Overview

Project finance, or financing for large capex projects whose source of repayment is cash flow generated by the project once constructed, has for decades played an important role in developing infrastructure and energy projects across Latin America. More recently, cross-border project finance in Latin America, which is the subject of this article, has been characterised by opportunities across both traditional and “new infrastructure” sectors in Spanish-speaking Latin America and largely in dollar-denominated and dollar-linked sectors (such as renewables and oil and gas) in Portuguese-speaking Latin America. The market continues to be dynamic in terms of the variety of players (both on the creditor and sponsor side) and financing structures. Traditional participants still play an important role but now coexist with new entrants; tried and true sources are branching into financing new sectors. There has also been, after a period of cooling off due to political and economic factors, a recommitment to public–private partnership (PPPs) and concessions programmes in key countries in the region such as Peru and Chile, and a new regime incentivising private infrastructure investments in Argentina, all of which show the promise of a busy next few years.

Geographical Trends: Brazil, Peru, Chile and Argentina

Brazil

In Brazil, while the domestic market for project financing has remained active, cross-border transactions have faced the challenges of high interest rates, volatile exchange rate fluctuations (and the related high cost of hedging) and competition from the deep pockets and increasing sophistication of local currency funding sources such as the debentures market and the Brazilian National Bank for Economic and Social Development (BNDES). The required capex and therefore scale of project financing transactions across Latin America have been increasing steadily; notwithstanding this fact, however, the Brazilian domestic market has consistently been able to finance recent projects in their entirety, predominantly through the local debentures market, BNDES or a combination of both. By way of example, CCR S.A. recently closed a record-breaking local project financing transaction with BNDES – including both a credit facility and issuance of incentivised debentures – totalling BRL10.8 billion (USD1.96 billion), the largest ever in the strategically important Brazilian roads sector.

A law passed in 2024 by the Brazilian Congress will likely further support the trend for domestic project financing. Starting in January 2024, not only investors (which were already contemplated under previous law) but now also issuing companies can benefit from certain tax incentives by issuing a new type of debenture (ie, “infrastructure debentures”) to finance infrastructure investment or innovation projects that meet the criteria set forth by regulation. The same law also created a new “incentivised bond” financing structure which could theoretically move the needle toward international bond financings of infrastructure projects by establishing (with exceptions) a zero withholding tax rate on interest derived from bonds issued abroad.

As a result, cross-border financing for Brazilian projects has consolidated recently in sectors with dollar-denominated or dollar-indexed revenues, in particular the renewable energy and oil and gas sectors.

Renewable energy

In the renewables sector, Brazilian legal reforms which entered into force at the end of 2022 have, according to Brazilian lawyers, brought greater legal security to power purchase agreements (PPAs) indexed or denominated in dollars. As a result, so-called “dollar PPAs” for utility-scale electricity in the free market are gaining traction for projects in Brazil as a more economically efficient hedging mechanism by reducing foreign exchange exposure on both sides: for sponsors where wind and photovoltaic equipment imports continue to play a large role in project development and for offtakers that are exporters. Long term PPAs with renewable energy sources also offer offtakers the ability to pursue decarbonisation targets without sacrificing the security of energy supply and increasing cost predictability – particularly in Brazil where there is significant dependence on hydroelectric power, often resulting in price volatility depending on rainfall levels.

PPAs with their long-term cash flow – especially those with highly creditworthy offtakers – serve as an anchor for project financing, and as a result, there has recently been a series of dollar PPA-based cross-border project finance transactions for Brazilian renewable projects. Initially these financings came from development banks including the Inter-American Development Bank (IDB) and its private-sector arm IDB Invest. However, a likely trend, given the better legal certainty in Brazil surrounding dollar PPAs and the importance of wind power in certain nascent segments such as green hydrogen, will be to see more financings from syndicates of commercial banks. As solar PPAs also begin to be dollar-indexed or dollar-denominated, this is expected to increasingly open the cross-border financing market to solar projects as well, such as the USD243 million non-recourse project financing for the Mendubim solar complex from IDB and commercial banks based on the project’s dollar PPA.

However, Brazilian development bank BNDES’s ability to issue dollar facilities continues to provide a challenge for international commercial and development banks seeking to lend to Brazilian projects. Additionally, there was for a period of time a slowdown in closing long-term PPAs in Brazil as a result of challenging demand and supply-side dynamics, driven by a number of factors including a period of energy surplus, a decrease in prices in the spot market and uncertainty in demand growth.

