Aratinga financing reveals new BNDES possibilities

Author: Michael Washburn | Published: 25 Sep 2012
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The recent $104 million loan supporting the Aratinga wood-to-energy greenfield project on Brazil's east coast signals the beginning of a new era for project finance, according to local lawyers. Here's why.

The project, being built by renewable energy start-up Energias Renováveis do Brasil (ERB), is thought to be the world’s first petrochemical plant powered by biomass-produced steam.

It is the first time Brazil's development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), has directly financed a wood-to-energy project. It approved the ERB loan on June 28.

"BNDES has been broadening its scope of action, acting on all sectors and providing equity to very high-profile deals," said Paulo Padis, a partner at Stocche Forbes in Sao Paulo.

The Aratinga project is a novel co-generation facility that will, over a phasing in period, replace the natural gas-fired steam supply in the city of Candeias, Bahia. It is a revolutionary power model, and its financing reflects the banking sector’s willingness to fund endeavors far beyond the familiar infrastructural and energy industries.

Wood-to-energy is not the type of project that would have won lenders over even 10 years ago, observers say.

Padis described how BNDES's financing of projects has developed sector by sector in recent years. The bank has gone through a process of focusing on a particular industry, achieving substantial success, encouraging investors and welcoming new market participants, and then moving onto a new sector.

BNDES used to intensely focus on the development of small hydroelectric plants. It then achieved phenomenal victories with wind projects and infrastructure development, bringing many startups, alternative energy vehicles, and international lenders into the market.

Encouraged by these successes, BNDES has forged ahead into other alternate sources such as biomass.

"It's good to see that they are supporting the development of new areas, and biomass electricity generation is one that will not flourish without BNDES support," Padis said. It is tough for biomass to compete with a more established and more traditional fully hydroelectric base. “It needs government participation," he added.

Beyond Brazil

The significance of this deal goes far beyond Brazil. Wood-to-energy projects are relatively inexpensive, environmentally friendly, and feasible in other parts of Latin America. But more importantly, BNDES is increasingly looking to lend beyond its traditional pool of locally-owned project sponsors.

For example, Carlos José Gómez of Lloreda Camacho & Co in Bogota has advised on a number of BNDES project financings, including its 2010 funding of a subsidiary of ISA, Colombia's state-owned power company.

BNDES has proven itself willing to provide financial support to non-Brazilian-owned projects. For projects in Colombia, they have the added incentive of a new private-public-partnership (PPP) law that provides many guarantees to financial institutions that are considering becoming lenders in such projects.

"Under the new PPP law, lenders can take control of a project in case of default. In the past, we had these projects, but we didn't have this provision of the new law," Gómez said.

"We have a lot of expectations with these new laws, providing a legal framework [favorable to] possible lenders. I think you are going to see projects like [Aratinga] here in the next few years," he said.

The Aratinga project involves a debt contract between ERB and a trio of local banks. The lead arranger is Banco Votorantim, which provides 34% of the debt, followed by Banco Itau and Banco Bradesco with 33% each.

See also ‘Brazil’s private loan first to prompt project finance spike’