Although most of the major Latin American economies avoided the worst impact of the global economic crisis, the turmoil in the worlds financial markets and the reluctance of investors to commit capital to new ventures led to the same sharp falls in both general and project loan volumes in the region as elsewhere.

With several countries experiencing growth rates that rival those of China, a pent-up demand for energy and new infrastructure has led to a spike in project development and a return of dealflow, if not to pre-crisis levels, then certainly to more respectable levels. By our estimation, the current project finance deal pipeline for 2011 is in excess of $16 billion.

The slow recovery in 2010

Like markets worldwide, the Latin American debt market started to pick itelf up off an unprecedented low in 2009, recovering to a total deal volume of about $20.4 billion from a disastrous $7.1 billion in 2009. This is vast improvement, but still lags pre-crisis levels that typically saw annual volumes of roughly $40 billion. And as might be expected from a market still shaking off a hangover, activity increased during the course of the year, only really taking off towards the end of the third quarter, driven mostly by corporate loans in Brazil and Mexico.

Project financings, with their long gestation periods, naturally lagged behind, representing about $3 billion, or roughly 14% of total Latin American deal volume for 2010. Banks continued to be cautious, most transactions were executed on a club basis and limited underwritings were only possible for select and key relationships. Adding to the caution, the onset of the European debt crisis halted the decline in banks cost of funds that had kicked off in the second half of 2009. But with dealflow still sluggish, strong pressure to meet budgets meant there was heavy competition for those deals that were in the market, and most banks swallowed the margin squeeze and lengthening of tenors. Local and regional banks solidified their presence, becoming increasingly competitive and liquid. The bond market also took advantage of the turmoil in the bank market, with opportunistic issuers availing themselves of attractive terms both for corporate and project refinancings.

Cruising to better times in 2011

The benevolent climate continued into the start of 2011, with the project finance market looking at a banner year. Banks cost of funds appeared to have stabilised at reasonable levels, allowing them to provide sponsors with meaningful proposals where the primary focus was no longer on market flex and yield protection clauses. Since 2010 did not come close to making up for the slow deal flow of past years, those banks active in the sector had plenty of capital available. Just as importantly, the year kicked off with governments and developers focused on a number of headline projects. The number of transactions closed in the first half of 2011 was still relatively low, largely due to the continuing project development process and the normal kinds of delays that typically affect projects in the region, rather than a global economic meltdown or some other calamity.

Two of the largest project finance deals that closed in the region in 2011 through June were the Norte II power project in Mexico and BTP port in Santos, Brazil. The $335 million, 433MW Norte II financing was notable as the first gas-fired independent power project awarded a contract through a public bid conducted by state utility CFE since well before the start of the crisis and for marking Korean sponsors first entry into the regions electricity sector, in this case KEPCO, the South Korean government-owned utility, and the conglomerate Samsung. Not only that, but the project achieved a 23-year financing tenor from the Korean Export-Import Bank, both under a direct loan and a guaranteed tranche that was funded by commercial banks, and a 20-year uncovered tenor. Following BTP in the second half of 2011 will be larger deals like the upcoming closing of nearby Embraport, also in Santos, Brazil, and the launching of airport, rail, roads and stadium bidding processes.

In the first half of the year several wind power transactions closed in Mexico, both with CFE and with private companies as offtakers. These were not the first wind farms to be financed in Mexico, but they were the first to be closed with commercial banks rather than multilateral lenders such as the Inter-American Development Bank (IADB) and International Finance Corporation (IFC), which closed several such deals during the financial crisis. Although the development of renewables in Latin America has lagged behind other areas and the policy frameworks vary widely by country, they are finally gaining some traction and such projects are expected to make up an increasing percentage of dealflow in coming years. Another important component of the wind financings with private offtakers was that, since several of the offtake contracts were denominated in Mexican pesos, the financings were too, through a combination of Mexican banks and international banks with access to peso funding.

Brazil, the regions biggest market, has an active power auction program encouraging the development of wind energy and has long been among the worlds leaders in the development of hydro projects, including several mega projects in recent years, though there are questions about whether these large hydro projects are truly environmentally-friendly. But with the financing market in Brazil dominated by BNDES, the national development bank, the commercial banking market has been more focused on the newest fast-growing Latin American economy Peru.

The new tiger Peru

Like Brazil, Peru has been conducting auctions for renewables, and by mid-year, no less than 10 projects were actively seeking financing, including the winners of solar, wind and hydro auctions. Peru is also trying to take advantage of its domestic gas reserves, with a planned expansion of the countrys main TGP pipeline and the opening up of new areas for exploration. The location of the gas reserves in Perus Amazonian region has slowed what has already been a long process, but at least one major new gas-fired project, AEIs Fenix, is expected to close financing shortly.

However, the election of presidential candidate Ollanta Humala has given temporary pause to this bandwagon. He ran his political campaign by claiming to a leader in the mould of Brazilian president Luiz Incio Lula da Silvarather than Venezuelan president Hugo Chavez, and his initial appointments after his election including those in the energy sector seemed designed to boost that impression. While market players have taken a wait-and-see approach, there has not been any change in banks behaviour or a slow down in activity. The market expects that Peru will continue respecting the policies of the previous administration allow the country to continue to attract the investment in infrastructure and energy assets needed to boost the countrys economic growth.

