it is capable of producing deals of the sophistication of the financing of this section of Ruta 5. The $215 million (US dollars equivalent) bond financing of the acquisition of this stretch of the Pan-American highway demonstrates not only that the recovery in the country's capital markets is real, but that regional governments should give sustained thought to following its example. Financiers Banco Santander Centro Hispano and XL Capital and sponsor Cintra may be the ones to export it, or at the very least corner a number of the new sections up for tender in the coming years.
The conditions that have made the financing (in fact the second of its type in the country) possible are the increased prosperity in Chile and the commitment of the government to the privatization of many state assets and reform of its financial sector. Between 1996 and 2000 alone the assets under the management of its pension funds have grown from $28 billion to 36 billion. However, there are strict limits as to the grades of securities in which these can invest.At which point the monolines come in, transforming sovereign-constrained ratings (usually in the BBBs rather than lower down) into domestically palatable AAA credits. The Chilean government has been fully behind the development of the financing instrument, reasoning that putting domestic capital to work in funding infrastructure would be better than seeing funds head north into the US equities market. The most attractive initial candidates for the bond treatment have been the Chilean sections of Ruto 5, or the Pan-American Highway.The section financed this year runs between the towns of Collipulli and Temuco, roughly 574km from the Chilean capital Santiago. Work to be done includes adding a lane in each direction for 75% of the road's length and strengthening underpasses and verges. The current toll collection system consists of a single toll plaza at Temuco. Upon completion Collipulli will also have a plaza, as will major ramps onto the road, charging a quarter of the rate to local traffic. Concessions are usually awarded on the basis of the highest up-front payment offered, subject to various technical requirements. The concession was awarded to Cintra in April 1998 after stiff competition.The section demonstrates strong and consistent growth in traffic ? at around 9.4% per year ? and consultants' reports measured potential for alternative routes as a result of any toll increase. Nevertheless, the concession (for a term of 25 years) comes with a base traffic level guarantee from the Chilean Ministry of Public works, which starts in 2003. This guarantee can be tranched away from a bond issue carrying volume risk, to be pitched at sovereign lenders, or the bond guarantor can simply wrap the entire package.XL, like its competitors, operates under a zero-loss assumption, in effect that it should never have to pay out. A Vollmer Associates report puts projected average growth at 5.6% per year, but the base case used had a rate of 2.7%. XL has an unconditional and irrevocable obligation to pay any claim, whether as a result of massive economic collapse in the country, or a temporary shortfall in revenues, or even a simple clerical error. As a result, XL's obligations to bondholders are straightforward, but in order to minimize the likelihood of a claim, its arrangements with sponsors can be quite complex. As David Stevens, President of XL Capital Assurance puts it, ?our legal agreement with bondholders probably runs to little more than a page, but our legal documentation with sponsors tends to be extremely complex, just like bank documents?.The first bond in Chile financed the Talca-Chillan section of Ruta 5, and carried an MBIA-Ambac wrap. Since then the Russian default has occurred and Latin America has slowly recovered. Nevertheless, it is a tribute both to the strength of the country's financial sector and competition amongst the monolines that Collipulli-Temuco came out with a 20-year tenor, an advance of over eight years on the previous issue. The bonds were priced at 110bp over the domestic base rate, and were rated AAA by Feller & Rate Rating Agency and Duff & Phelps Chile.Bookrunner for the bonds was Banco Santander Centro Hispano, which also acted as financial advisor to the sponsors. In fact, given its capabilities in pensions, banking and brokerage (as the number one bank in the country) Santander probably has more of a grip on this side of toll road financing than any insurer does on the wrap market. Cross-border bank deals, of which there have been a few in the country, can often bring in deep-pocketed outsiders, but bonds are very much the government's favoured instruments.Moreover, local funding, which for projects in the region of $215 million usually means project bonds, usually has a competitive advantage when matched with locally-denominated revenue that few cross-border deals can match. The insurers will be able to do business where local currency ratings of sovereigns are high enough to achieve an investment grade project rating so that their own ratings are unaffected.Construction has already commenced on the road improvements, using the $83 million equivalent equity from sponsor Cintra (part of Spain's Grupo Ferrovial). This began in May 1999, and was 40% complete by August 2000, the date of the bonds' issue. The contractor is Ferrovial Agroman Chile, with Cintra (which won, through the 407 International, Project Finance's 1999 Transport deal of the year) operating the concession.There are several further concessions up for financing in the country, including non-Ruta 5 work, which may be financed on an NPV rather than a fixed concession basis. Peru and Argentina, and indeed any Latin country which makes solid enough progress in reforming its financial sector, are the next candidates for using domestically-wrapped bonds. Competition will also remain intense, with MBIA, Dexia-FSA and XL all with toeholds in the market. Ellis Juan, Head of Investment Banking at Banco Santander in New York says, ?it is possible to get around seven groups bidding for a concession, as happened in the Norte Sul tender. The urban roads tend to show more variation in bids received than the rural ones?. There will probably be plenty of work to go around, even in a country the size of Chile, or as Stevens puts it, ?The pipeline of infrastructure concessions in Chile runs into the billions of dollars, everything from new roads, water, and airports to takeouts of existing projects initially financed by the banking community. Project finance bonds are going to be essential to Chile's ability to finance its massive infrastructure needs?.Collipulli-Temuco Toll Road financingStatus: closed August 2000Cost: $241.7 millionDescription: acquisition and upgrade of 144km toll road south of Chilean capital SantiagoSponsor: CintraDebt: $215 millionMaturity: 20 years, with a average maturity of 17 yearsPricing: 110bpBookrunner and financial advisor to the issuer: Banco Santander Centro HispanoInsurer: XL Capital AssuranceLawyers to the lenders: Debevoise & Plimpton (international) Claro y Cia. (Chile)Technical consultants: Vollmer Associates, R&Q
Latin America ? merchant power
Bajio (Energia Azteca VIII)
The choice faced by the IPP developer in Mexico has often been summarised as whether to work within the strictures laid down by the government or to opt out altogether. Whilst generation assets in private hands have been springing up for the last few years, developers have usually been obliged to sell all output to the Commision Federal de Electricidad (CFE). InterGen and AEP's Bajio project, on the other hand, is a single-handed attempt to create a medium term market in buying and selling electricity. Its financing, moreover, sets the standard for multilateral co-operation and goes some way to understanding why the US Ex-Im Bank's clients are currently rampaging through the global power markets.
