Diversity is the name of the game for Banco Santander's project finance operations

Bnamericas Published: Wednesday, December 14, 2022
Diversity is the name of the game for Banco Santander's project finance operations

The Brazilian unit of Spanish banking giant Banco Santander is expecting to expand its financing of telecommunication projects in the coming years.

The bank is also seeing project finance operations in Brazil becoming more diversified. 

Edson Ogawa, head of the project finance area at Banco Santander Brasil, spoke with BNamericas about the bank's plans, the business scenario and the expectations for the new government, among other topics.

BNamericas: Which sectors have generated most activity for Banco Santander's project finance area in Brazil?

Ogawa: This year we had a volume of operations more positive than expected and with a very large sector diversity.

In the electric power sector, we work in generation operations from all kinds of sources, renewable, thermoelectric, PCHs [small hydroelectric plants].

In the transport sector, we were also very active, financing operations in all modes, line 6 of the São Paulo metro, airports, ports, roads, railways.

Before the end of this year, we’re expecting to conclude new transactions, linked to the sanitation sector.

Another sector that was positive for us and a sector where traditionally we weren’t so present is telecommunications. With the arrival of 5G, we’ve seen signs of an investment boom.

BNamericas: Why is telecommunications gaining scale for project finance operations?

Ogawa: If you look at our history of activity in this sector, you will see that we didn’t have a lot of demand for operations for us in the project finance area. This sector has always made a lot of investment, but before these operations were done with a corporate credit profile.

Now we’re seeing a change in profile, with a lot of investment being made in fiber optics and also a lot of investment made by independent telecom operators, which are companies that offer infrastructure to large companies.

Before, major companies took over everything, they didn't share infrastructure, now that has changed and these independent companies seek financing more linked to the cash flow of the projects and not using their balance sheet.

This year, one of our outstanding operations in the sector was with V.tal.

In view of this, we’re interested in working on more operations in telecommunications next year.

BNamericas: What is the expected scenario for next year in general?

Ogawa: 2023 could be similar to this year because infrastructure financing has some particularities.

The financing that will be completed next year refers to projects auctioned in previous years.

If the elected [new] government promotes a change in the concessions agenda, this will only be felt in the project finance area in a stronger way in 2024, 2025. There is always a delay between the auctions and the financing and this delay is about two years in general.

But in addition to the change in government, I see that we’re experiencing a difficult economic moment for companies all over the world, because the base rates are high, at a much higher level than the companies predicted when they won the auctions.

BNamericas: What strategies have you been recommending to clients to mitigate the effects of high interest rates?

Ogawa: It really depends on the investor's profile. For some companies, there’s the possibility of seeking long-term financing from development banks and multilateral banks.

The second option is contracting bridge loans in an attempt to wait for the scenario to improve. In the past, bridge loans matured in a few months, today we already see bridge loans of up to three years, with companies trying to wait for a better moment to finance themselves in the longer term. But this is not a guaranteed strategy, it’s not possible to know when and how much conditions will improve.

Market forecasts in relation to interest rates are quite volatile and we’re in a market moment when things can turn very bad from one day to the next.

BNamericas: Under a scenario where the incoming federal government [of Lula’s Workers Party] is uncertain as to whether or not to continue the concession plans, do you think the concession agendas of state governments in Brazil, with a more liberal profile, could assume a greater role?

Ogawa: The pipeline of infrastructure projects by states and municipalities is more limited than that of the federal government, but there may indeed be a change in focus [by investors] at first.

São Paulo and Minas Gerais states always have important projects in the area of highways, as well as Paraná, but in the case of Paraná highways, the concessions to advance depend on the approval of the federal government, since many of the highways there are under federal management, so there is a dependence on the federal government.

The areas that are most linked to state and municipal governments are urban mobility, but the most important projects are very concentrated in São Paulo, while in the area of sanitation, this agenda is in the hands of local governments.

But if we look at history, I don't think the federal government will halt the infrastructure agenda. If we look at what was invested annually in infrastructure, this level remains similar, what differentiates past PT [Workers Party] administrations from governments of other parties is that there was more public than private investment.

But we always have to remember that past PT administrations continued the concession plans that were initiated during the FHC government [Fernando Henrique Cardoso, president between 1995 and 2022].

There is an aspect that limits a complete reversal of the scenario, for much more public investment. In the past, for example, the biggest investor in the energy sector was Eletrobras, which was state-owned. Now the company is privatized, so the government has one less vehicle to make investments.

BNamericas: What are the main doubts that persist regarding the new government?

Ogawa: The other change that could happen is about the participation of state-owned banks in financing.

In recent years, we’ve seen a reduction in this financing, but there could be a turnaround. State-run banks can indeed be a vehicle to be used by the government to accelerate investments, but we’ll only have a clear vision of this after the incoming government appoints people to lead the economy and public banks.

BNamericas: Do you fear that development bank BNDES will abandon its role of structuring projects that it has assumed in recent years?

Ogawa: One of the major developments in the country's infrastructure market in recent years was the use of BNDES as a vehicle for accelerating the project structuring processes, which was previously quite dispersed.

The studies carried out by BNDES have a highly technical profile, with very prepared people, who evaluated the entire history of concessions in the country so that past mistakes are not repeated.

For example, BNDES ended a discussion that existed on the model of auctions for concessions, whether an auction based on the highest fee offered, the lowest tariff or a mixture of both was more interesting. In the past, several contracts had problems because there was a preference by governments for lower tariff models and over time, and with variations in economic scenarios, these models were not sustainable and the contracts had problems.

If BNDES becomes more active in financing, it could lose focus on this area of project structuring and that would be negative.

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