In March, the Consortium APM Terminals Callao won a 30-year contract for the Muelle Norte project, which stipulates investments of over $700 million to modernise and upgrade Perus busiest port location. This new contract follows the inauguration in October 2010 of the Muelle Sur port, operated by DP World, which invested over $500 million and will be able to handle soon 1.2 million containers annually. Continued investment in roads such as Linea Amarilla (sponsored by Brazils OAS and requiring over $600 million in investment), water treatment plants, port facilities designed to serve mining assets, as well as in airports and services are expected.

Fewer and larger deals from Colombia and Chile

Things were less eventful in Perus neighbours to the north and south, Colombia and Chile. In Colombia, an especially active second half of the year appeared to be in the cards. Many projects in Colombia were financed on a corporate basis, thanks to the strength of the domestic market and the ability of Colombian borrowers to access international bond markets. The number of transactions pursuing project financings was low compared to Peru, but those that were expected to materialize made up in size what they lacked in quantity. The $2.5 billion Refineria de Cartagena (Reficar) and the $3.0 billion Bicentenario pipeline were large enough that despite ownership by, and significant corporate support from, the state-owned oil major Ecopetrol and tapping export credit agencies for very large debt amounts a level of commercial bank project financing will be needed to fill out the capital structure. Last August, Colombia was able to attract a complex financing package for a greenfield port asset located in Buenaventura, TCBuen. The new port was inaugurated in May and is expected to handle 250,000 TEUs in 2011. Operated by Spanish terminal operator Grup TCB, the port received investments over $240 million, and is desiged to foster economic growth in this region of Colombia. But as Colombia focused on developing its hydrocarbon reserves and associated infrastructure, there was little movement in the renewables sector.

Chile also experienced a presidential transition in the first half of 2011, though the markets barely noticed. However, it was the newly-elected centre-right president Sebastian Pinera who vetoed the development of a controversial coal-fired power plant after the Suez-sponsored plant had received its environmental approval. An even more significant project, the $3.2 billion, 2.75GW HidroAysn hydroelectric project from utilities Endesa and Colbn, which would entail five dams and the flooding of thousands of hectares of nature reserves, remained clouded in environmental controversy. A governmental decision to approve the project was followed by street protests and polls show that almost three-quarters of the population oppose it. Equally problematic was the 3,000 km transmission line that would be required to bring the power to populated areas, passing through additional nature reserves and indigenous lands.

Chiles attempts at encouraging more environmentally-friendly energy have been only partially successful. Rather than state-supported contracts, the country has required generators and distributors to secure a percentage of their energy from renewable sources. Although the penalties for failure to comply were relatively low, this is nonetheless leading some large end-users, particularly some of the many large mining companies, including the state-owned copper company Codelco, to enter into their own arrangements with solar, wind and small hydro producers. Some of these projects are expected to seek financing in the second half of the year. Chile also had to cope with a severe drought, which curtailed hydro generation and caused electricity prices to soar. This meant that the handful of wind projects that had previously been built on a merchant basis were thriving.

More of the same from Mexico

Back in Mexico, the outlook was for more deals from familiar sectors, with Baja California III, another gas-fired independent power project that will sell power to the state-owned Comision Federal de Electricidad, scheduled to be bid in early August and more third-party offtake wind financings, including the Mexican peso-denominated Soria project for Macquarie, which looks set to shatter records for peso-denominated project financings.

There was less progress elsewhere in Mexico, however, as the market waited for final bidding rules on a programme of gas pipeline procurements that was supposed to start in 2010. These pipelines are needed to deliver gas to other gas-fired projects that the CFE has under development, which are stalled while the pipelines remain on paper. Further investment in infrastructure continues, but not at the level of pre-crisis deals like Farac. Peso-denominated revenue streams (as compared to the US dollar-denominated power purchase agreements with the CFE) pose some challenges to some project finance lenders, but creativity and further collaboration is needed with entities such us Banobras to increase international bank involvement.

Targeted opportunities in small, stable countries

Bankers are looking at opportunities in countries in the region that received scant attention in the past. Uruguay successfully conducted one wind auction in the first half of the year and was planning for a follow-up, in an effort to reduce its reliance on hydropower and expensive diesel generation. With a very strong economy (it was the only country in the Americas that did not technically experience a recession between 2007 and 2009) and stable political situation, developers and banks alike saw the country as an attractive, although relatively small, target. In Costa Rica, smaller in area but with a slightly larger population, state owned ICE has plans for a large hydroelectric plant which will shortly be seeking bank financing. Dutch operator APM won a concession to expand the Limon-Mon port on Costa Ricas Caribbean coast, which is scheduled to be completed by 2016 and estimated to require over $900 million in investment. These deals will need the backing of the traditional infrastructure financiers.

This year and beyond

In light of the busy times, for resource-constrained banks the ability to pick and choose should be the flavour of the next 18 months. Clubs will still dominate the landscape, with a discrepancy in terms reflecting top-tier relationship-driven deals setting new benchmarks while the rest of the pack deals will give bankers a break. A slow entrance of retail investors will provide the means of executing the large volume of transactions expected in the near future.

Jared Brenner is an executive director in the global energy group; Maria Rosa Garcia Otero is an executive director in global syndications; and Fuensanta Diaz Cobacho is managing director in the global infrastructure group at WestLB.