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Financing and Funding Infrastructure Projects in Latin America

12 MIN READJune 03, 2020
The global sanitary crisis led to an economic crisis and then we found ourselves caught up in the middle of drastically less liquidity in the markets. Considering that infrastructure projects, especially in Latin America, require substantial amounts of capital, we gathered with four different financial institutions to discuss what is the availability of resources and how to get access to them.

Co-moderated by Guilherme Barbosa (XP Investimentos, Brazil) and Carolina Duque (Baker McKenzie, Colombia), the GRI Club Infra hosted as special guests Kristie Pellecchia (Head of Western Hemisphere at the US DFC), Rodrigo Mota (Brazil Senior Country Representative at the USTDA), Guillermo Freire (VP of Structured and Project Finance at Export Development Canada), Maria Angélica Luqueze (Brazil Country Head at UK Export Finance), and Alban D'Herbès (Area Manager - Latin America at BPI France).

United States International Development Finance Corporation (DFC)
Represented by Kristie Pellecchia, Head of Western Hemisphere

Originated from OPIC and created in December 2019, but with almost 100 countries served, the DFC provides equity financing and support for investment funds, direct loans and guarantees of up to USD 1 billion for tenors as long as 25 years. Additionally, offers coverage of up to USD 1 billion against losses due to currency inconvertibility, government interference, and political risks (including terrorism), funds feasibility studies and technical assistance. DFC is considered to be quite unique among similar institutions, as their mandate does not require American companies or content to be part of the supported projects. Thus, it can be considered as a regular lender. The key considerations are the bankability of the projects and that they must drive development. DFC also intends to contribute to projects made to last and have a positive impact on societies.

The loan tenor (length of time remaining before the financial contract expires) goes from 5 to 25 years, with a maximum time frame of 30 years. A grace period is usually allowed for the principal repayment at the beginning of the term, however each transaction will be evaluated on a case-by-case basis. Financing amounts range from USD 1 million to USD 1 billion and the corporation also works with co-lenders to bring the right amount of resources to larger projects. For each project there are varying interest rates and fees, based on the intrinsic risks of that specific project.

Aiming at tackling monetary risks, DFC can lend some local currencies. Furthermore, its mandate prohibits operating in high-income countries (ranked by the World Bank), which is the case of Chile, Panama, Uruguay and Bahamas.

As the pandemic evaporated much of the credit, DFC came up with a USD 4 billion credit line for the existing businesses in the agency's pipeline. That was built exclusively to support companies facing the crisis' consequences. At the moment, the entity is mostly helping small and medium companies (SMEs) with liquidity problems and healthcare companies to keep them providing medical and hospital equipment and materials.

United States Trade and Development Agency (USTDA)
Represented by Rodrigo Mota, Senior Country Representative - Brazil

The USTDA has 3 main areas of operation in developing and middle-income countries: transportation, telecommunications and energy - although not strictly restricted to them. Resources coming from the Agency are not intended directly to financing projects, but to their most critical part: origination and initial structuring. Through an array of tools, USTDA offers funding to feasibility studies and technical assistance when structuring infrastructure projects, which will get projects moving from concept to financing and implementation. Specifically on these three segments, energy is highlighted as USTDA’s largest sector of investment, comprising three subsectors: traditional energy and power generation; electricity transmission and distribution; and renewable energy generation. The goal is to increase the world’s supply of clean energy and access to cleaner and more efficient fossil fuels. The agency has been providing important support for projects destined for positive social impact, like sewage, electrifying remote communities and bringing potable water to poor communities.

Basically, infrastructure proposals are sent to selected consultancy firms, who will make sure that all norms match USTDA's requirements. After that, the Agency will begin working with the original sponsor and helping them to kick off in the pre-completion phase of the project. Contracted US consultancy firms to deliver the studies may subcontract its subsidiaries in the country where the project was originated, with up to 20% of total amount destined to that purpose. USTDA only works with US dollars, as the resources never actually leave the US (only through international remittances).

One of the main priorities at the moment is to support initiatives related to healthcare infrastructure projects. The pandemic also changed how incoming proposals are being regarded, mainly in the airport and energy sectors. Values and CAPEX calculations were reviewed in order to have a more accurate perspective when structuring those projects.