A final trend to note in the renewable energy sector in Brazil is the increased use of the self-production model for solar power, such as the aforementioned Mendubium project. In the self-production model, the offtaker or consumer invests in some form in the renewable energy facility generating electricity for their consumption. This can be via traditional self-production where an industry owns and operates its own asset, a leasing model or the increasingly common equivalence structure where the offtaker holds an equity stake via a special purpose vehicle (SPV) in the asset and energy is sold to the offtaker via a PPA. The latter option is attractive in Brazil because of related incentives such as tax credits and funding lines.

Oil and gas

The Brazilian oil and gas sector has long been financed by cross-border project financing structures, drawn by cash flows which are backed by the exploration and production (E&P) vessels’ long-term, dollar-denominated charter contracts. Syndicates of commercial banks, sometimes backed by export credit agency (ECA) insurance cover, commonly provide the project financing for vessel construction.

More recently, however, as floating production storage and offloading (FPSO) projects in particular have become increasingly capex intensive and certain commercial banks have limitations on lending to projects involving fossil fuels, obtaining financing for these multi-billion construction projects has been challenging for Brazilian sponsors. Some have begun to tap the international capital markets – with a number of Rule 144A/Reg S non-recourse senior secured project bond issuances by FPSO owners having closed recently. However, investors’ skittishness at taking construction risk results in the capital markets being accessed more frequently for refinancings, and bridge/syndicated bank lending remains an important source of financing for oil and gas projects in their earlier stages.

Another response to financing challenges has been the move by Petrobras, one of the main contractors for FPSOs in the world, to use a build-operate-transfer (BOT) model for its FPSO tenders. The BOT model seeks to minimise the cashflow demands on owners by providing for payments on completion milestones, and in certain cases, a percentage lump sum advance payment – thereby also reducing the amount of financing required for the construction phase.

Cross-border project financing activity in the Brazilian oil and gas sector should continue at a strong pace as Petrobras continues its strategic focus on pre-salt production and more modern, technological and carbon-efficient platforms, explores the so-called “new pre-salt” in the Equatorial Margin and has stated its intention to make its FPSO bidding tenders more attractive.

Peru

The outlook for project financing in Peru appears positive, after several years of political crisis which slowed auction and construction progress, made regulatory approvals for financing difficult to obtain for existing projects, and resulted in sponsors having to fund projects out of cashflow. However, ProInversión, Peru’s private investment promotion agency, has recently awarded a number of mega-projects and activity is expected to continue; according to ProInversión’s own data, in the first half of 2024 alone it awarded six public-private investment projects with an investment commitment of USD5.07 billion, the highest aggregate amount in the last ten years, and in the second half of 2024 it expects to award 17 projects for more than USD3 billion in strategic sectors such as electricity, sanitation, roads, railways, health and industrial development. High activity levels should continue into 2025 and 2026, with the agency expecting to award in excess of USD8 billion in projects each year.

Spanish and Chinese sponsors continue to be active in the Peruvian infrastructure and energy sectors, with a notable presence in mega-projects recently awarded by and ongoing bids submitted to ProInversión. For example, a consortium comprised of Spanish companies Acciona Concesiones, Sacyr Concesiones and Grupo Ferrovial is behind what is anticipated to be one of the most important project financings in Peru in the coming year, the financing for the construction and operation of the Anillo Vial Periférico ring road in Lima. In 2021, Peru’s National Port Authority granted Chinese state-owned Cosco Shipping Ports the right to develop and operate the Chancay deep water mega-port, a USD3.5 billion greenfield project being financed by Chinese banks through a syndicated project loan facility.

Chile

Chile continues to benefit from its role as a regional leader in the commitment to phase out fossil fuels and develop renewable energy sources. Accordingly, much of the recent significant project financing activity in Chile has centred on the energy transition, not only renewables generation but also the critical storage and transmission infrastructure for such power, which has reached overcapacity and resulted in curtailment challenges across the country. Accordingly, project financings seen commonly in Chile recently have included:

• renewable energy plants;
• battery and storage;
• transmission lines;
• mining facilities for sustainability-critical minerals such as lithium and copper; and
• electric vehicle fleets.

There continues to be significant chatter around potential for projects in the nascent green hydrogen sector, with IDB having approved a USD400 million loan to support the development of the industry in Chile.

