Banco Votorantim and Banco Santander have closed a R400 million ($225.8 million) holding company loan for Brazilian renewables developer SIIF Energies do Brasil. The subordinated debt package indicates that even when developers can access cheap project-level debt from Brazil’s state-owned lenders they may still require additional financial products from commercial banks operating in the country.

The eight-year financing is the first of its type and came about because of the tangled recent history of the developer. SIIF do Brasil was once owned by EDF, which pursued renewable projects in emerging markets under the SIIF brand name, but has since consolidated its activities in the sector under the EDF Energies Nouvelles brand. It has also shown a greater preference of late for developed markets.

SIIF, like most Brazilian developers, struggled for years to get its project in a financeable shape despite, or perhaps because of, the Brazilian incentive regime. It won power purchase agreements under Brazil’s Proinfra programme in 2004, which provided for attractively-priced power purchase agreements with state-owned electricity company Eletrobras.

But the PPAs also came with onerous 60% domestic content requirements, part of the government’s desire to promote a domestic wind turbine industry. Working from a standing start, Brazil’s fledgling turbine industry has been unable to produce turbines with a reliability record robust enough to meet the demands of project finance lenders. In the mean time, many international sponsors have opted to leave the market or look at other technologies, including small hydro.
The Proinfa guidelines were eventually relaxed, although not before Alstom, Impsa and Enercon, though its Wobben subsidiary set up operations, and GE and Siemens, the project lenders’ favourites, began to increase their presence. Brazil now encourages turbine makers to set up operations through import duties rather than Proinfa, in part because of the six-year odyssey the regulations inflicted on the likes of SIIF.

SIFF’s plants receive an average of R280 per MWh, and it was able to renew its Proinfa power purchase agreement on a rolling basis, despite subsequent decreases in the prices that other developers offered at auctions. But during the intervening period it changed hands several times. EDF sold SIIF Brazil to Portuguese developer Aeolus in 2005. Aeolus in turn sold the operational and late-stage development SIIF projects to a consortium of Citi, Black River Asset Management and Liberty Mutual in 2008. Aeolus retained three development projects, which it is pursuing under the name Zephyr.

But closing construction financing for the 210MW SIIF portfolio was challenging. The SIIF portfolio consists of 100 Suzlon S88 2.1MW turbines, for which some assembly takes place in Brazil. Suzlon, headquartered in India, has made a concerted push into emerging markets, in part as a result of developed market lenders’ cool reception. Suzlon owns a maintenance facility in Fortaleza, in the state of Ceara, close to the four projects – Icaraizinho (54MW), Praia Formosa (105MW), Foz do Rio Choro (25.2MW) and Paracuru (25.2MW).

The four projects closed separate construction financings with state-owned lenders Banco do Nordeste and SUDENE, an economic development agency with a record of financing hydro projects, in 2009. Icaraizinho received R201.8 million, Foz do Rio Choro R78.9 million, Paracuru R80.3 million and Formosa R338.4 million. In 2007, SIIF closed a R124 million bridge loan and R25 million mezzanine loan with Standard Bank, which was its financial adviser.

The developer also closed a Eu110 million convertible loan with AES, which saw the deal as a chance to gain a toehold in the Brazilian wind market. It already owned utility and generation operations in the states of Rio Grande do Sul and Sao Paulo, but its wind generation is concentrated in the US, Europe and China. The convertible loan, which closed in 2008 was due to become a SIIF equity stake in August 2009. SIIF replaced it with a bridge loan from Liberty Mutual, which was set to mature in June 2010.

The developer’s desire to close longer-term and more stable funding led it to mandate Votorantim and Santander to lead a R400 million eight-year loan. The two leads, given their subordination to the BNB/SUDENE loans, insisted on rigorous performance standards, including a 97% availability record on the turbines, making a nearby maintenance facility vital. The projects entered operations between 2008 and 2009.

But the deal indicates that there are roles for commercial lenders in Brazil, even where state-owned lenders like BNB and SUDENE, not to mention the all-dominating BNDES, offer terms to project lenders that commercial banks cannot match. The length and rigour of the public lenders’ credit processes provide ample opportunities for lucrative bridge loans, to tide projects over, guarantee facilities, which mitigate construction risk, and subordinated loans, to increase sponsors’ leverage. The increased interest that financial sponsors, foreign and domestic, have shown in Brazilian renewables, make further use of these products much more likely.

The Brazilian government, chastened by the torpid progress of the Proinfa deals, held another round of wind auctions, achieving an average price of nearer R149 per MWh, in October 2010. Among the biggest winners in the auction were DESA and Renova, whch plan on using GE-made turbines for their combined 414MW of capacity. Another round of auctions is due in August, and while state lenders will provide the bulk of the projects’ debt, Brazilian banks see a number of opportunities to work around the margins of these deals.

SIIF Energies do Brasil
Status: Closed June 2009
Size: R1.1 billion ($620.9 million)
Location: Ceara, Brazil
Description: Holding company financing for 210MW wind portfolio with Proinfa contracts
Sponsors: Citi, Black River Asset Management and Liberty Mutual
Debt: R400 million subordinated facility, on top of R700 million project-level debt
Project lenders: Banco do Nordeste, SUDENE
Subordinated lenders:
Banco Votorantim, Banco Santander
Financial adviser: Standard Bank
Technical adviser: Garrad Hassan
Legal adviser to the lenders: Souza Cescon Barrieu & Flesch
Legal adviser to the borrower: Pinheiro Neto Advogados