Opportunities and challenges for Brazil project finance

Bnamericas Published: Thursday, January 30, 2020
Opportunities and challenges for Brazil project finance

Demand for project finance in Brazil, historically focused on the energy sector, will increase in the highway, airport and sanitation segments, opening up opportunities for banks.

But Brazil's project finance space includes a major barrier for international players.

Gustavo Fava, head of project finance at investment bank BTG Pactual, talked with BNamericas about the challenges of entering the local market and the country's project finance outlook for 2020.

BNamericas: What are your expectations regarding project finance in Brazil this year? 

Fava: The expectation is very positive. There are two major movements going on in the market right now. 

First is the growing participation of the capital market as a project financier and this opens room for more innovative financing structures, that is, there is a diversification of financing.

Another major movement is in the number of projects, generating opportunities. We have in Brazil a robust pipeline of projects in the area of infrastructure, with the concession of highways, airports, sanitation services, which will demand a lot of funding.

BNamericas: Historically, Brazil's energy sector demands much project finance. Will this persist in the short and medium term or do you foresee changes?

Fava: On the energy side, we have a recurring pipeline of projects, both for transmission and generation, which are already more structured sectors. 

Still regarding energy, we have the so-called free energy market, which is something relatively new in Brazil and has attracted a lot of investment. The energy sector will still be very important in terms of the number of projects.

Now, in general terms, the participation of energy projects, although it should grow in volume, should lose ground in terms of market share in the next years because other segments will gain relevance. 

In the highway sector, we have very attractive concession models for investors and this sector should attract a lot of investment from the private sector. 

The same goes for the sanitation and airport sectors, which are segments we are looking at with great potential for expansion for project finance operations.

BNamericas: What do you expect for the oil and gas sector? 

Fava:  In the area of oil and gas, project finance has always been very active in platform construction. Now, with the opening of the gas sector, as new players are entering, we may have more operations in the gas sector as well.

BNamericas: In Brazil, we see banks with relevant local operations dominating the project finance market, while in Latin America there is a relevant participation of foreign players. What is the reason for this?

Fava: Most projects in Brazil are structured using cash flow in local currency as the benchmark. Thus, banks with robust operations here and that have more access to local funding tend to take advantage, offering better products for local needs.

In other Latin American countries, there are many contracts, projects denominated in dollars and this facilitates the entry of foreign players in the market.

BNamericas: Do you already notice the reduction of BNDES' participation as a financing provider? Are banks taking over the space BNDES leaves?

Fava: What is happening is that the BNDES currently does not offer loans at rates as advantageous as it did in the past, when it had subsidized interest rates. As banks currently are able to offer interest rates that are even more attractive than those of BNDES, the companies themselves are migrating from BNDES to other banks and other financing options.

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