A sense of optimism has taken hold of Brazil’s infrastructure sector as banks show more appetite for project risk in the country, according to a speakers at an event hosted by LatinFinance.

One of the drivers of this trend is Brazilian federal development bank BNDES, which for decades was accused of crowding out capital for the infrastructure sector by offering cheap credit to project sponsors, said participants in the Brazil’s New Infrastructure Agenda Roundtable.

Panelists at the October 5 event in New York were also upbeat about Brazil’s project pipeline, especially after the federal government launched a new infrastructure investment plan and the central bank’s anti-inflation policies yielded fruit.

“It is noticeable that the economy is maturing, and the economic cycle is decoupling from the US’,” said Kamen Atanassov, the head of Project Finance and M&A for Latin America at Canadian Solar’s Recurrent Energy division. “The Brazilian Central Bank has done a much better job in curtailing inflation than the US Fed has done.”

Recurrent Energy, which began investing in Brazil eight years ago, has been impressed by improvements in energy market regulation and structural improvements to the economy, Atanassov said. Additionally, local sources of equity and debt are getting cheaper and more comprehensive, which helps the structuring of financial packages for projects, he added.

The greater availability of local funding partly stems from commercial banks’ increased appetite for infrastructure risk together with a strategic shift by BNDES, according to Rafael Mirandola, the head of transportation and logistics at Banco Santander in Brazil.

“The market still counts on BNDES funding, but what has changed is the appetite from BNDES and commercial banks for project risk,” he said. “This is something that attracts foreign players too.”

RISK ANALYSIS

This newly-found risk appetite has a flip side: banks demand more information from sponsors about due diligence, cost overruns, environmental licenses and the technical aspects of their projects. Lenders can contribute their own risk analysis during the structuring phase, which has helped to raise the quality of projects.

“Even in the case of projects where we are not fully comfortable with the risks, we can think of hybrid financing structures, where we demand corporate guarantees or letters of credit until completion,” Mirandola said. “Projects’ schemes have changed a lot and, as a result, foreign players are more interested in Brazil.”

The emergence of non-recourse financing in the Brazilian market has been a key development, said John Anderson, a partner at White & Case. Previously, non-recourse project finance was limited to a few developments that had revenue streams in US dollars and were usually sponsored by foreign companies, he said. 

Now, however, financial markets are eager to take more risks in such projects, at a time when, for fiscal reasons, the federal government is unable to provide funding for the whole sector.

“It has all opened room for other players, which are bringing the technology and expertise for non-recourse financing,” Anderson said.

ALLOCATING RISK

He highlighted the BRL6.9 billion ($1.34 billion) project finance for Line 6 of São Paulo’s metro system, where BNDES accepted to assume 52% of all construction risk.

“It was very interesting to see their willingness to be educated and to accept best practices,” Anderson said. “We had to confront their practices with international practices and try and find ways to allocate the risks correctly.”

Bernardo Môcho, a partner at Mattos Filho Advogados, noted that BNDES has shown openness to new ideas on project finance in recent years, and this new approach has survived leadership changes at the bank. 

“Five years ago, nobody would have believed that BNDES would be lending money in dollars or providing letters of credit for other banks, which it has done of late,” he said. 

Furthermore, Môcho stressed that if in the past Brazil had a small group of mammoth construction companies that dominated the market, in the past decade the number of sponsors have increased markedly, including a stronger presence of international firms and private equity funds.