Mexico , Chile , Brazil , Colombia and Peru

BTG's strategy to mitigate the impact of LatAm political turmoil on project finance

Bnamericas Published: Friday, June 18, 2021
BTG's strategy to mitigate the impact of LatAm political turmoil on project finance

Brazilian investment bank BTG Pactual is expecting an increase in project finance operations in Latin America in the coming months. 

The bank is currently structuring a string of operations for a combined amount of around 5bn reais (US$1bn) and it expects this to grow quickly mainly due to sanitation, highway and renewable energy projects. 

With operations now concentrated in Chile, Colombia and Brazil, the bank is also seeing potential in Peru and Mexico. 

To mitigate the impact of political turmoil in the region, BTG Pactual is using multilateral institutions to provide more security for investors.

Although Latin America registered a contraction in Q1 in project finance operations, market players have a bullish outlook for the year as a whole. Project finance transactions totaled US$3.18bn in Q1, down from US$6.28bn in the same period 2020, according to data from Dealogic. The number of transactions fell to 32 from 51.

BNamericas spoke with Gustavo Fava, head of project finance at BTG Pactual, to find out more.

Fava: We currently have in our portfolio, in the structuring phase, a total of 5bn reais in project finance operations in the region. These operations are concentrated in sanitation projects, highways, renewable energies – wind and photovoltaic solar – in addition to gas thermoelectric.

The countries where we’re structuring these projects are Chile, Colombia and Brazil.

BNamericas: With 5bn reais in operations being structured at this moment, is it possible that the volume of project finance operations of the bank this year will be even higher?

Fava: Without a doubt, there are great possibilities for us to increase this pipeline.

We now have 13 mandates for operations in the area of renewable energy and these mandates at some point in the next few months should be converted into project financing operations.

We also have five mandates in the sanitation area, which in the coming months should also be converted into new operations.

BNamericas: In the first quarter of this year we saw a reduction in the volume of project finance operations in the region. What are your expectations for the next few months?

Fava: What happened during the pandemic is that many projects were put on hold. There were some financing operations, but these operations were not public, the banks took over these financings and did not take them to the capital market. In addition, there was a lower volume of operations because there were fewer auctions in the worst phase of the pandemic. There were no infrastructure auctions, there were no energy auctions for months.

We’re now seeing a resumption of project finance activity, which is being driven by segments such as sanitation, highways and energy generation.

BNamericas: Talking about power generation, this is a very active sector in terms of projects, what explains that?

Fava: Power generation in Brazil is a sector with its own dynamics.

There is a major migration of customers from the regulated energy market to the free power market. Today most of our mandates in the segment are linked to the free power energy market, where PPAs [power purchase agreements] are closed.

This phenomenon has been very intense because in the free power market the consumer is finding much better price conditions than in the regulated market. In addition, there’s greater interest in clean energy, and finally, the financing market was able to develop mechanisms to mitigate the risks of free power market contracts that have a shorter-term profile compared with the regulated market.

BNamericas: You mentioned optimism with project finance operations in Chile, Colombia and Brazil. Which other countries in the region do you see with great potential?

Fava: In addition to these countries, we have a strong presence in Peru and Mexico.

In Peru we saw that the electoral process brought many uncertainties and I believe that we still have a few months to go before the situation becomes clearer. But Peru is an interesting country, it’s investment grade, has gone through other crises in the past, and it’s a country that has a lot of potential for growth in highway, port and energy transmission projects.

In Mexico we also saw a moment of great political uncertainty. There was a threat of breach of contracts in the energy sector, but over time the risks decreased and the situation now points to major potential in terms of operations in the energy generation area, for example.

BNamericas: Regarding elections, 2022 will see a presidential election in Brazil and, according to polls, we can expect a polarized dispute. How do you see the electoral effects for the segment?

Fava: We always suggest to our clients they bring forward financing operations, especially in an election year, due to the effects that this has on the interest rate and on the exchange rate, generating more volatility.

An important point that’s worth mentioning is that, in the face of turbulent elections in Latin America, we’ve been using a mechanism in operations to reduce uncertainty for investors, which is to use multilateral banks as guarantors.

In 2018, which was an election year [in Brazil], we carried out a project finance operation for a photovoltaic park, with an IDB guarantee, as investors see the participation of multilaterals as an insurance for operations. 

This year we structured an operation in Colombia, for a road project [Puerta de Hierro], with a guarantee from the [US International] Development Finance Corporation.

BNamericas: Some infrastructure companies have criticized the increase in raw material prices and have even threatened to halt infrastructure works, to review contracts. Are you noticing this problem of increasing costs in some sectors that you follow?

Fava: This is an existing problem and I’ve noticed, for example, the impact of this in the renewable energy sector in terms of construction costs, which have a lot of imported materials and commodities that are on the rise in terms of prices, forcing several projects to be put on hold until costs fall.

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