BNDES shares collateral with banks to boost credit for infrastructure

The Brazilian Development Bank (BNDES) has reached an agreement with the leading banks in the country establishing new rules to share collateral in the financing of infrastructure projects. BNDES will start sharing collateral it gets from companies that get loans from the bank whenever partner lenders accept providing bank guarantees equivalent to at least 40% of the loan. The other 60% of guarantees, as receivables of the project, will be secured by BNDES itself. The rules are valid for the phase of construction, when the investments are still being made and the banks’ risk is higher.

The sharing of collaterals by BNDES will already be in effect for financing of the consortia that won the auctions of the Fortaleza, Salvador, Florianópolis and Porto Alegre airports in March, and also for the concessions of São Paulo state highways also auctioned in 2017. But other infrastructure projects may also benefit from the new rules. “It is an umbrella agreement and will mark our modus operandi with other banks moving forward,” says Claudio Coutinho, credit, financial and international director at BNDES.

Mr. Coutinho says that the discussion with banks, including Banco do Brasil, Caixa Econômica Federal, Itaú, Santander and Safra, was on conditions that permit these institutions better gauge the risks they are running. Greater clarity on the risks may lead to competition among banks to offer the guarantee to the project. As a result, the costs of the guarantee may fall, Mr. Coutinho says. A guarantee may cost between 1% and 2% of the project, according to estimates.

The negotiations defined the conditions that must be met for BNDES to declare the physical and financial conclusion of the projects that will have bank guarantee of the partner banks. The project will need to be ready and producing the expected cash flow. It will also have to ensure a minimum coverage ratio of the debt service of 1.3 times the cash generation of the last two years.

These are “objective” conditions that allow the partner banks understand what must occur for them to get out of the project risk when construction is concluded, says Luciene Machado, head of sanitation and transport at BNDES. She says that these conditions may be attested by financial statements or by companies that supervise the construction work.

In the market, companies complained that BNDES didn’t accept sharing its collateral, demanding from companies, in exchange of loans, very high corporate and financial guarantees, which often hindered the loans. Since last year, when it ceased to extend bridge loans, BNDES has been studying ways of bolstering the funding of projects.

Mr. Coutinho says the BNDES difficulty to share collaterals in the past was related to the fact that banks often only accepted participating in the first stage of the financing, of the bridge loan, with the offering of a low percentage of bank guarantee.

In general, these guarantees cover the first two years of a project, and the ideal is that they be expanded to periods of four to five years, when the projects tend to present operational viability.

“The sharing of collaterals will enable the better allocation of risks of the infrastructure projects, increasing the predictability to guarantors, potentially reducing costs,” Mr. Coutinho says.

BNDES is currently the largest lender to infrastructure projects in the country, having disbursed R$988 billion, in constant values, over the last ten years. The expectation is that, with the model of sharing collaterals, the projects may attract new investors, such as large foreign financial institutions, which could help finance the Brazilian infrastructure.

Source: Valor Econômico