Changing Pernambuco’s Agreste

24 Jul Changing Pernambuco’s Agreste

by Erik Oioli and Matheus Zilioti

Serra das Vacas is a known dairy bay located in the semiarid Agreste region of Pernambuco, belonging to the city of Paranatama. The long drought which hits the place – possessing one of the lowest indexes of human development of the country – makes its population collapse. However, due to the abundance and constancy of its winds, it was chosen for the deployment of the “Serra das Vacas Wind Farm Complex”, result of a partnership between PEC Energia and CHESF.  With a total investment of more than R$ 530 million, the project, comprised by four Wind Energy Generating Centrals which, together, bring the total of 53 windmills and 91 MW of installed capacity, in addition to generating clean energy through wind power, has been changing the landscape, the economy and the lives of the residents of the area.

Although 2015 GWEC Report (Global Wind Energy Council) points out that Brazil has wind power potential equivalent to triple of its internal demand for electrical power, Brazilian wind power generation parks only took off in the last six years.  This is due in part to recent development of an efficient local productive chain, with manufacture in national territory most of the machines and equipment used in the wind market and the compliance by the manufacturers with the term for the nationalization of their production, as per funding rules of FINAME Program of Brazilian Development Bank – BNDES, program from which the Project is benefited.

The Serra das Vacas complex was funded by a Project Finance structure; thus, in addition to the funding provided by BNDES, resources necessary to develop the Project were obtained through inputs of its entrepreneurs –  PEC Energia and CHESF – and obtained with investors in the Brazilian capital markets through the issuance of infrastructure debentures, pursuant Law No. 12,431/11, each and all steps for the structuring of the deal were advised by VBSO Advogados. We would like to share a bit of this story.

After assessing the Project’s technical feasibility, a property structuring phase of the wind parks took place, conceived from leases of real properties, as well as the institution of servitudes over rural properties deemed potentially sound for commercial production of wind electrical power.  With this issue settled, four specific purpose vehicles (SPV) were incorporated, which would participate of and win the auctions promoted by the Brazilian Regulatory Agency for Electric Energy – ANEEL for the purchase of electrical power and that, later, would be authorized by the mentioned agency for independent production of electrical power.

Still in this phase, development of feasibility studies had already positively impacted the local economy due to the arrival of experts and researchers in the Paranatama area.  Furthermore, the institution of the costly servitudes and the lease of the properties to install windmills represented a new source of income to small local landowners such as Mr. Zé Maria, whose testimony can be found here.

“People never expected to see such a transformation in the area; not only for me, but for the population here in Pontais and everyone in the city of Paranatama.  Where it has already generated lots of jobs, income, a lot of income for the city; it is quite high”. (Zé Maria, local resident)

The multidisciplinary expertise of our team in advising this kind of deal, which involved designing a complex structure of guarantees, complying with a series of regulatory conditions of the electrical power sectors and negotiating with some of the largest investment banks of the country across the table, as well as our proactive approach in face of difficulties arising from the case and customized service rendered to the SPVs, at the time debuting in Brazilian capital markets, were crucial for the strict compliance with the Project’s financial schedule, itself critical to the progress of the wind parks deployment works and entry into operation, which occurred on January, 2016. Throughout two years, a complex guarantee sharing structure was conceived in order to adjust interests of the many creditors and investors of the Project.

In parallel, the Project was considered prioritary by the Ministry of Mines and Energy for the purposes of the fiscal benefit provided by Law No. 12,431/11. This law created income tax benefits for investors of certain securities, issued by specific purpose companies, intended to fund the development of infrastructure projects.  Having obtained the authorization granted by the Ministry , the bases for the structure of a new issuance of debentures with lower intake cost were settled.

Later, a change in Law no. 12,431/11 allowed the priority projects to be carried out by the SPV’s parent company; in light of that, a corporate reorganization in Serra das Vacas was promoted, with the incorporation of an integral parent holding of the SPEs.  Therefore, the infrastructure debentures could be structured under a single issuance, so that the holding operated as a revenue and expenses equalizer of the whole Project.

The wind parks started commercial operation without any delay regarding the original schedule and with all measures of environmental compensation fully complied with – even before the last step of the Project Finance deal took place.  Furthermore, with the wind literally in favor, the amount of energy produced by the Project has overcome the most optimistic expectations.

This positive history of the physical and financial performance of the Project, as well as the reliability of the agents involved in its development, resulted in a great demand for the debentures issued by the Project holding company by investor: the bookbuilding process resulted in an excess of demandand, as a consequence, in an interest rate lower than initially expected.

Moreover, the change in the Paranatama area resulting from the Project, arising from the direct and indirect jobs created, the increase in the income of the local population resulting from the leases or the deployment of transportation and signaling infrastructure, will be reinforced with the investment of over 1.3 million Reais in social projects aimed at the local community.

For us at VBSO Advogados, listening from our clients that the Serra das Vacas Wind Complex Project Finance deal is considered by the big players of the wind sector as reference in terms of legal and financial modeling and social-environmental responsibility is a source of pride.  This is how we work: turning clients into partners and positively impacting people’s lives.

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