What do you do if you are a national development bank and
want to support a nascent industry, but your public debt load
is staggering and you are running out of funds?
Brazil’s BNDES is transitioning from its role as a
subsidized lender to eventually match the market rate. It will
partner with lenders and provide project guarantees but will
less often be the lead investor in renewable energy
The new approach is set to raise funding costs for
Brazil’s renewable energy projects. But the hope
is that the changes will encourage a deeper and more
competitive project finance market. "Some people like to
complain, but I think the market will get around this much
quicker than you can expect," says Elbia Gannoum, chief
executive of the local wind power association ABEEólica.
"Brazil is following a new path in many ways. Policies are
changing, not only in the electricity sector. BNDES now needs
to choose where it is going to invest because the country does
not have much money. Brazil is broke."
Starting next year, BNDES will retire the TJLP long-term
corporate lending rate, which the national development bank has
used for up to 70% of investments in wind and solar energy
projects. The TJLP today stands at 7%, a sharp discount to the
central bank benchmark rate of 10.25%. The replacement TLP
rate, in contrast, will start with the IPCA consumer price
index and then add a spread based on the yields on five-year
inflation-linked NTN-B government bonds.
"For the first time, BNDES will not be the obvious answer,"
says Marcelo Girão, head of project finance for the
power sector at local investment bank Itaú BBA.
"Companies will have to think outside the box and look for
alternative sources for new projects."
Projects that are financed through the end of 2017 will
still pay rates based on the TJLP. BNDES will begin the
five-year implementation period for the new lending rate in
2018. "Renewables still have some privileges, but in the medium
term they will not have them any more," Girão says.
At least four projects made the cut in June, when BNDES
granted some 2.08 billion reais ($628 million) in long-term
financing for wind farms in the northeast, including 1.04
billion reais for the Ventos do Araripe III.
BNDES’ plans to overhaul its benchmark lending
rate come during a lull in auctions for new renewable energy
projects. The last auction for wind projects took place in
2015, and the government canceled an auction in December last
year as a deep recession took a toll on electricity demand,
especially from renewable projects. As it now stands, power
distributors in Brazil do not need to sign new energy supply
contracts for two years.
But as Brazil’s economy rebounds, builders and
developers are urging the government to hold more wind power
auctions before the end of the year. "If the macroeconomic
scenario keeps improving, the distribution companies will
probably have higher demand for power and the government will
realize that it is necessary to have new auctions," says
As BNDES loans become more expensive, developers should be
able to tap project finance. Commercial lenders have played a
role in financing wind projects in Brazil, often through
onlending agreements with BNDES. French bank BNP Paribas, for
one, has disbursed 1.3 billion reais in financing to Brazilian
renewable energy projects in the past three years, while
Itaú BBA dedicated around 60% of 2.6 billion reais in
power project finance to renewable energy in the first five
months of 2017.
"This year, we have been signing deals related to projects
that were announced two years ago. But next year, we will have
a decline in terms of wind power projects," says
Jean-Valéry Patin, the head of project finance for Latin
America at BNP Paribas.
"On the other hand, we do have several solar energy projects
that were auctioned in 2014 and 2015, which are closing now or
maybe the beginning of next year. So solar energy projects may
help make up for the decline in wind power," he says.
BNDES is not going to lose the top spot in the project
finance sector anytime soon but its role could change. "We have
a pipeline of 1.5 billion reais to 2 billion reais in
debentures for renewable energy projects in 2017 and 2018,"
says Eliane Lustosa, managing director of the capital markets
department at BNDES.
The goal is to combine BNDES’ resources with
those of the market. "Sometimes we can act indirectly to boost
projects in the green sector. We believe that eventually
differential pricing will emerge. At the moment, it does not
exist, but we can help attract other investors for these kinds
of projects," Lustosa says.