There is also a sense of opportunity around more traditional infrastructure projects in Chile given the Ministry of Public Works’ announcement of a USD17.6 billion portfolio of concessions projects that it plans to advance between 2024 and 2028. Transportation (including road, rail and airport) projects are expected to be relevant, as well as desalination plants, hastened by Chile’s ongoing water crisis and attracting the stated interest of large international sponsors. Chile’s desalination plants have historically tended to be financed by the traditional syndicated lender cross-border project financing structure.

Finally, another trend seen in project financing in Chile (as well as neighbouring Peru) is the reduced role being played by pension funds. Following pandemic-related withdrawals, funds have become more cautious and are searching for more liquid investments due to uncertainty as to when the next run may occur, though many are hopeful the worst has passed. This, at least for a period, limited the capital available for long-term investments, such as infrastructure and energy projects, which pension funds have traditionally supported.

Argentina

In Argentina, focus is on the potential impact of the new Incentive Regime for Large Investments (RIGI), intended to incentivise private investment amid Argentina’s general financial crisis. RIGI will offer certain tax, export duty and exchange rate benefits to approved private investment projects in public infrastructure, mining, and oil and gas, among other sectors. The RIGI regime includes a minimum USD200 million capex requirement for most sectors and has a local content requirement. It is expected that domestic investors will be among the first test cases for this new regime, given they are already exposed to Argentine country risk, with foreign investors taking more time to assess the regime’s incentives and risk-mitigation protections.

Market sources are optimistic that in particular the mining sector may benefit from the RIGI regime. Argentina is, together with Chile and Bolivia, part of the “lithium triangle”, which collectively accounts for a significant portion of global lithium reserves, a critical metal in the decarbonisation movement because of its suitability for batteries used in electric vehicles and energy storage grids. Lithium and other mining projects have been a bright spot in project financing in Argentina in recent years.

If the RIGI regime works as intended and attracts investment notwithstanding the country’s current economic state, given the size of project capex and the requirement to deploy at least 40% of the minimum agreed investment within two years of project approval, it is anticipated that there could be increased need for cross-border project financing in Argentina in the short to mid-term.

Structural Trends: Project Finance Across Latin America

Refinancings

Notwithstanding the positive outlook in certain countries and sectors going forward, projects throughout Latin America were undoubtedly affected by the continent’s recent macroeconomic and political scenarios. For greenfield projects:

• legislative and permitting changes with the entrance of new political administrations have introduced legal uncertainty;
• social unrest and protests have disrupted certain categories of projects like mining; and
• progress has been hampered by bureaucratic hurdles and decision-making paralysis.

For operating projects, in certain cases, assets’ usage and tariff rates have been reduced. These challenges often have a direct impact on construction timelines and project revenues, thereby affecting the SPV’s ability to service debt on the previously agreed schedule.

As a result, so-called “amend and extend” refinancings have represented a relevant portion of project financing transactions over the past few years across Latin America. Such transactions have been common in Argentina given the country’s macroeconomic challenges and in Chile as a result of issues like curtailment in the energy sector affecting project revenues.

Additionally, interest rates remained generally high across the region, making take-outs of construction financing a less attractive or available option, though some bond/hybrid refinancings of this type have been seen recently.

Funds: private credit sources and equity investors

Private credit sources such as infrastructure funds are taking an increasing role in project finance globally, including in Latin America. Traditionally, project lenders have been dominated by commercial banks; however, with the increase in bank regulation, internal policies and interest rates, a space has opened for private credit funding of projects – largely through direct lending but also through infrastructure funds underwriting bond or debentures issuances. Private credit lenders tend to have more flexibility in terms of structure, applying bespoke infrastructure financing models, and risk appetite.

Another trend seen within private credit is greater interest by these funding sources in the “new” types of infrastructure (such as digital assets, telecoms, fibre optics, broadband, data centres and social and “smart” infrastructure), as well as the related move to finance portfolios of assets through securitisations and holdco/mezzanine level debt. Patria Investments, for example, is in the process of raising a new BRL5 billion (USD1 billion) infrastructure credit fund, which will invest in infrastructure debentures for smaller scale projects in sectors like energy transition, water and waste management, and urban mobility.

Funds are also playing an important role in projects across Latin America as project sponsors via equity investments. Funds are developing or have acquired significant projects across the continent, some of which require their own long-term project financing. These funds are moving the needle in terms of project financing structures, driven by their internal restrictions including the inability to provide guarantees which are looked on with disfavour in project financing but required in some Brazilian structures.

Blended finance and co-financing

There is space for further so-called “blended finance” in the region, generally defined as financings with a mixture of private sector funding and public or development finance or guarantees to mitigate specific investment risks and promote projects of strategic importance. Blended finance in Latin America has involved the participation of:

• development finance institutions;
• export credit agencies (ECAs);
• investment/risk guarantees; and
• insurance cover.

