The Pink Tide (& interest rates) rock the boat in 2022
The interest rate rose with the Pink Tide this year, leaving many in the renewable project finance market stranded in Latin America. While Latin America shouldn’t be treated as a monolith – the continent comprises 33 countries including the Caribbean – the impact of political uncertainty, the reemergence of leftist governments, known as the Pink Tide, and rising interest rates were felt across jurisdictions.
“The project financing market, for refinancing in particular, was really hot last year and the year before, notwithstanding the pandemic, but the interest rate environment in 2022 put the brakes on that. From one week to the next, developers’ estimates of costs to build new generation assets are changing dramatically and that has definitely been a challenge for the greenfield market,” said Tobey Collins, managing director and head of Americas at Astris Finance.
Since March, interest rates have hiked to levels unprecedented in recent years. For the past two years, interest rates hovered just above 0% but in 2022, the Fed steadily increased rates hitting 1.5% mid-year and closing the year in between 4.25% and 4.5%, the seventh consecutive increase this year and highest level in 15 years.
With added pressure on construction costs, financing greenfield projects hit a slump with significantly less transactions recorded this year compared to 2021 while project refinancings also slowed down. “If we look at the capital markets in 2022, the last LatAm project finance public bond was issued in February. Following the global geopolitical crisis, inflation spikes and massive interest rates increases, there has been a flight to quality where investors tried to secure liquid assets, buying US paper and even dollars or treasuries instead of investing in Latin America. Public bonds have become quite expensive so investors turn to the private market instead,” said Pedro Aparicio, Project, Infrastructure and Principal Finance associate at Goldman Sachs.
The rise of the Pink Tide again in 2022 and Latin America’s reputation for political volatility has not comforted investors and lenders alike in their endeavors across the region either. “It’s not only the fact that rates and spreads are up, but also the high levels of uncertainty. I think when you see that kind of uncertainty, it pushes one to rethink financing / refinancing decisions because this might not be the right moment to lock in borrowing costs for the next 10 or 12 years,” said Collins.
This year, South America saw three of its major economies change governments, veering to the left with the return of Lula in Brazil and the election of the first ever left-wing president in Colombia, Gustavo Petro.
Chile’s Gabriel Boric assumed the presidency in March, a left-leaning millennial with ambitions to rewrite a dictatorship-era constitution which crashed against the shores of democracy when a referendum overwhelmingly rejected the proposed changes.
In the last moments of 2022, Peru delivered a dramatic final act with the impeachment and subsequent arrest of its democratically elected president Pedro Castillo following a not so democratic attempt at dissolving Congress. Castillo had taken office just a year prior.
“Everybody’s decision making has to be done globally. Your local project is competing with projects around the world. You are on even footing with other projects as they are becoming more costly at the same time. The added challenge for Latin America is market perception. Do global investors see your particular market as more or less stable than their alternatives?” said Dino Barajas, a partner and chair of the Global Project Finance Practice Group at Baker Botts. “And in an uncertain market where macro factors are changing, whether it’s regionally or globally, there’s always a flight to quality and to stability.”
With new administrations in place, policies have already been pushed to help define the way forward in the renewable sector, keeping the market on its toes. Colombia’s Ministry of Mines and Energy has been working on a new roadmap that will outline the energy transition and the development of renewable sources in the country. The document, expected for May 2023, is set to bring changes to a space that so far had been operated without a formally defined roadmap.
In August of this year, the Chilean government introduced Law N° 21.472, known as PEC II, establishing a second round of electricity tariff stabilization mechanisms and effectively delaying payments to distribution companies which has had impacts on small and large generators.
Despite it all, the continent saw projects close on significant financing deals including a historic portfolio refinancing operation by Innergex. The Canadian developer completed a $803 million refinancing of its 650MW Chilean portfolio consisting of solar, wind, hydro and energy storage assets.
Led by SMBC and CIBC World Markets Corp, the deal was significantly oversubscribed with interest from global institutional investors according to the company and is said to be Latin America’s largest private placement in recent history.
Multilateral banks also supported a number of large financings in the region. The private sector arm of the Inter-American Development Bank, IDB Invest, granted a $245 million loan to a 453MW solar project in Brazil developed by Norwegian sponsors Equinor, Norsk Hydro and Scatec and an up to $300 million debt package to Engie for the construction of the 260MW Punta Lomitas wind farm in Peru.
“The multilaterals shined during this time because they were not as impacted. They can also offer protections to commercial banks and depending on the bank, they’re able to offer lower interest rates on a loan,” said Jessica Springsteen, partner and member of the Americas Energy and Infrastructure Group at Clifford Chance.
“In emerging markets, you’re always going to have some volatility and you have to find ways to be creative to mitigate the impact.”