Investors wanted by Chinese contractors for Brazil deals

Institutional investors are needed to bridge the gap between Chinese contractors’ preference for government-supported borrowing and Brazil’s project finance needs.
Investors wanted by Chinese contractors for Brazil deals

The largest Hong Kong-listed Chinese infrastructure company is calling for investors and financial institutions to team up with its overseas arm to tap opportunities building infrastructure projects in Brazil.

Speaking at the recent Brazil Investment Summit organised by AsianInvestor and FinanceAsia, Chang Yunbo, deputy general manager of the overseas department at China Communications Construction Company (CCCC), invited investment banks and investors to form a financing consortium and to set up special-purpose vehicles (SPVs) to act upon concessions granted by the Brazilian government.

Chinese infrastructure companies have been exporting not just capital, but also their experience, technology and equipment accumulated from building domestic projects, along with capital.

They are taking their expertise to developing countries in Southeast Asia and Africa where governments have signed financing deals with Chinese banks, such as China Exim Bank and China Development Bank.

Resource-rich Brazil is a growing destination for Chinese capital, and China’s Ministry of Communications has recently signed agreements there for joint development of ports and other large projects. CCCC is a major Chinese contractor that goes in to execute on these deals.

However, Brazilian law does not allow it to offer sovereign guarantees on local developers’ borrowings from abroad, which has limited the ability of CCCC or other Chinese contractors to do work there. They are not prepared to take the risk of direct ownership of these projects, says Chang. Rather, Chinese contractors only want to operate if the government supports state-owned enterprises’ credit.

So, Chinese firms bring execution capabilities and capital, while Brazil has a huge need for developing infrastructure, but different regulatory approaches are hindering deals.

Chang, therefore, wants to see financial institutions form a consortium under the auspices of a government-backed entity, such as the Brazilian Development Bank, that establishes an SPV. This would own the concession granted by the Brazilian government and act as borrower, and the consortium could provide a guarantee on SPV loans.

Chang says such a business model would combine government-to-government deals that China prefers with standard project finance: “If we can have a breakthrough, the future opportunity is unlimited, not only in Brazil, but also in many other countries with a similar situation.”

Such investors could be sovereign wealth funds, state pension funds, development banks or investment banks, as well as private-sector funds.

“Investors will be the equity holders of the SPV and CCCC will provide access to financing through the buyer’s credit,” Chang says, suggesting a debt-to-equity split of 70%/30%. “The attractiveness of such credit is being long term, in a large amount, and with softer conditions.”

According to a research report released by ratings agency Moody’s in October, China has spent 10% of its GDP on its infrastructure since the 1990s, while Brazil only invested 2.3% of its GDP in the sector between 2001 and 2008.

The Brazil-China Chamber of Commerce and Industry offers some statistics for comparison. By 2009, China had built 78,000 miles of railroad, versus 29,000 in Brazil; 110,000 miles of waterways, versus 50,000 in Brazil; and 238 paved airport runways, against Brazil’s 205.

¬ Haymarket Media Limited. All rights reserved.