Project Finance Insights
Citi's role in shaping Latin America's project finance landscape
Published: 02/21/2024
Daniel O'Czerny
Citigroup has outlined three sectors as being key for project finance operations in Brazil this year, highways, energy transmission and sanitation.
Meanwhile, in Latin America as a whole, Brazil, Chile and Mexico are likely to remain the top destinations for operations for the group's project finance area.
Daniel O'Czerny, director of global infrastructure finance for Latin America at the US banking giant, speaks with BNamericas about the business outlook for the region in 2024.
BNamericas: What is Citi's estimate for business generation in the project finance sector in Brazil this year?
O'Czerny: It's important to separate this assessment by looking at sectors and also products.
Regarding sectors, the project pipeline perspective suggests that we have operations that have already been auctioned but still need financing, and other projects that are yet to be auctioned.
The first highlight is in the highways sector, where we've seen significant contracts, such as highways in Paraná state being tendered last year, and the agenda for new tenders remains strong this year, with highway contracts in Minas Gerais and Goiás, as well as two additional lots in Paraná state, among others?
Even if not all [highway] projects expected by the federal government this year go to tender, there’s still a strong outlook in the highway sector.
But I would draw attention to one particular fact in the highway sector, which is a bottleneck in the local market. We still only have few participants in the auctions, they’re still highly concentrated.
In Colombia, for example, where we also have a highway auction agenda underway, there’s more competition, as well as in Paraguay, for the route 1 highway project.
Perhaps Brazil would need to bring more flexibility regarding currency in contracts, somehow introducing hard currency into contracts to attract more interest, for example, from European companies. But that's easier said than done.
BNamericas: Besides highways, which other sectors will be prominent in business generation this year??
O'Czerny: Another sector with a lot of activity will be energy transmission, which has already had an auction approved by?Aneel for March 28, with capex of around 18bn reais [US$3.7bn].
This is a sector with a lot of projected investment.
Another sector with considerable representation is the sanitation sector, with auctions linked to contracts in Porto Alegre, Paraíba, Pernambuco, not to mention the planned privatization of [S?o Paulo state water firm]?Sabesp and [Paraná state utility]?Sanepar's PPP contracts.
BNamericas:?Which segments are expected to perform more weakly??
O'Czerny:?Power generation. We're not expecting tenders in the sector, as energy prices are low, and there are few interested parties.
BNamericas: In terms of products, where are the expansion frontiers for project finance business??
O'Czerny: We're very excited here about the new infrastructure bonds law, the?infrastructure debentures.
This law still needs some regulations, but it should enable new structures of transactions in the capital market, banking structures, since the anchor of disbursement will be extended.
The new regulation will allow the debentures to become bonds that can access new types of foreign investors, which will bring international investors to Brazilian infrastructure.
Traditionally, international investors like the infrastructure sector because it has resilient characteristics, and with incentivized debentures also reaching external investors, we will see new types of investors looking at this market in the coming quarters.
When you can provide these tax breaks, the international investor becomes more interested.
Regarding banks, this will provide more activity for international banks, as is our case, since we have a three-pronged approach, with a presence in the local capital market, international capital market and also project finance solutions.
International banks tend to lead this trend.
BNamericas:?Citi has been active in the oil and gas sector, FPSOs. What is the bank's strategy in this sector, given?Petrobras' current business strategy and the increasing global appeal for ESG aspects in business??
O'Czerny: We have seen Petrobras very focused on investment guidelines that are profitable and appropriate for its capital structure.
The credit market for Petrobras is going through a fantastic time, with everyone understanding that the company has good cash and debt management.
Petrobras' leverage is really low at the moment and it has a financial capacity that few companies in the world currently have.
That said, the oil and gas sector has an interesting avenue for growth and the FPSO segment continues to be very important.
We expect to see financing operations linked to one or two FPSOs this year and there's still great demand for new production units.
But the current question mark is the market's capacity to absorb this need for financing.
BNamericas: What exactly is the issue?
O'Czerny:?Before, an FPSO was a project with capex of US$1.8bn, US$2bn.?Currently, we're talking about US$3bn-US$3.2bn capex.
This has changed both because the platforms are larger and more complex, and also because important inflationary pressures in recent years have impacted prices.
There's a big difference between financing a project worth up to US$2bn and one worth more than US$3bn. We also have to remember issues related to ESG practices.
