Brazil’s BNDES looks to multilaterals to co-finance wind

IN DEPTH | Brazil's development bank and its key backer of wind looks outward as it prepares to take a smaller role in the future

Brazil’s National Development Bank (BNDES) is seeking closer ties with multilateral financing agencies such as the World Bank and Inter-American Development Bank (IDB) in order to diversify financing for the country’s wind power industry.

“We are in talks with the IDB, the [World Bank’s] International Finance Corporation (IFC) and the IIC [the Inter-American Investment Corporation, a unit of the IDB] but this will have to undergo a stage of acquiring knowledge. It’s been a while since we carried out projects with them,” Carla Primavera, BNDES energy department head told wind power investors last week.

The announcement came as BNDES’ new, pro-market CEO Paulo Rabello de Castro was sworn in, following the resignation of Maria Silva Bastos Marques for personal reasons.

The approach comes at a time when the bank is discussing alternatives for financing in which it will take a smaller role than in past as the Michel Temer administration, which took power in mid-2016, has set guidelines to change the bank’s role.

The announcement also comes as the IDB opens an IIC office in Brazil’s financial hub of São Paulo in order to offer financing for infrastructure projects, including renewables.

An IIC spokesperson told Recharge that wind and solar will be prominent in the bank’s activities and that it will go beyond “traditional financial products and offering long-term debt in local currency Reais and guarantees that back the issuance of infrastructure debentures to support the involvement of Brazilian investors”.

The spokesperson also confirmed that it plans to carry out co-financing with the BNDES.

This is the latest of a series of changes promoted by BNDES in the past 12 months, although most are being slowly implemented. The deepest so far was the change in the bank’s lending from the traditional, partially-subsidised TJLP to the more market-linked TLP, which will start in 2018.

Brazil rate switch could spell uncertainty for BNDES lending

Read more

Aside from this, the bank has set up a R$500m ($158m) fund to bolster the secondary trading of local-currency debt issues by renewables investors, aiming to make up at least 10% of total investment costs. The plan is to give the issues liquidity in secondary trading and eventually turn them into registered green bonds linked to specific projects.

Although BNDES has approved R$1.8bn in loans for wind projects so far this year, the bank reduced its lending to all sectors by 30% in 2016 from 2015 and by 40% for the wind power sector. Additionally, BNDES loan costs have been rising, reaching double digit figures for the first time in almost a decade.

This year, the aim is to lend R$7.5bn in a sector that still needs around R$30bn in financing to conclude projects already contracted at auctions by 2019.

The backdrop is a government decision to reduce National Treasury subsidies to the bank and force it to rely only money raised from payroll taxes. This is aligned with an overall government policy that will also remove wire fee usage subsidies for wind power projects.

Alongside that, the bank has also taken steps to diversify its sources of capital.

This year, for example, the bank has raised $300m from the New Development Bank and $1bn from an international issue of green bonds that will be used to finance renewables. BNDES was also chosen by to manage a $20bn Chinese fund that will finance Brazilian infrastructure projects, including renewables.

But this has yet to translate into a clearer path for financing or cheaper loans. The discussions exclude technical issues such as guarantees, sharing of risks between financiers and the possibility of a secondary market for debt in Brazil.

Brazil reaffirms 2017 renewables tender, but details remain thin

Read more

“We welcome the changes, but they have to be carried out stepwise, just as we are not against removal of subsidies as long as it removed for all technologies that compete in tenders,” said the executive president of the Brazilian Windpower Association (ABEEólica), Élbia Silva Gannoum.

Wind power investors welcome the change only warily, since the sector has relied heavily on the BNDES’ 16-year loans, which have traditionally financed projects at least 50 percentage points below private sector financing. So they expect things to move slowly and said that BNDES should continue to play an important role in the wind sector.

“We have been consulting private banks, and we saw that their costs are not that much higher now compared with those of the BNDES. We’re getting there,” said Gustavo Souza, CEO of CPFL Renováveis, the Brazilian renewable energy unit of China’s State Grid.

Going to private banks for long-term finance is not a tradition in Brazil, so another problem is that relatively few banks can offer such products.

“If I go to the private sector for financing I don’t have much of choice, if financing demand grows rapidly, the banks will reach their lending limits,” said Sérgio Brandão, head of the Brazilian unit of British fund Actis.

Bankers, on the other hand, say they are prepared to finance the sector. But they need a more developed market to share risks with other banks and, more specifically for the wind sector, such higher risk and costs should be reflected in the price of wind power at the tender, indicating higher prices than the historic $60 per MWh level.

But the wind sector’s track record makes bankers in Brazil more comfortable in taking up room left empty by the BNDES.

“Today we can take on risks that we didn’t think about taking in 2009. The sector’s track record allows us to assume risks in some well-structured projects allow for a reduction in the need for shareholders to inject capital into the projects,” said Marcelo Girão, head of project finance at Itaú BBA.