MPX Energia and Energias do Brasil (EDP) closed the dollar- and reais-denominated long-term financing for their $1.36 billion Porto do Pecem project in Brazil on 10 July. The Porto do Pecem unit is a 720MW facility, located 40km from Fortaleza, in the state of Ceara in north-eastern Brazil.

It is the first financing for an imported-coal project in Brazil. The success of the deal can be explained in a large part by the early preparations of the sponsors in agreeing terms between themselves, securing licenses and talking to the Inter-American Development Bank and BNDES.

Even before the energy auction in October 2007, the sponsors had already secured an installation license – a first step before obtaining a preliminary environmental license – and had been talking to IDB and BNDES about financing from May 2007 onwards.

"As a coal project, lenders had concerns about greenhouse gas emissions, particularly development banks and multilaterals," says Carlos Andrade, finance director at EDP Brazil. "So we took an early upfront decision to procure flue-gas desulphurisation technology (FGD), and used EDP's experience in developing similar projects in Europe."

As the plant runs on imported coal and uses Siemens turbines and Doosan Babcock boilers, it was difficult for domestic development bank BNDES to provide all of the funding, so it was decided that the deal would require an IDB US dollar A/B loan.

"The biggest challenge was putting together the financing structure because we needed a long tenor for a good rate of return and we managed to obtain 17 years," says Rudolph Ihns, chief financial officer at MPX. "Because of the changing market conditions we needed to very quickly change our strategy and went to a club deal."

The project is financed with a debt:equity ratio of 75:25, with the two sponsors each contributing 50% of the equity, and the dollar debt benefits from foreign exchange and Libor hedges. The BNDES loan is for R1.4 billion ($710 million), has a 17-year tenor, a 14-year amortisation period and a grace period on interest and principal till July 2012. It is priced at 277bp over the TJLP benchmark rate (8.77% per year at February 2010).

The IDB debt consists of a 17-year $147 million A loan directly from the bank, and a 13-year $180 million B loan, for which Millennium BCP, Caixa Geral de Depositos and Calyon are arrangers. The A loan is priced at 350bp over Libor and the B loan at 300bp. The minimum debt service coverage ratio is 1.3x and there are sponsor guarantees in place during construction.

When the sponsors first went to eight commercial banks in July 2008, they targeted a margin of around 210bp for the B loan portion of the debt but had to increase this by 90bp after the financial crisis, and increased the A loan margin by a similar amount, but the BNDES pricing remained fixed. Fortunately the sponsors never came close to losing a bank, despite financing a new asset class with a long tenor. They were able to obtain such relatively advantageous terms due to the robustness of the project and their relationships with BNDES, IDB and the three commercial banks.

From a lender perspective the two key credit risks were the currency risks and the offtaker counterparty risks – both are well mitigated. The sponsors' success in the energy auction allowed the project company to sign power purchase agreements with 32 different offtakers for 615MW over 15 years, starting in January 2012. The generator receives a fixed capacity payment, and a variable dispatch component whereby it is allowed to pass through all fuel costs to its customers. Because the coal for Pecem is benchmarked against the CIF ARA coal price, which incorporates transportation fees to Europe, the project has a small cost advantage as it sources its coal from the southern hemisphere, primarily Colombia.

The regulated PPAs are fairly secure because the offtaker group is so large and disparate and because the distribution companies that buy the power directly guarantee their offtake agreements. In the event that one of the offtakers becomes insolvent, the government would step in to continue the distribution concession with the end-user fees passed through into a central account that pays the generator.

The sponsors moved quickly to hedge the foreign exchange and interest rate risk associated with the equipment that would have to be paid for in dollars, which accounts for around 40% of the project costs. The sponsors are obliged to hedge 100% of both currency and interest rate risk at all times. They executed both interest rate (10-year) and foreign exchange (five-year) hedges on the day of the auction, with some small adjustments before the long-term deal was signed.

In February 2008, Citi was mandated as financial adviser, and also arranged and syndicated a bridge loan for the plant, which allowed the sponsors to make progress payments on their longer lead-time pieces of equipment. Participants in the $270 million bridge were Citi, Banco do Brasil, Banco Espirito Santo, Millennium BCP, ING, and WestLB.

The sponsors agreed with IDB, in a separate agreement outside the project financing, that 10% of the carbon dioxide emissions from Pecem I be offset with renewable energy projects to be developed throughout the life of the loan. The shareholders also signed an agreement that includes a cure undertaking, under which one of the sponsors can replace the other, if a wider sponsor default would threaten the project. So rather than the project slipping automatically into default in case of insolvency of one of the sponsors, the other sponsor has the option to step in and avoid default on the project.
Progress of the project is around 50% complete and on schedule to be in operation before the end of 2011. One disbursement has been made under the BNDES facility of R700 million and 80% of the IDB debt has been disbursed.

Porto do Pecém Geração de Energia S.A.
Status: Signed 10 July 2009
Size: $1.36 billion
Location: Fortaleza, Brazil
Description: 720MW coal-fired plant at Ceara, Brazil
Sponsors: MPX Energia, EDP (each 50%)
Debt: $147 million IDB A loan, $180 million IDB B loan, R$1.4 billion BNDES loan
Maturity: 17 years (IDB A loan, BNDES loan), 14 years (B loan)
B loan providers: Millennium BCP, Caixa Geral de Depósitos and Calyon
Financial adviser: Citigroup
Borrower legal counsel: Mattos Filho, Veiga Filho, Marrey Jr e Quiroga (Brazil) Allen & Overy (US)
Lender legal counsel: Felsberg, Pedretti, Mannrich e Aidar (Brazil) and Clifford Chance (US)
EPC contractors: Maire Tecnimont, EFACEC
Technical consultant: Sargent & Lundy