Cross-border project financing could thrive in troubled Brazil

Monday, January 30, 2017

Projecting financing in Brazil has long been the domain of development bank BNDES and government-controlled commercial banks Banco do Brasil and Caixa Econômica Federal, but changes are starting to take place, opening up the market to other financial institutions.

The country's crises, both political and economic, have also affected the project finance market, but according to John Anderson (pictured, right) and Victor DeSantis (left), partners at White & Case, this could all now be in the past.

BNamericas spoke with Anderson and DeSantis about whether or not their clients have shied away from transactions in Brazil in the wake of the Lava Jato corruption scandal and what more diversified sources of funding could mean for the project financing market.

BNamericas: What would be an example of the types of cross-border transactions you deal with?

John Anderson: In recent years, we have done a lot of things in the oil and gas space. In particular for the financing of drilling rigs, FPSOs [floating production, storage and offloading units] and other vessels for the oil and gas industry.
BNamericas: Have either of you run into any problems in your work related to the Lava Jato corruption scandal?
Victor DeSantis: I think it's safe to say that anybody doing business in Brazil has interests in the Lava Jato developments and the potential impact that they may have on participants in transactions they may be looking at. Whether that is perhaps as a result of the investigation, an entity being prohibited from doing certain kinds of business or being subject to significant penalties. So yes, it has been of interest to people looking to do business in Brazil, either sponsors or lenders or in other capacities.
BNamericas: Have you seen clients shy away from Brazil because of this?
Victor DeSantis: I don't think shy away, no. I think it's more of vigilance and staying informed. But I don't think I've seen anybody abandon Brazil because of what's going on. It's just a matter really of diligence and, as I said, staying informed.
BNamericas: Other than dealing with the Lava Jato scandal, what would you say is the biggest challenge you face when working in the Brazilian market?
Victor DeSantis: In our particular sector I would say that the biggest challenge we've faced, and that everybody is facing, is oil prices. A lot of our activity and a lot of the project finance activity in Brazil has been in the offshore sector, as John mentioned, and oil prices, going in the direction that they've gone, that's reduced opportunities for new projects and put existing projects under stress.
BNamericas: The role of Brazilian development bank BNDES is being scaled back, creating more room for other financial institutions to get more involved in project financing. How do you think that will affect the way transactions are done here?
John Anderson: It's a recent change and a recent development, the announcement that BNDES will decrease the amount of its financing for projects. As a result of that we are seeing a lot of prospects for future transactions that are being financed in particular by foreign ECAs [export credit agencies]. I think we can confirm that we are seeing different sources and different players considering the Brazilian market, given that for a very long period most of the projects in Brazil were financed by BNDES and other public sector banks, like Banco do Brasil and Caixa Econômica Federal.
BNamericas: Are you able to comment on which other institutions are showing interest?
John Anderson: No, not at this point.
BNamericas: With all these changes happening, what do you think is the future of project financing in Brazil?
Victor DeSantis: It's tough to say, but I think that there are reasons to be somewhat optimistic in that, obviously, Brazil and the market have gone through a difficult period, with what I mentioned that's happened in the oil and gas market and the ongoing effects of the Lava Jato situation. But there seem to be indications that perhaps things are moving on, and oil and gas prices are starting to stabilize. And we've been hearing from clients expressions of interest in some new projects, whereas for a period there were certainly fewer of those than there were in the past. So there are signs that things are perhaps turning a corner.
John Anderson: I'm optimistic as well. I think that as a result of the decrease in BNDES and public financing, we have been following several discussions conducted by commercial banks that are players in the industry to understand better best practices of project finance and how things are done in different markets. Generally, I think, Brazil is preparing for a new wave of project finance in a more complex manner and following international practices. So we have been discussing with several banks best practices on collateral packages, direct agreements with project parties, and other things that have not necessarily been considered in Brazil in previous financing [transactions] where public banks were providing the majority of funds, where banks were guaranteeing the financing of public banks through completion. So we welcome the debate and the perspective of sophistication in the market and in the project finance practice, generally.
BNamericas: Why is it important for the market to have funding coming from private banks as well as public institutions?
John Anderson: For the Brazilian market, it would be very important to have a diversified base for financing or diversified financing sources, including commercial banks, including international banks, ECAs and options in the capital markets as well. In the offshore space, in the oil and gas space, we have seen commercial banks and ECAs being involved, and I think we expect that this trend will also be seen in other areas in Brazil, in particular in the infrastructure space, and others. Again, I think one thing that needs to be said that it is a challenge for international finance in Brazil is the fact that most of the revenues of projects are in reais. So there is always a discussion on how to address the foreign exchange mismatch that would result from a financing in dollars vis-à-vis the revenues in reais. But that said, there are certain sectors in Brazil in which this problem would be less relevant or less material, like the port sector, airport projects and certain power projects as well. So back to your question, it will be a great thing to see diversified sources for financing for the Brazilian market.
BNamericas: What makes those last sectors that you mentioned different than the others?
John Anderson: Those sectors would have some kind of US dollar component to the revenues or US dollar indexation.
BNamericas: So then what makes it worthwhile to work with the Brazilian market? It seems to have a lot of obstacles to overcome.
Victor DeSantis: Cross-border project finance typically is not an easy thing in any market, but I think that when you have a market like Brazil – given its size, the variety of sectors in which there are significant needs, the presence of local sponsors – the opportunities are there. Sophisticated financial institutions and other participants in project finance understand that there are always going to be challenges, but Brazil continues to be a market that will generate interest for those reasons.
John Anderson: As a Brazilian, I am very confident in Brazil's potential. It is a large country with great natural resources and a need for the development of infrastructure and several other projects. Despite the complexities, as Vic pointed out are present in many markets, I believe it is a country that will still have a lot to offer in terms of very interesting projects and developments that will make Brazil fulfill its potential.