Export Development Canada
Represented by Guillermo Freire, VP of Structured and Project Finance

Being active for the past 25 years, EDC mainly finances Canadian companies investing in infrastructure abroad and exporting goods and services. In Latin America, the institution already supported investments in Brazil, Chile, Colombia and Mexico. EDC can lend in some local currencies like Mexican and Chilean Pesos and Peruvian Soles.

Sectors covered by EDC range from the extractive, to power, utilities, infrastructure and industrial. Concerning exchange rates risks, when the local currency depreciates, borrowers will only pay that amount in local currency converted to US dollars - that means that the Canadian Treasury will hedge the operation from their end.

EDC can be involved from day 1 in the projects, as its mandate sets clear the ability to take construction and pre-completion risks. As Canadian pension funds invest heavily in infrastructure worldwide, EDC plays an important role in this process - the institution can support structured and project finance. This nature of operation is useful to Latin American companies and governments working closely with Canadian infrastructure investors, due to the multiplier effect originated from EDC financial support and guarantees. The Canadian agency can work together with banks, for guarantees, or solely.

UK Export Finance
Represented by Maria Angélica Luqueze, Country Head - Brazil

The United Kingdom Export Finance is, as per definition, a true export credit agency. They provide guarantees, not direct lending. However, specific projects in some very specific cases, like the ongoing pandemic, may get direct lending.

It has a capacity of up to £ 3 billion in support of Latin America-UK transactions and is able to finance projects in major local currencies. Countries that can receive resources in local currencies are Brazil, Chile, Uruguay and Peru. Although it does not provide guarantees in the construction period of the project, they provide guarantees to the financial transaction itself. However, when there are one or more lending institutions (banks, for instance) in the pre-completion part of the project, UKEF may join them and provide guarantees in initial phases. If a payment default happens in this period, banks will be refunded by UKEF. As risks are taken by the British Treasury - and not directly by the UKEF - interest rates are, in average, lower. For that, a premium is charged based on the Organisation for Economic Co-operation and Development (OECD) consensus for each country (the information by country is available on their institutional website).

Regarding projects involving renewable energy, UKEF has an extended period of repayment - 18 years, not counting the construction period. Political risks are also addressed by UKEF, mainly when British investors are dealing with economies facing uncertainties. A specific tool is deployed by the agency and put to work whenever there is a risk of remittance prohibition and resources repatriation restrictions.

Originated from talks with the London Stock Exchange, UKEF launched the Transition Bonds, which are very applicable to infrastructure projects, mainly railways. That is intended for projects aiming at reducing carbon footprint.

Banque Publique d'Investissement - BPI France
Represented by Alban D'Herbès, Area Manager - Latin America

There are two main ways that BPI can interfere in infrastructure projects in Latin America. Firstly, as a regular Export Credit Agency (ECA) operation: ensure projects, convert risks probabilities to nonpayment and sovereign risks. In the case of SMEs originating the projects, it is mandatory that the project comprise at least 20 percent of French components and equipment. For large companies, that ratio is 50 percent. The second way is through a pure financial solution, which can go from EUR 1 million to EUR 75 million, depending on the strategies and goals set for the project. BPI France can ensure guarantees to banks alone or to a syndication of these financial players.

When projects are considered strategic to France, like sewage and renewable energy ones, the minimum amount of 20 percent of a French company participation is disregarded. For these projects, BPI will cover up to 80 percent of the risk. When French products are put to work in the projects, risk coverage goes up to 95 percent of the total amount.

At the moment, BPI France lends only in Euros, but US dollars loans will be available in the coming months. However, when another bank is lending to the projects, BPI can insure it in local currencies. The premium charged by BPI France depends on each market, but is considered to be "classical" - attached to risks calculated by international agencies. Interest rates are also averagely lower than those available in commercial banks, also based on the risk grades given for each country.

Following the guidelines adopted by several countries, renewable energy projects can get up to 20-year repayment periods. Interest rates for this type of projects are also lower in comparison with regular projects.
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