Unlocking the Brazilian debentures market through credit guarantees

Santa Vitoria do Palmar Wind Farm

Context

• The Brazilian government sought to diversify its energy mix and planned to add c. 10GW of power from renewable sources to its national grid by 2018
• To support its energy diversification goals and facilitate a more stable long- term electricity supply, the Brazilian government planned to build the 207MW Santa Vitoria do Palmar wind farm complex (made up of 12 wind farms)

Problem

• The wind farm project was estimated to cost c. USD 320M , presenting a financing challenge because the availability of long-term project loans is limited in Brazil due to the dominance of BNDES
• The remaining alternative was tapping Brazil's relatively immature market for project based debt capital market instruments (debentures)

Innovation

• To support fund raising, IDB Invest3 provided a Total Credit Guarantee (TCG) for a c. USD 24M debenture issuance that partially funded the wind farm project
• The TCG guaranteed bondholders' principal, and interest payments, and includes an additional margin to the holders of debentures
• It also provides a buffer against possible payment for fluctuations in inflation over the term of the debenture

Stakeholders Involved

• Atlantic Energias Renováveis S.A – Equity platform focused on renewable energy infrastructure in Brazil, Developer
• IDB Invest – Private sector institution of the Inter-American Development Bank (IDB), Provided Debenture Guarantees
• Clifford Chance – transaction advisor to IDB Invest
• BNDES and BRDE4 – provided long-term loans to Atlantic Energias to support the project's completion

Results/Impact

• The Total Credit Guarantee was able to lower the cost of the debenture issuance, with bonds having a local1 AAA rating2 – higher than Brazil's sovereign debt rating
• The TCG helped increase the bond tenor to 13.5 years, and was able to generate significant investor interest, with the issuance raising five times the required amount
• The TCG marked the first time that a guarantee was provided in BRL (Reais) for a renewable energy project, as well as guarantee of an infrastructure debenture in Brazil's capital markets

Key lessons learnt

• In countries where capital markets are still maturing credit enhancements have the potential to improve invest-ability of, and mature the market for, infrastructure linked project bonds
• MDBs and other international organisations can leverage guarantee mechanisms such as the TCG to support the adoption of debt instruments in immature markets, facilitating future private sector participation in infrastructure projects
• The provision of a credit guarantee in local currency (BRL) provided financial flexibility and the terms required, to make the project financially viable given the limited supply of long-term financing for infrastructure projects denominated in BRL