When Brazil devalued its currency, the real, in January this year many bankers and sponsors considered the prospects for getting Latin American oil, gas and petrochemical projects competitively financed in 1999 to be grim. Brazil's devaluation blew apart an already damaged Latin American project finance market. And the impact of Brazil on the rest of the economies on the continent is still being weighed up.

At the time of devaluation, oil was wallowing at one of its lowest prices for many years at a little over $10 a barrel and many petrochemical products were, and continue to be, stuck in one of the sector's cyclical troughs. As such it looked set to be one of the toughest years for some time raising limited recourse debt for these assets in the region.

In many respects, the outlook is more or less the same at the end of the first quarter. But there are, at least according to some in the market, tentative signs that there is some light at the end of this particular tunnel. ?Brazil is slowly stabilizing,? says John Laxmi, managing director in the global project finance group at Citibank in New York. ?The country avoided a complete meltdown and there is now a very managed rehabilitation underway.?

But the institutional capital markets may prove to be a better bet for projects than the bank market. ?Over the past month or two there has been a resurgence of interest from investors in Latin American securities,? says Laxmi. ?This is not so much because the fundamentals are OK but because investors can find value in Latin securities as a consequence of prices being beaten down so far. Many investors think that if they invest now then they will reap the consequences when the economic reforms underway begin to work.?

And there has been some capital markets issuance in the past few months including project deals such as Chile's Santiago Airport.

Within the oil sector there has been a large volume of Latin paper placed by firms such as Pemex and PDVSA over recent months. However this debt is based on structured export receivables which at the moment seem the best option for firms that are looking for investment capital for expansions and new developments.

Mexico's Pemex has issued two large oil receivables-backed deals recently. In December 1998 it launched a four tranche $1.5 billion deal led by Goldman Sachs, JP Morgan and Morgan Stanley Dean Witter.

The debt is securitized on oil receivables where buyers of Pemex oil pay into an offshore Pemex subsidiary for the oil. Since then, Pemex has returned using a similar structure and the same leads for a $1 billion four tranche issue which was priced slightly tighter than the previous issue.

Venezuela's PDVSA has taken a similar route into the capital markets. Last year it issued a $1.8 billion oil receivables-backed bond rated at A-/A3. In March, PDVSA, through its offshore subsidiary PDV Finance, launched a four tranche dollar ($800 million) and Euro (Eu200 million) ($212.2 million)-denominated issue led by Credit Suisse First Boston and Goldman Sachs.

More or less at the same time the low global oil prices, while still low compared with previous years are edging up noticeable to well over $14 a barrel. ?The firming up of oil prices has helped some of these economies,? says Laxmi. ?Mexico has been helped most with a near dollar-for-dollar benefit from improved oil prices.? And Brazil despite being a net importer of oil still benefits from the increased hard currency earnings of Petrobras.

Best efforts only

While there may have been a subtle shift in market demand for Latin American oil, gas and petrochemicals since the end of the year appetite is still extremely weak and so far this year there have been no true oil, gas or petrochemical projects financed through the institutional capital markets. The mainstay of the Latin American project finance market, the syndicated credit market, is still extremely cautious about financing assets there.

Much of this is not credit specific. ?Many of the European banks in particular, are just saying no way to Latin American risk ? period,? says one project financier in New York. ?The credit committees and senior management of these firms, who have already taken painful write offs over the past year or two, are simply shooting these deals down.?

Cross border capital allocation capacity in many traditional Latin American project finance syndicate banks has been scaled back dramatically. ?Country risk is a precious commodity and we will only allocate it to our very best clients and we will also expect some serious status on the deal,? says one banker in New York.

But one Latin American oil project sponsor argues that this is a short-sighted view taken by banks: ?Very good export based oil and gas projects in Latin American with strong sponsors have been tarred by the same brush by some banks along with assets such as Indonesian power projects.?