There are banks that have started to reduce their participation in financing FPSOs. There are banks with certain restrictions on assets related to oil and gas and it will be an interesting process to understand the viability of financing these projects going forward, because it's an issue linked to market size.
BNamericas: Does the greater appeal of ESG practices tend to restrict financing for the oil and gas sector?
O'Czerny:?Today, I don't have an easy answer on that, but there’s a capital constraint today that's greater than it was two or three years ago.
When we came out of the end of the COVID-19 crisis there was an abundance of capital in the world, but soon after we saw a restriction of capital globally, including long-term capital.
Before, there were financing terms of 17-20 years, and currently the trend is toward financing shorter terms.
So I see greater restriction in this sense, in relation to longer deadlines, but obviously there's greater scrutiny in relation to the carbon footprint of projects.
Given this, there's even a tendency for change regarding the characteristics of FPSOs, with new FPSO projects with different equipment, which reduces emissions from platform operations.
BNamericas: Regarding aspects linked to the energy transition, what do you think about the advance of green hydrogen projects in the region?
O'Czerny: Citi is very active in this area, discussing the possibilities that exist with new players.
In Brazil, there's the possibility of developing some hubs, such as in Pecém port [Ceará state) as well as other initiatives, smaller projects, in other states.
The Brazilian northeast is very competitive for these projects due to the generation of renewable energy in that region.
With regard to South America, in addition to Brazil, I see projects in Chile and also Uruguay as highlights.
In Chile, the projects are very competitive also because of the generation of solar energy in the Atacama desert, while in Uruguay, they're a little less competitive.
In any case, it should be noted that it's still an incipient market, where the main issue is concluding offtake agreements for projects to be viable.
It's a sector that I look on positively, but it won't develop too quickly.
BNamericas: In Latin America, which countries do you see having the highest volume of operations in the project finance area this year?
O'Czerny: For us, Chile has always been a robust economy with large projects.
In Peru we see a resurgence, mainly in the energy transmission area where there are already successful tenders.
We've seen interesting projects in the lithium segment in Argentina as well, which aren't necessarily associated with project finance operations, but with banks advising on certain transactions.
In Mexico there has been a resumption of activity and there are important gas pipeline projects. Another country of interest is the Dominican Republic, specifically the electrical energy sector.
Colombia is also a country in which we should carry out some transactions.
BNamericas: Which countries in the region generate the most business for Citi's project finance area?
O'Czerny: Brazil, Chile and Mexico are the most important countries. Sometimes these positions change a little from one year to the next, but they're the most important.
Why project finance will pick up in Brazil
Published: 02/19/2024
Project finance operations?in Brazil are set to pick up pace this year, with transactions led by the energy, sanitation and logistics sectors following a series of bidding processes already held and others planned.
Marcelo Gir?o, head of project finance at?Itaú BBA, the investment arm of Brazil’s largest bank Itaú Unibanco, speaks with BNamericas about the outlook for 2024.
BNamericas: What is the outlook for the bank's project finance operations?
Gir?o: It's worth mentioning that 2023 was a year that started very cautiously, as expected.
In the first quarter of last year, we saw that only operations that had already started to move forward in 2022 were continuing to move forward while many new businesses remained on standby because there was a change in government [the first year of?President Luiz Inácio Lula da Silva’s term], when a reduction in business is common and in parallel with this, we had events linked to the credit market, which affected activities in the first half of the year.?
[Editor’s note: In early 2023, major local retailer Lojas Americanas filed a request for bankruptcy protection following the discovery of accounting errors, which impacted the capital market]
Given this, the first quarter was difficult, but we began to see a recovery in the other quarters, with the progress of the energy transmission auction, highway concession auctions in Paraná state and a highway auction in Minas Gerais state, all of which made the last quarters of the year quite strong for project finance operations.
That strong momentum has continued into the first quarter of this year.
BNamericas:?What are the expectations for operations at Itaú BBA this year?
Gir?o:?We had a total of 119 operations here at Itaú BBA in 2023 within my project finance area.
The operations range from bank guarantees, loans, international financing, financing share purchases, greenfield projects, financing operations in general and M&As.
These operations totaled 68bn reais [US$13.7bn], of which 35bn reais were in the electric power and oil and gas area and 33bn reais in the infrastructure area, in which we also include logistics and sanitation.
