Odebrecht signed a $774 million debt financing for its $1.2 billion Chaglla hydro project in Peru on 5 July 2013, after almost 11 months of effort. Negotiating an inter-creditor agreement between Banco Nacional de Desenvolvimento Econômico e Social (BNDES) and the Inter-American Development Bank (IADB) was the main reason for repeated delays to Chaglla’s closing.

Empresa de Generación Huallaga

STATUS

Signed 5 July 2013

SIZE

$1.2 billion

DESCRIPTION

406MW run-of-river hydro project in Huánuco, Peru

SPONSOR

Odebrecht

DEBT

$774 million

LENDERS

BNDES, IADB, BBVA, SG, Crédit Agricole, DNB, SMBC, Cofide, Deutsche

SPONSOR FINANCIAL ADVISER

BNP Paribas

SPONSOR LEGAL ADVISER

White & Case

BNDES LEGAL ADVISER

Shearman & Sterling

A/B LOAN LEGAL ADVISER

Clifford Chance

DEUTSCHE LEGAL ADVISER

Milbank

The Chaglla financing, for project company Empresa de Generación Huallaga, was the first time that BNDES and the IADB co-financed a power project, though the two both featured in the December 2012 financing for the Etileno XXI petrochemical project in Mexico. Chaglla is also one of BNDES’ few cross-border project financings, in which it acts more like an export credit agency than a development bank.

BNDES’ project finance experience has largely been in domestic infrastructure, through which it is very familiar with Odebrecht, a large Brazil-based multinational construction, oil and gas and petrochemicals firm. BNDES typically offers longer tenors and cheaper debt than available from commercial banks.

Odebrecht did not need to wait for a long-term deal to close to start construction. It was able to convince lenders to extend their bridge loans to Empresa de Generación Huallaga on more than one occasion. By July 2013 Chaglla was 65% complete.

Odebrecht had not originally planned to include BNDES, in Chaglla’s lender group. The sponsor had approached the IADB early in the financing process in late 2010. A few months later, it started talking to commercial lenders about the financing. About 15 lenders expressed interest and some even proposed to underwrite a debt package.

BNDES, at that point, was a fall-back, but by the end of the year Odebrecht had come to view BNDES as a necessary complement to an IADB A/B loan. The eurozone crisis was limiting the ability of commercial banks, especially European banks, to offer debt beyond 10 years.

Odebrecht did consider a bond financing for Chaglla. Peru boasts one of the most mature local bond markets in Latin America. Another Brazilian sponsor, Invepar, had closed a combined bank-bond financing for the Vía Parque Rimac toll concession in Lima in 2012.

Odebrecht discussed a potential bond deal with Apoyo, a local ratings agency, but eventually picked a bank financing. Via Parque Rimac featured some construction risk and some revenue risk, though it also benefited from existing cashflows. Earlier bond financings for Peruvian roads featured almost no construction or revenue risk. A bond for a complex hydroelectric plant like Chaglla would have to wait until 2015 and the start of operations.

Even after it had settled on a bank deal, Odebrecht still had to assuage lenders’ concerns about construction risk. Odebrecht declined to offer a full construction guarantee on a financing for Empresa de Generación Huallaga. Construction guarantees are common on BNDES project financings, and the bank prefers to lend against these guarantees. But Odebrecht convinced lenders to share that risk.

Few market observers doubted that a long-term financing would ultimately close, however. Odebrecht has a huge bank following from a group of businesses as diverse as US construction and Brazilian offshore oil and gas.

Chaglla was a high-profile deal spanning multiple countries that launched at nearly the worst possible moment – the peak of the eurozone crisis. Market observers had expected financial adviser BNP Paribas, which participated in bridge debt for Chaglla, to also help finance the long-term facilities, but BNP was not present in the final lender group.

Instead BNP stuck to roles with which it has become comfortable since the eurozone crisis peaked in mid-2011: advising on long-term debt financing whilst, if necessary, joining short-term project loans. BNP had a similar role in the El Dorado airport PPP, in Bogota. French banks’ funding positions have improved markedly over the last 18 months, though like many European lenders it finds long-dated commitments to emerging markets projects hard to digest.

The Chaglla financing ultimately consisted of a $340 million direct loan from BNDES, a $150 million IADB A loan, a $183 million B loan from five lenders and a $100 million Cofide-Deutsche tranche, which Cofide will fund.

The B loan matures in 2030, while the rest of the financing package matures a year later. BBVA and Societe Generale (SG) were mandated lead arrangers on the B loan, with Crédit Agricole, DNB and Sumitomo Mitsui Banking Corporation participating. At least some of the lenders were involved in the inter-creditor negotiations between BNDES and the IADB because they provided interest rate and foreign exchange hedges on the debt.

Chaglla's intercreditor arrangements may serve as a template for other multi-sourced project financings in Latin America. The project will sell power to Electroperú under a power purchase agreement extending a little beyond the tenor of the debt. The 406MW Chaglia project, located in Huánuco, is scheduled to be operational in 2015.