Energy companies in Brazil need to finance their projects locally since their revenues are denominated in reais and government regulations ban power generators and distributors from linking their prices to the dollar. But borrowing in Brazil is difficult because there is so little affordable long term real-denominated financing available.
Yet Maesa, a consortium of energy companies that is building a hydro power plant in southern Brazil, was still able to raise $145 million with a 12-year debenture issued in April 2001. This was only possible because investors had the option of selling the bond after four years to the federal government’s BNDES national development bank, by exercising a put option against the bank, which is also a creditor of the project. Maesa was able to raise the financing needed to complete its Machadinho power plant and minimize currency and refinancing risks at a reasonable cost.
“It is almost impossible to hedge for such a long period of time and it is very difficult to create a currency derivative,” says Vinícius de Queiroz, director of local capital markets for Citigroup Brazil. “It was very important that the sponsor not have a refinance risk in this project. It’s impossible to go 12 years and it was necessary to have a put and call feature.”
The bond’s structure also benefited BNDES by allowing it to reduce its financial contribution to Machadinho and free up resources for it to finance additional energy projects elsewhere in the country. Brazil has not adequately invested in power generating capacity to meet the growing demand for energy and had to impose power rationing in 2001 that helped cut economic growth.
“At the time, it was very important for BNDES to make this deal a success, ” says Maurício Leite, associate at Citigroup Brazilian investment banking. “BNDES had to find new ways to finance projects. It was very important to have a good first transaction so that it could be replicated in other projects.”
Maesa is a special purpose company incorporated in 1999 to finance the construction of the Machadinho plant, a concession shared between Gerasul, a local generation company controlled by Belgium’s Tractebel and by Maesa’s 11 shareholders. They include Brazil’s Votorantim group, Camargo Correa, Alcoa Alumínio and Valesul.
At the time of the debenture issue, 78% of the plant was complete and commercial operation of its first generator was scheduled to begin early this year. When the third generator begins operating in July, output should reach 1.14 megawatts of electricity.
The proceeds of Maesa’s contracts to deliver energy are equal to the funds used to repay debenture holders and support the operating expenses of the hydro plant. This separates the concession agreement of each sponsor from the special purpose company and avoids regulatory constraints. Maesa’s shareholders are either heavy energy users or energy distribution companies and the electricity generated by Machadinho will be distributed to them according to their respective stakes in Maesa.
The consortium originally tried to finance the project with equity and loans from multilateral lenders and BNDES. But the multilaterals disliked the mismatch between the project’s real-based revenues and plans for dollar-linked debt. When the external agencies bowed out, Maesa turned to BNDES for funding. But the bank would only lend up to $155 million. Maesa’s shareholders would also have to put up $155 million in equity.
With the help of Citigroup Brazil, Maesa was able to raise almost all the money in the local market. “We had to fit the interests of the investors and BNDES,” says de Queiroz, “Instead of BNDES having a direct financing for two-thirds, it has a contingency.” On the Brazilian rating scale, Standard&Poor’s rated the bond br AA-, and Moody’s assigned it an Aa1.br rating.
Marcelo Saddi, fixed income fund manager at Banque National de Paris, says the shareholders´ background, the project’s structure and purpose, the yield and the put against the BNDES made the bond worth buying. “The fact that a recognized governmental entity like BNDES is supporting the project is very important,” says Saddi. “It shows how committed the shareholders are. And although we recognize the shareholders’ financial capability, it is an additional guarantee that this project will succeed.”
The coupon was initially set at 75 basis points over the CDI overnight interest rate. But the issue was three times oversubscribed and strong investor demand drove the final coupon down to 43 basis points over the CDI.
BNDES may hope that investors will not exercise the put, but without such a feature, the debenture would never have succeeded. Four years is considered a long-term investment in Brazil. Citigroup has made a full commitment to BNDES to remarket the paper after four years and if the investor base isn’t there, then the development bank will buy the paper from the original buyers. “Since this project is very sound in terms of sponsorship it’s reasonable to suppose that investors will continue to be interested,” says Leite.