Bajio is not the first Mexican power project to sell direct to corporate clients ? both the TEG deals (see below) and the Monterrey III deal sold capacity to the private sector. The TEG deals ? as well as the more recent Enron Monterrey project ? were created under self-supply legislation as inside-the-fence facilities. Monterrey III had a mixture of CFE (498MW), PPA with Alfa PEGI (388MW) and merchant output (114MW), but was constructed by sponsors Iberdrola on balance sheet, ostensibly for reasons of timing.The rationale behind these additional supply contracts is not only an unwillingness to rely too heavily on the CFE credit at a time of rapid reform in the Mexican energy sector, but also a reflection of the competitive nature of the bid process. The prices offered under the CFE contracts have been driven so low that only the sponsors with the lowest cost of capital and the least demanding return requirements can compete. A creative approach and the ability to oversize a project by adding additional turbines can seriously alter a project's economics. Bajio, originally tendered as El Sauz, is a 600MW gas-fired power station located at Guanajuato in central Mexico. It was awarded to InterGen in June 1999, and AEP Resources bought a 50% stake in December 1999. The bid process itself was fraught, since at that time the legality of bidding additional capacity was open to debate. John Foster, senior vice-president and regional executive for Latin America InterGen, continues, ?up until Bajio, no company had made a material generation investment in a non-fully subscribed CFE project. Since Bajio, most CFE project bidders have followed our lead?. He has a point: the Naco-Nogales (Union Fenosa) and La Rosita (then Rosarito, InterGen) plants all carry plans for extra turbines. 495MW of the plant's capacity acts as the ?anchor? for the plant, a 25-year power purchase agreement with the CFE along the lines of vanilla IPPs in Mexico. This is supported by a fuel supply agreement, also with the CFE, which allows for the pass-through of fuel costs. The remaining 105MW is to be sold to nearby industrial companies under recent regulations permitting large companies to do so. The sales will normally take the form of short, 1-2-year bilateral contracts. Here Bajio relies upon the economic strength of the region, which currently imports some of its power.The financing was grounded on two lending institutions. The first was the Inter-American Development Bank, an experienced player in the market and sine qua non of the independent power developer. The IDB A/B loan facilities both have tenors of 12 years (door-to-door). The $23.0 million IDB A loan is funded directly by the IDB and the $113.0 million IDB B loan is funded by commercial banks. BNP Paribas and Deutsche Bank have underwritten the IDB B loan, with Citibank and Dresdner acting as co-arrangers.The most novel aspect of the deal, however, was the introduction of a comprehensive guarantee from the US Ex-Im Bank to a further $215 million of debt. Exim has been examining the use of cover that goes back into the construction period of a project's life, but has historically been too risk averse. Bajio is the first time that such comprehensive cover has been extended to a project, at least in part because of the presence of InterGen parent Bechtel as EPC contractor for the GE 7FA turbines to be installed.The cover marked an advance for Exim, but also opened up a fresh pool of liquidity in a market where some institutions show signs of lagging. Since the $215 is now backed by the credit of the United States of America it amply qualifies for inclusion in Citibank's GovCo commercial paper conduit. GovCo, where the paper will remain during construction, has only been used for equipment finance before, and marks a project first. Comprehensive cover now appears on the InterGen/Enka deals and the Kepco Ilijan deals, where Exim has contributed to two other awards.Mexico's energy could be undergoing a revamp very soon, with everything from partial privatization to the creation of a spot market up for discussion. In this atmosphere it was difficult to persuade banks to take on the risks on the merchant offtake portion, and this has been guaranteed by InterGen. Mexican growth, Bajio's efficiency and a lack of subsidies for industrial users of the CFE's electricity make this unlikely.The challenge for sponsors, at least in the more populous parts of the country, will be to adapt this in a way to make banks more comfortable with merchant risk. InterGen might be able to increase its equity/sub-debt proportion mix, or a sovereign upgrade may give lenders a clearer perspective on which are the top Mexican industrials. Its next project is the La Rosita plant, which will use cross-border supply and partial offtake contracts to alleviate the southeastern US' power woes.
Bajio
Status: signed 23 June 2000Cost: $436 millionLocation: GuanajuatoSponsors: InterGen, AEP ResourcesCapacity: 600MWFuel: natural gasOfftake structure: 495MW purchased under PPA with CFE, remainder sold under short-term contract to local industrial customers.Financing: $22.5 million IDB A loan, $113 million B loan, $215 covered by Ex-Im construction guarantee through construction and sold through a Citibank conduit.Arrangers: Paribas, Deutsche Bank, Dresdner Kleinwort Benson, CitibankLawyers to the borrower: Hunton & Williams Lawyers to the Lenders: Mayer Brown & PlattFinancial advisors to Exim: Taylor de Jongh
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