Blended finance has been seen in projects across Latin America; however, there tends to be general market agreement that this financing mechanism is not being applied to its full potential, given its importance in “crowding in” private investment, in the development of new but untested technologies, and in facilitating expensive but critical infrastructure in smaller and less profitable markets.

A related project financing structure seen in Latin America is co-financing, whether by multiple multilateral organisations or by multilaterals together with commercial banks. A criticism of this structure is its potential “greatest common denominator” nature, meaning that borrowers can ultimately be required to comply with the strictest of each type of lender’s fundamental requirements (such as a multilateral’s strict ESG requirements plus a commercial bank’s stringent anti-corruption KYC/policies) or regional standards (such as an international bank’s requirement for direct agreements plus a local development bank like BNDES’s requirement for corporate or bank guarantees), instead of only those common for one such category of lender. Intercreditor issues can also raise complications and potentially extend transaction timelines. Nonetheless the model has been deployed with success in the region.

Sustainable debt: green or sustainability-linked loans and bonds

Green or sustainability-linked loans and bonds continue to play a role in financing of projects throughout Latin America, driven by the investment appetite of institutions which have mandates to invest sustainably such as pension funds in certain key markets like Chile and Colombia and development banks with green agendas. Green loans, following the Green Loan Principles (GPBs), must apply funds to environmental improvements and provide periodic reports on the use of such funds and their expected impact. Sustainability-linked loans, following the Sustainability-Linked Loan Principles (SLLPs), require the borrower to set certain sustainability goals in the financing facility and provide reports on their progress; there is then typically a reduction in the interest rate once the borrower achieves the stated sustainability goals. Green or sustainability-linked loans and bonds may be structured as traditional limited or non-recourse project financings or more like typical corporate financings. “Greenwashing”, or the use of green financing instruments in order to lower the cost of financing as opposed to effectively improve a company’s environmental impact, remains a concern.

Government-backed certificates

Certain countries in Latin America have sought to make project financing more attractive to investors by the incorporation of government-backed milestone certificates or payment rights, which serve to reduce construction cost and risk, deter mismanagement, ensure a reliable flow of funds for debt service and provide liquidity as securitisable assets. Although not a new feature of Latin American project finance, this structure is notable as it remains relevant in active and newly tendered projects.

In Peru, project financings particularly in the transportation sector continue to rely on PPP structures and often involve certificates, backed by Peru’s Ministry of Transport and Communications, which are paid on specific construction milestones. This structure was used in Lima Metro Line 2’s project financing, and is expected to be a critical element of the upcoming project financing of Anillo Vial Periférico. A similar structure has been used in other Latin American countries, such as the recent international capital markets financing involving a securitisation of government-backed payment rights for the consortium constructing the fourth bridge over the Panama Canal.

Conclusion

In spite of the challenges posed by the macroeconomic and political scenario across Latin America, the region continues to be an interesting and dynamic one for cross-border project financing. This is particularly true for cross-border project financing in Latin American countries other than Brazil, where the domestic funding market – both via the capital markets and the national development bank – has recently been in the forefront of the biggest transactions. In countries like Peru and Chile, cross-border financing continues to play an important role given that they are dollarised markets with shallower pools of local finance than certain other countries in the region (particularly given the liquidity shock caused by withdrawals during the pandemic from private pension funds, a historically important source of long-term financing in local currency) but with projects of equally large scale. Ambitious PPP and concessions agendas in the coming years in both Peru and Chile are only expected to increase cross-border project financings.

Transactions are expected to centre not only on traditional infrastructure – given the longstanding need for private sector participation to close the region’s infrastructure gap – but also in the “new wave” of infrastructure sectors like renewable energy, nascent green hydrogen, and digital infrastructure and assets. This trend will be driven by governments’ and private companies’ push toward decarbonisation, but also by the AI revolution, which fundamentally requires power and connectivity.

In sum, notwithstanding regional challenges, projects in Latin America will continue to be developed and commercial banks, development banks, ECAs, private credit and the capital markets – whether domestic or international – will continue to find financing solutions for them.

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Rebecca L. Roman, the author of this article, is licensed to practise New York law and as a Consultora em Direito Estrangeiro by the Ordem dos Advogados do Brasil (OAB). Any references to laws other than those of New York in this article are summaries based on advice the author has received from licensed local lawyers.