Esteves Backs $14 Billion Amazon Dam Itau Shuns

Blake Schmidt, Bloomberg
Tuesday, December 4, 2012

Billionaire Andre Esteves’ Banco BTG Pactual SA is helping fund construction of a 29 billion-real ($14 billion) dam opposed by Amazon indigenous groups after Brazil’s two biggest non-state banks opted not to take part.

BTG, based in Sao Paulo, is passing through 2 billion reais of a 22.5 billion-real government credit line granted to Norte Energia SA’s Belo Monte dam and will lend at a rate of as much as 3 percentage points above Brazil’s 5.5 percent long-term reference rate, according to a BTG official who asked not to be identified because he isn’t authorized to speak publicly. Haidian-based China Three Gorges Corp. sold 3 billion yuan ($482 million) of 20-year bonds to finance the world’s second-biggest dam on the Yangtze River at a yield of 4.15 percent in 2006.

While Brazil has repeatedly redesigned the dam project since the 1980s to reduce its environmental impact, and the Energy Ministry says the development will cut costs and help maintain economic growth, Belo Monte has sparked protests by indigenous groups, prompted a court-ordered suspension of construction and drawn opposition from James Cameron, the director of “Avatar.” Sao Paulo-based Itau Unibanco Holding SA and Banco Bradesco SA, located in Osasco, along with state-run Banco do Brasil SA chose not to participate.

“This is a project that will have a big environmental impact on the Xingu River, and that’s a risk that could be expensive for those who are offering credit,” Henrique Kleine, the chief analyst at Sao Paulo-based Magliano SA, said in a telephone interview.

New Markets

Record-low interest rates are prompting banks to move into new loan markets in search of higher returns, including longer- term financing for the 1 trillion reais in infrastructure needs the government estimates for Latin America’s biggest economy.

A BTG official who asked not to be identified because he wasn’t authorized to speak on the matter declined to comment.
Indigenous people won’t be removed from their villages for the Belo Monte project, which is “fundamental” to the country’s development, President Dilma Rousseff said in an August 2011 statement on the presidential website.

Norte Energia, a consortium controlled by state-run companies and pension funds including Rio de Janeiro-based Centrais Eletricas Brasileiras, said in an August statement the dam won’t “directly affect any Indian territory.”

“The indigenous communities living in the region have been consulted and their opinions respected in the elaboration of the project,” according to the statement on Norte Energia’s website.

Project Considerations

Banco de Brasil, Itau and Bradesco, Brazil’s three biggest banks by assets, all considered the project before deciding against it, Marcelo Perillo, financial director for Norte Energia, said in a telephone interview from Brasilia.

Itau had concerns over legal issues related to whether indigenous groups were properly consulted, according to a person familiar with the matter who asked not to be identified because he isn’t authorized to speak publicly on the matter. An Itau official who asked not to be identified citing bank policy declined to comment.

Bradesco opted out after evaluating the project based on the Equator principles, which are guidelines established by the World Bank for managing social and environmental issues in project finance, according to a person familiar with the discussions who asked not to be identified and isn’t authorized to speak publicly on the matter. A bank official who asked not to be identified citing bank policy declined to comment.

Equator Principles

The Equator principles were also a factor in Banco do Brasil’s staying out of the project, according to a person familiar with the decision who asked not to be identified because the talks are private. A Banco do Brasil official who asked not to be identified citing bank policy declined to comment.

Banks are searching for new loan markets after the central bank lowered the benchmark interest rate 5.25 percentage points since August 2011 to a record low 7.25 percent.

Yields on Brazil’s benchmark local bonds due in 2021 have tumbled 2.38 percentage points to 9.28 percent, according to data compiled by Bloomberg.

The extra yield investors demand to own Brazil government dollar bonds instead of U.S. Treasuries was unchanged at 153 basis points at 9:07 a.m. in New York, according to JPMorgan Chase & Co.

Default Swaps

The cost of protecting Brazilian bonds against default for five years fell one basis point to 109 basis points, according to prices compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The real gained 0.7 percent to 2.1081 per dollar, paring its decline this year to 11 percent. Yields on swap rates due in January 2014 fell four basis points to 7.13 percent.

Of the total credit line from state development bank BNDES, 14 percent is for social and environmental costs, the biggest portion for a project in the bank’s 60-year history.

Brazil’s Rousseff has been working on a buildup of power plants since her predecessor, Luiz Inacio Lula da Silva, named her energy minister in 2003. Brazil is spending 168 billion zreais to build 20 hydroelectric plants in the Amazon and power lines to faraway cities. The dam is a “social investment” that will help improve the quality of life of those living in the Amazon, Rousseff said in August 2011.

The 11,233-megawatt dam in Para state would generate enough to supply almost a third of Brazil’s 193 million residents when it is finished in 2019, Norte Energia says.

‘Sticky Issues’

Federal prosecutors in Para are processing 15 cases against Belo Monte, including some filed by environmental groups and indigenous leaders, according to an e-mailed response to questions from the federal prosecutor’s office.

A court ordered the suspension of dam construction in August after indigenous groups alleged they weren’t properly consulted. A higher court overruled the suspension, which lasted two weeks, and federal prosecutors in Para have appealed.

“These are sticky issues,” said Zachary Hurwitz, policy program coordinator at Berkeley, California-based International Rivers, which lobbied banks against funding the dam project. “Just from a standpoint of reputational risk, banks see tribes getting involved and that is too risky. Private banks don’t want to be associated with that.”

Chance to Expand

For BTG, founded by Esteves through the takeover of UBS Pactual in 2009, the project is a chance to expand its business from investment banking into project finance and develop its relationship with BNDES, Hurwitz said. BTG isn’t a signatory of the Equator Principles.

State-run Caixa Economica Federal, which is a signatory of the Equator Principles, is taking 7 billion reais of the BNDES credit line and passing it through to Norte Energia.

A Caixa press official didn’t respond to e-mails and phone calls seeking comment.

Tribes, peasant farmers and fishermen seized control of one of three Belo Monte construction sites Oct. 8, saying Norte Energia hasn’t followed through on a pledge to invest in communities affected by the project, in one of several protests against the dam. Norte Energia said in a statement it met with protesters and agreed to build health clinics and schools for indigenous groups.

The protests haven’t put the company behind schedule, said Perillo.

‘Different Reality’

Brasilia-based Norte Energia will fund the rest of the construction with capital from shareholders and as much as 500 million reais of tax-exempt infrastructure bonds to be sold by 2015, Perillo said. The company sold 1 billion reais of 180-day promissory notes in August, according to Brazil’s capital markets association, in a deal coordinated by BTG.

BTG’s participation is a sign that BNDES’s financing for social and environmental costs help make the project attractive to private banks, Perillo said.

“Even though people say no private banks support the development, there were various banks interested in participating,” he said.
Norte Energia’s 29 billion-real cost estimate on the dam is up from a figure of 16 billion reais quoted as recently as 2009 by Tribunal de Contas, a Brazilian court that oversees government spending. Norte Energia’s head of institutional relations, Joao Pimentel, said the 16 billion-real estimate wasn’t the company’s forecast, which has increased only by 3.1 billion reais since it won the bid, driven by social and environmental costs.

The rising outlays add to the risks for banks that finance the project, according to Magliano’s Kleine.

“There were various obstacles,” Kleine said. “And now the cost of Belo Monte is a different reality than it once was.”