Brazil’s private loan first to prompt project finance spike

Author: Michael Washburn | Published: 19 Sep 2012
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Bank of America’s $479 million loan and guarantee agreement to the state of Mato Grosso in west-central Brazil will radically change Latin American and Brazilian project finance.

The loan, which matures in 2022, is the first private loan to Brazil’s third-largest state. It involved intensive negotiations at the federal level of government, because Brazilian states were previously banned from raising capital market debt.

Moreover, the financing arrangement comes ahead of the 2014 World Cup for which Brazil will serve as host. Interest in the country’s infrastructure and investment opportunities is likely to soar in anticipation of the event, which will take place in 12 cities in Brazil, including Cuiabá in Mato Grosso.

Pinheiro Neto Advogados’ Enrico Bentivegna, who advised on the local law aspects of the deal, said the deal created a benchmark. “Other states will be able to follow the concepts and standards of the Mato Grosso deal,” he said.

Milbank Tweed Hadley & McCloy partners, Marcelo Montesi, who advised Bank of America, said there were overwhelming financial benefits to a deal such as this.

“The savings are really significant,” he said. “We anticipate a lot more deals like this in coming months and we think they will go ahead as long as interest rates maintain their current levels.”

The deal will also enable Brazilian officials at all levels of government to become more fluent with loan agreements used by the commercial bank market.

Structural concerns

The loan had to be structured and presented as something other than a straightforward loan to Mato Grosso, to navigate the constitutional strictures.

Bentivegna said the deal was born as a pure Mato Grosso loan transaction, with no guarantee at all from the Republic, and then months later the Republic stepped in to secure it.

The structure enabled Mato Grosso to pay its debts to the government, tap other sources of liquidity for infrastructure spending, and generally have a much better financial profile.

“Mato Grosso will be able to make investments in infrastructure and other fields,” Bentivegna said. These investments include the financing of roads, mass transportation, water treatment facilities, sanitation, and other areas that visitors and international observers are sure to notice when the World Cup comes to Brazil.

Milbank Tweed Hadley & McCloy partner, Jay Grushkin, elaborated on some of the regulatory issues and the challenges of closing a deal with which officials had limited experience. What might seem to some like uncontroversial language in a loan agreement needed to be explained to officials who had not dealt with the commercial bank market in a long time.

“One big challenge was taking a current form of bank loan agreement, which has evolved a lot in the last 20 to 30 years, and walking the state government through each provision,” said Grushkin.

“The Bank of America personnel, particularly in Brazil, were very effective at managing the process on a daily, if not hourly, basis,” he added.

The constitutional provision that precludes states from incurring debt in the capital markets stems from a traumatic period in the 1980s, when states’ indebtedness to the federal government reached crisis point.

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