It's a lender's market

But while the sponsors may cry foul, this is a lender's market and sponsors will have to take on board these banks' views. One of the key requirements by most lenders at the moment is for some form of political risk insurance, mainly through export credit agencies and multilaterals. ?Uncovered term Latin project risk is just way off a lot of banks' radar screens at the moment,? comments one Latin American syndications specialist in New York. Despite the insistence on political risk insurance, bankers are realistic that it will not provide a panacea for the business.

?There is only so much that structuring out risk can do,? says the New York-based project financier. ?In the end you could be looking at Brazil and Petrobras risk, for example. And don't forget that Brazil is a net importer of oil. If a company such as Petrobras could not meet its debt payments then even if a firm like Exxon or Mobil was involved in a deal with a remit to market the oil in the case of Petrobras being unable to buy it then do you really think that Brazil would let the oil be taken off Petrobras and sold in the international market??

From a sponsor's perspective, political risk insurance does not add much to a deal according to Ted Helms, international finance manager, at PDV America: ?For oil and gas projects that are export-based, political risk insurance covers primarily expropriation which is not seen as a big risk these days. You have to ask whether these projects in Latin America really need political risk insurance.?

Perhaps some of the strengths and weaknesses of the arguments for and against political risk insurance will be shown by the launch of the general syndication of the restructured and uncovered $675 million Compañia Mega project sponsored by YPF (38%), Petrobras (34%) and Dow Chemical (28%). The project involves the construction of a natural gas separation plant, a pipeline and a fractionating facility in Argentina producing ethane, propane, butane and natural gasoline.

After bringing in ANZ, HypoVereinsbank and KBC during senior syndication, the lead arrangers, Citibank and Credit Suisse First Boston, were preparing to launch the retail phase as Project Finance went to press. In general, the leads are looking to raise around $125 million in debt.

The project's debt is split between a $175 million senior secured note tranche due in 2014 and a $297 million floating rate note tranche. These tranches are rated BBB- by Duff & Phelp's Credit Rating Company. A further $175 million of debt will be sold into the private placement market.

?Mega will be the benchmark for Latin project debt this year one way or the other,? says a banker on the deal. ?At the moment there has been so little activity in the market that how it will be received is really tough to call.?

In other respects Mega shows how the market for these assets is developing. Under the terms of the restructured deal, the sponsors are required to provide additional equity for the project from 20% to 30%. This equity will also now be funded up-front and then pro-rata with the debt elements as opposed to at completion.

The sponsors have also been required to provide joint and several completion guarantees on a portion of the floating rate notes. Such extra involvement from sponsors through both equity contributions and in terms of guarantees is now seen as essential if a project is to attract well priced debt in the markets. The syndication of Mega's debt is also being conducted on a non-underwritten best efforts basis and uncovered basis. Few, if any, banks are prepared to fully underwrite uncovered Latin American oil, gas or petrochemical, or any other sector's project debt at the moment.

While market appetite for these assets remains so uncertain the volume of deals being brought to market over the next few months will remain extremely thin. Sponsors will look for bridge facilities from core relationship banks as with the Barracuda oilfield project off the Brazilian coast which has a three phase, 90 day apiece facility priced at 200 basis points over Libor to 300bp. Equally sponsors may choose to fund the initial stages of key projects through their balance sheets.

Either way, behind the scenes there will continue to be much activity. ?The primary determinant for these deals is whether the sponsors want to go forward in strategic business terms with these projects,? says Ted Helms at PDV America in New York. ?If they do believe that a project makes sense then they will carry on preparing for the financing of the deal even if at the time the markets aren't there. It does not cost that much to prepare for financing and the markets have shown historically that windows of opportunity do appear and sponsors will want to be prepared to take advantage of that window.?

Sponsors of the $3.5 billion Hamaca heavy oil project, PDVSA (30%), Arco (30%), Texaco (20%) and Phillips Petroleum (20%), for example, have delayed their final investment decisions until June partly as a result of the state of the markets. The sponsors are hoping to raise around $2 billion in debt through both the bank and capital markets. With any luck, a window of opportunity may have appeared by then.