This year we’re likely to see an increase in the number of operations because we expect momentum throughout the year, compared with 2023, which had a weak first quarter.
However, some risks could threaten the outlook for this year, such as possible unexpected events linked to the municipal elections [in October], tensions associated with the US presidential election and also if we have a repeat of some credit market incident like we had last year. But these risks are not in our base case scenario.
BNamericas: In terms of sectors, which are going to be the most active in 2024?
Gir?o:?In 2023 we saw a strong emphasis on the sanitation and highway sectors.
Electric power, which is always the most important sector for project finance, had some difficulties moving forward with new generation projects due to low power prices, although the energy transmission area generated business.
We started 2024 very actively, with a positive impact following the slowdown of operations at the end of 2023 and also with new power transmission auctions expected for this year.
There is a new world to be explored which is the opening up of the free energy market to smaller consumers, which could generate a little more activity for wind and solar projects as well.
In the sanitation sector, we’ll also have a positive year, with the expectation of concession auctions in Sergipe, Rond?nia and Porto Alegre [capital of Rio Grande do Sul state], and in each of these three contracts, we’re talking about between 6bn reais and 7bn reais in capex and fees.
The [S?o Paulo state water utility] Sabesp privatization process will also have a positive effect. The privatization operation itself is not related to project finance models, but we’re talking about the largest water company in Brazil and once the company is privatized, from the next day onwards the privatization will tend to accelerate its investment program, which is very big.
Furthermore, regarding highways, the federal government has already said that it wants to auction more than nine highway concession contracts this year. I think it’s difficult to move forward with all of those auctions, but advancing with some of them would be positive and would guarantee an important pipeline in terms of capex.
In urban mobility, we have the Intercidades?train, which is a complex, challenging project that could advance this year.
Projects associated with digital infrastructure saw a lot of activity last year, in fiber optics and datacenters, and we’re seeing some players with an important growth curve that will also require financing.
BNamericas: What is the bank's current level of activity in the oil and gas sector?
Gir?o: We work on financing almost all projects for junior oil companies, which gained scale during Petrobras' divestment program. We’ve worked on operations for 3R, Petroreconcavo and Seacrest, financing acquisitions and capex since the creation of these companies that are very concentrated on onshore production in mature fields.
In midstream, gas transportation, we’ve participated in advising companies on debt issues as well.
BNamericas: What is the bank's interest in green hydrogen projects and what is the status of these projects in Brazil?
Gir?o: We’re following this segment.
Until 2022, I would say that our assessment of this sector was almost an academic interest, where we were learning, but we were looking at it carefully because this sector is within the commitments that the bank has to finance projects and segments with a positive impact in terms of lower emissions.
From 2023 onwards, discussions related to green hydrogen projects began to become more pronounced in Brazil and we saw a series of project plans announced and even the creation of a sector association.
We’re starting to see more mature discussions about the projects but there are still a series of issues to be addressed, starting with the lack of buyers of green hydrogen, the scale of the projects, associated costs and also the regulation for the segment.
At this moment, green hydrogen projects are still three times more expensive than gray hydrogen, but there are factors that could make this change quickly, which would be a drop in project costs and also potential taxes making gray hydrogen more expensive.
That said, I would say that in order to achieve the financial viability of green hydrogen projects in the short term, we would need some type of government subsidy.
But once this entire equation is resolved, we’ll see a range of project financiers involved in these operations, including development banks, export credit agencies, multilateral banks and commercial banks.
Here at this bank, we’re in discussions on green hydrogen with some clients, learning from them. We don’t have any mature projects about to be announced, but yes, plans are moving forward.
BNamericas:?In 2023, development bank BNDES started to be more active in financing projects. Does this represent an increase in competition for private-sector banks that work with project finance?
Gir?o:?The financing profile of development banks, such as BNDES, is very different from that of commercial banks.
These institutions provide very long-term financing that commercial banks rarely do, so there is no competition.
In general, BNDES has worked on very large projects, which could have difficulty finding resources in just the capital market. I would say it's a more complementary role than competition for us, at least for now.
There are certain project profiles that, without the participation of a development bank, would be difficult to structure financially, such as projects with very long concession periods, where cash flow is negative for many years, and the role of the capital market is limited, which is why there is a lot of financing with the joint participation of BNDES and commercial banks.
Without BNDES, many of these operations wouldn't even be launched, so I don't see direct competition.