Infrastructure Financing: Brasilia eases collateral terms for infrastructure finance

Brasília eases collateral terms for infrastructure financing

By Leandra Peres Brasília
Companies that win upcoming highway auctions will be allowed to substitute traditional collateral – real or financial assets and corporate bonds – in the financing they get from public banks with contracts in which they commit to increase their consortium’s capital by up to 20% of the total value of the works demanded to cover any problems that arise during construction, the so-called “equity support agreement” (ESA).
Dyogo Oliveira
Such design, agreed upon at a meeting of Finance Minister Guido Mantega, industry executives and trade groups, also sets that the Brazilian Agency for Funds and Guarantees Management (ABGF) will offer protection against the so-called “uninsurable risks,” basically unpredictable political events.
If something of that nature occurs, ABGF, which is 100% controlled by the federal government, will anticipate the needed funds to cover possible losses faced by concessionaires. With this, it will prevent construction work from being paralyzed while the issue is evaluated. At the end of the process, if it is proven that the contract had an economic-financial imbalance, compensation will be paid to ABGF as reimbursement of money advanced in the insurance policy.
“This model guarantees construction will be delivered, since shareholders will face the commitment of coming up with more capital. In parallel, it offers a relief for the balance sheet of companies while also keeping banks healthy, since they'll have guarantees that the works will be executed in the deadline and with a much lower risk,” explains Dyogo Oliveira, acting executive secretary of the Finance Ministry.
Under the current model of long-term financing, pre-operational loans are usually collateralized with real assets, like properties, and financial assets such as bank deposits or other accounts; or corporate bonds, which are basically a pledge by controlling shareholders, who even offer their personal assets.
The government's view and the claim from the private sector is that the volume of concessions to be granted and the size of domestic companies would make it impossible to use such tools. Currently, even before the auctions have started, there are important engineering firms in the market with no room in their balance sheets to offer more collateral to large-scale projects.
That is why the government decided to accept the ESAs, which are basically capital commitments in case of problems during construction work. Concessionaires will also have to offer performance insurance, which guarantees work goes along the agreed-upon timetable, and is a common demand in large-scale works.
The advantage for the auction's winners is that the capital-injection agreement does not directly affect company balance sheets. A bond, for instance, affects a company's net worth. ESAs, meanwhile, are booked out of the balance sheet.
A similar structure already was used for the financing of hydroelectric plant project Santo Antônio, in which the Brazilian Development Bank (BNDES) wanted corporate collateral from the concessionaires. At the time, however, the state-owned bank said that the collateral structure was an “exception.”
ABGF's presence has to be complementary to the private insurance market. Created in 2012 to manage all of the Union's collateral funds, ABGF will have the role of mitigating the “non-manageable” risk, a technical term that basically means political risks.
In the contracts prepared by the government, such type of risk gives to concessionaires the right to seek the “economic-financial rebalancing” of contracts, which is nothing more than compensation for any losses. But this discussion usually is long and drags in court.
The Finance Ministry's proposal is having ABGF offer a product that allows it, in case of such a claim, to advance funds to the concessionaires. Thus, work would be guaranteed to go ahead. But the state-owned firm also becomes the creditor of the result of any conflicts for the rebalancing of contract terms.
This model will be used in financing granted by state-owned banks, but officials also hope it could serve as a reference for the private sector. Despite the verbal agreement between government and private sector, the rules haven't been entirely detailed, something officials hope to make by mid-September, when they expect to launch the first highway auction.

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