Brazilian LNG-to-power: BNDES bears GNA cash brunt – again

Brazil’s LNG-to-power market hosted two of the largest such financings in 2018 and 2019 to date – CELSE’s Sergipe deal and the $1.2 billion 1,338MW UTE Geracao de Energia (GNA I) gas-to-power project respectively. Each project benefited from heavy DFI backing and innovative ECA support, which proved integral to getting the deals across the financial line.

Some GNA I deal-makers predicted the second phase of the scheme, a 1.7GW gas-fired power project, would start to shift the existing LNG-to-power financing templates towards pure commercial bankability in the world’s ninth largest economy. But, as deal details emerge, this private sector funding prophecy has been rendered hollow.

When sponsors of GNA II (and GNA I) – Prumo Logistics (owned by US-based fund EIG Global Energy Partners and Abu Dhabi-based investment company Mubadala Capital), BP and Siemens – started sounding out banks in November last year, debt was expected to be provided by private institutions acting as lenders. GNA II is now more likely to mimic the structure of its predecessor GNA 1, which was backed solely by DFIs, including: BNDES, IFC and KfW.

But this time round, BNDES is expected to put up around 90% of the debt package stapled to GNA II, which has a total project cost of $1.5 billion. Financed on a debt-to-equity ratio of around 75/25, the second stage has a significantly higher debt leverage than GNA 1, with the Brazilian development bank shouldering just shy of $1 billion in debt on GNA II. The remaining 10% is expected to be funded by the issuance of infrastructure debentures (either on local or international markets).

GNA II’s financial adviser on the deal – Santander – has also provided a credit commitment to the project vehicle, although it has not been confirmed whether this facility will be drawn. Traditionally, BNDES does not take on construction risk, and therefore Santander could be tapped by project sponsors for working capital or a bridge loan. Andrade Gutierrez is EPC contractor. Commercial operation is scheduled to come online in 2023.

Drawing on precedents  

The $1.74 billion financing for the CELSE LNG-to-power project marked firsts for the involvement of ECAs in capital markets financings, as well as Brazil’s local currency project bond market. But the local currency bank-bond financing template for the project has yet to be repeated, with ECA bond wraps still yet to take off. Either ECAs just aren’t ready to roll out such product innovations, like SERV, which backed Sergipe, or this structure just simply isn’t as easily repeatable as first thought.

GNA I was the next test case for project sponsors. SPV GNA I, which uses the same name as the project (located in the Port do Acu region of the state of Rio de Janeiro, known as the largest port-energy-industry complex in Brazil), was set-up to fund construction of a CCGT power plant, an LNG import marine terminal, a transmission line and expansion of an existing substation. The integrated nature of GNA I meant there was greater risk to financiers, and therefore the scheme was backed by a lower debt-to-equity ratio of 64/36. Commercial operation is scheduled for 2021.  

Signed on 15 March 2019, the debt structure remained the same on meeting conditions precedent in August when sponsors closed a $763 million ECA/DFI-backed loan. The IFC provided a $288 million 15-year dollar-denominated loan, although the SPV will receive the loan in Brazilian reals, with the exchange rate from the date of disbursement. In short, GNA 1 is liable only for the amount in local currency, without being exposed to currency risk.

GNA 1 had already signed in December 2018 a R1.76 billion facility with BNDES (approximately $475 million at the closing of exchange rates), which benefited from a 5% guarantee from KfW IPEX-Bank and 95% cover from Euler Hermes – the tranche relates to a contract with Siemens to provide turbines for the gas-fired plant (this will be the first application for the Siemens H-class gas turbines in Brazil). Historically, ECAs are not allowed to cover development banks loans, but there has been cases – like Markbygden in the renewables sector in Europe – and in the instance of GNA I, KfW backed the financing from BNDES, which in turn was supported by Euler Hermes.

The advisory line-up included Pinheiro Neto, Milbank and Souza Melo Torres. However, it is unclear whether the same advisers will be used on GNA II, although Mattos Filjo is local legal counsel to the sponsors.

GNA II headaches

GNA II, which is backed by a 25-year PPA with a tariff of R213.91 ($55.10) per MWh (starting January 2023), hasn’t been without trial. For example, one such hurdle to the project is the fact project sponsors needed the installation license from the local government of Rio de Janerio to be allowed to proceed with the financing.

Rio’s governor Wilson Witzel remedied the situation when he signed the license at the end of last month allowing sponsors to install the second stage, which could potentially attract energy-intensive industries directed to exports.

GNA II’s funding mix contrasts BNDES’ revised mission statement on reduced participation in large-scale project financings too, with its bid to leave more room for private investors continually falling far short of the mark. Market observers have in fact said the capital markets would be more than comfortable to pick up this type of deal. 

And given there is a growing trend of capital markets transactions repaying development banks’ loans in Brazil – Brazilian wind portfolio company Ventos do Sul is to issue R325 million in debentures to refinance debt raised from BNDES in 2005 – there is a chance the private sector might still get a piece of the GNAII debt portion – albeit indirectly. But given the primary debt volume of the second phase, much will depend on market appetite.

With interest rates in the country in a precipitous fall, deal participants say it would come as no surprise if the project vehicle raised more than needed to fund the second phase in order to service outstanding debt attached to GNA I. After all, GNA II is the largest thermal power plant in Latin America.

BNDES says it has outlined various potential follow-on LNG projects that could be spawned by the GNA projects including: a virtual pipeline system for transport and distribution for customers outside the transportation network; the construction of a gas pipeline connecting the terminal to the 50km transport pipeline network, linked to the GASCAV; the possibility of connection with Route 2 offshore pipeline (Macaé); and a modular natural gas processing capacity.

The economic scenario in Brazil reflects an imminent reduction on government spending, which will certainly have an impact on BNDES' role going forward. Coupled by historically lowest yield rates and positive expectations for infrastructure projects in Brazil, there will undoubtedly be an uptick in private sector participation in such schemes. But private players are going to have to wait patiently for now to see if these prospective projects are viable for pure commercial bankability. While the omission of ECA backing from GNA II is progress, it looks like BNDES will continue to bear the brunt of project finance capacity in Brazil – for now at least. 

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