With that aim in mind, BNDES is forming a 500 million real
renewable energy investment fund with local asset management
firm Vinci Partners. It also raised $1 billion from the sale of
a seven-year green bond to more than 250 investors in early
"We have diversified our funding sources. In the meantime,
we are supporting initiatives such as externality in the green
sector," Lustosa says. In mid-May, for example, BNDES provided
guarantees for 42.4 million reais in debentures from Potami
Energia, a wind farm subsidiary of Omega
Eduardo Klepacz, the Brazilian head of Cubico Sustainable
Investments, views debenture issues as an increasingly relevant
source of financing for renewable energy projects. Cubico,
which is owned by the Ontario Teachers’ Pension
Plan and fellow Canadian pension fund PSP Investments, recently
raised 300 million reais from the sale of debentures in
"The market response was positive," Klepacz says. "There is
increasing interest from investors to seek a complement to
BNDES financing. It is not a substitution. It is a
Meanwhile, renewable energy companies see potential in
Brazil. Echoenergia, a wind power producer owned by the British
private equity fund Actis, acquired two wind farms in Brazil in
May and is planning more acquisitions. The company has already
invested 1 billion reais in equity and intends to generate 1.5
GW in energy within three years. Echoenergia also has an IPO in
its sights for the medium term, along with an issue in the
local bond market.
"The growth plan is aggressive but achievable. We are
looking at M&A as well as greenfield projects. The issue
about greenfield is whether there are going to be auctions or
not," says Claudio Ferreira, vice president of
Actis’ new business. "All our projects are being
financed. All of them include infrastructure debentures. At the
moment, we have to follow the rules of the game. To be
competitive in an auction you need to have 50% to 70% BNDES
financing and maybe 20% in debentures," he says.
But the model is changing, and Echoenergia intends to issue
infrastructure debentures on its own in the second half of the
year or in the first half of 2018, Ferreira says.
BNDES will eventually become another source of financing,
and not necessarily the leading one, for renewable energy
projects in Brazil. "But it will be difficult to achieve
without the correct incentives, as banks already have to deal
with their own short-term liabilities," Ferreira says.
Gaétan Quintard, executive manager of project finance
at BNP Paribas, sees change on the way but cautions that
institutional investors are not yet ready to take the lead in
the Brazilian renewable energy sector. "There will be a
transition period and BNDES will not pull out entirely," he
Questions persist about the liquidity of infrastructure
debentures and the nature of the investors themselves.
Infrastructure debentures in Brazil are tax exempt for local
retail and foreign investors. "But the market is currently very
much restricted to a few family offices and some credit funds,"
Itaú BBA’s Girão says the
investor pool is relatively small, and retail investors can
choose from other tax-free securities, such as real estate
receivable certificates and agribusiness receivables
certificates. Or they can choose to buy bonds from well-known
companies like Vale and Fibria. "They like the brand
recognition," he says.
"The depth of this market is still very limited. We took
part in some operations for wind projects. All of them were
successful, but the volume is relatively small, around 150
million reais, and the demand is typically around 200 million
reais. If you have a huge project with no BNDES [financing] and
800 million reais to raise, there is no market nowadays to
absorb such a huge volume in a single issue," Girão
To address the lack of liquidity, the Brazilian market for
infrastructure debentures must attract more institutional
investors, he says.
Sergio Brandão, the head of Actis in Brazil, says
BNDES and multilateral agencies could easily improve financing
for renewable energy projects by providing more guarantees. He
also says BNDES could ease capital requirements for
"They currently restrict the use of cash that is available
in special purpose entities [SPEs]. We would like to be able to
reinvest part of this cash in other projects. Such reinvestment
would increase the efficiency of capital, increase industrial
activity and generate more jobs," he says. "Leaving that cash
stuck in SPEs is not an efficient way of using foreign capital
that comes to Brazil."
BNDES says it is open to dialogue. "We want to add our
resources to those of the market," Lustosa says.
ABEEólica’s Gannoum views the
development bank’s retreat as a way for the sector
to eventually stand on its own. If BNDES maintains its dominant
position, private-sector lending will remain subdued and the
capital markets will not emerge as a consistent source of
funding for renewable energy projects, she says.
"The idea is for BNDES to diminish its influence to allow
for development of the capital markets," Gannoum says. "We
understand the changes will be healthy as long as they are
implemented gradually. But there cannot be abrupt changes
because, at the end of the day, you do not have a deep capital
market here." LF