OAS: Stadiums, Soles and soccer

With one of the world’s largest international sporting tournaments coming in just over a year, Brazil still has a lot of infrastructure upgrades to complete. During 2012, developer OAS eased the pressure on the Brazilian government by advancing the construction of several significant stadiums in the country. It also played its part in an award-winning transport deal, and, perhaps most significantly, helped regional investors become more comfortable with subordinated debt.

OAS has closed three financings for football stadiums in Brazil in recent years, two specifically for the 2014 FIFA World Cup, Dunes Arena and Arena Fonte Nova, and one other, Arena Gemio. The latest of these, Fonte Nova, is unique for the length of its tenor, compared to previous Brazilian project financings, and a guarantee of base payments by the regional government.

Fonte Nova is an existing stadium located in Salvador, one of the 12 host cities of the FIFA World Cup, in the state of Bahia. The state government auctioned the 35-year concession for the demolition, rebuilding, operation and maintenance of a new Fonte Nova stadium in December 2009, with the consortium of OAS (50%) and Odebrecht (50%) selected as winning bidder. The project has a total cost of R800 million ($408 million).

The granting authority will pay the majority of revenues to the project company, Fonte Nova Negocios e Participacoes (FNP), as 180 monthly instalments starting after the completion of construction. Those payments are split into two tranches; a variable one to cover maintenance of the site, and a fixed one to cover debt service. An independent evaluator will decide on deductions from the variable tranche based on the stadium’s operational performance. FNP and the granting authority will split the stadium’s operational revenues.

The base payments for debt service come from federal tax revenues, with the federal government transferring 21.5% of national tax revenues to individual states through the Fundo de Participacoes dos Estados e do Distrito Federal (FPE). In turn, 12% of the FPE revenue collected by Bahia is reserved for future PPP projects under state law, thus mitigating projects’ exposure to the state’s credit. This arrangement is unique in Brazil to the state of Bahia and helped FNP achieve a longer tenor for its debt. It has also meant that the three lenders in the deal have agreed to an inter-creditor arrangement that shares the guarantees pari passu between them.

Financing for Fonte Nova is made up of three tranches; a commercial bank tranche and two tranches provided by local development banks. Santander is the sole commercial lender, with a 13-year loan of R94 million priced at 360bp above CDI. Banco do Nordeste, the Brazilian development bank for the north-east, has provided a 15-year loan at a fixed rate of 10%, although this increases to 15% as a bonus if all instalments are paid on schedule.

Subordinated debt comes from another public lender, Desenbahia, in two portions, both with a tenor of 15 years, a R50 million loan priced at 500bp over TJLP and a R323.6 million loan with a margin of TJLP plus 190bp. The first loan is funded through state development fund FUNDESE, while the larger second loan is provided through federal lender Banco Nacional de Desenvolvimento Economico e Social (BNDES). All of the debt has a debt service coverage ratio of 1.2x. Signing took place on 22 February 2012, with financial close occuring just over a week later, on 1 March. Construction is expected to be complete by the end of February, with its inaugural football match set to take place on 31 March.

Commercial bank funding using a project finance structure is rare for Brazil, and a 13-year tenor represents very long-term lending for the country. The urgency of getting all of the stadiums ready for the forthcoming international football tournament probably helped move the deal forward at a brisk pace. Many other host cities have struggled to complete projects on schedule, however, and the FPE and the involvement of commercial lenders has given Fonte Nova an advantage.

“Capital markets and commercial debt structures for project finance in Brazil are still evolving, and depending on the stage of the projects, these sources of funding may not be available,” said Fabio Hori Yonamine, chief financial officer of OAS. “In those instances, we have to go after investors that are willing to take on this kind of risk. That is the challenge with these projects.”

OAS’ earlier Dunas and Gemio stadium financings both also used subordinated debt tranches as part of their financing packages. OAS has been promoting subdebt to local lenders on recent transactions, but the market still remains in its infancy. “The Brazilian government has been working to increase the role of the capital markets as a source of long term debt,” Yonamine added. “There are only so many senior lenders in the country, but they are getting more and more comfortable with sharing guarantees and subordinated debt structures.”

Away from stadiums, Invepar, of which OAS owns 30%, closed the financing for the Via Parque Rimac toll road project in Peru. Like Fonte Nova, this project only used a small tranche of commercial debt but was ground-breaking for its host country. It represents the largest project bond in the Peruvian market and is Project Finance’s Latin American Transport Deal of the Year 2012 (see p.65 below). The financing followed on from an earlier deal in Peru, for the Huascacocha water project, which featured a S./321 million local currency bond issue.

OAS, along with fellow consortium members Invepar and Airports Company of South Africa, recently won the 20-year concession for the Guarulhos International Airport in Sao Paulo, the largest, and one of the most congested, in the country. The R16.2 billion project will involve building additional terminals and renovating the aging transport hub. In October BNDES approved a R1.2 billion bridge loan for the development. Like its stadium developments, this OAS project will be vital to the success of the FIFA World cup, with Sao Paulo also a host city.